百度 (BIDU) 2008 Q3 法說會逐字稿

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  • Operator

  • Good evening and thank you for standing by for Baidu's third 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 meeting over to your host for today's conference, Linda Sun of Baidu's Investor Relations department.

  • Please proceed.

  • Linda Sun - IR

  • Hello everyone and welcome to Baidu's third quarter 2008 earnings conference call.

  • We distributed Baidu's third quarter 2008 earnings release earlier today.

  • You may find a copy of the press release on the Company's website, as well as on newswire services.

  • Today you will hear from Robin Li, Baidu's Chief Executive Officer, and Jennifer Li, 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 U.S.

  • Private Securities Litigation Reform Act of 1995.

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

  • As a reminder, this conference is being recorded.

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

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

  • Robin Li - CEO

  • Hello everyone.

  • I know there might be clouds somewhere in the US or elsewhere, but it's a beautiful, beautiful morning here in Beijing.

  • So again, welcome to our third quarter conference call.

  • As you may have seen from our press release issued earlier today, we had a solid quarter.

  • In the midst of the global market turmoil, we generated healthy revenue growth and more notably, improved profitability.

  • Once again, our operating profit rose faster than revenue over the corresponding period from the previous year, showing the scalability of our business.

  • Even though global markets are going through a hard time, I'd like to point out, China is still a growth market.

  • And we believe the Internet industry still has tremendous long-term growth potential.

  • Baidu has developed a diverse customer base.

  • Companies, large and small, increasingly appreciate the benefits of our platform.

  • Working closely with customers from so many different industries and from so many regions of China, we meet the varied and complex needs of almost every sector.

  • We leverage this knowledge to deepen our penetration in the market.

  • And our diverse customer base provides a strong foundation for future growth.

  • We maintain our focus on providing the best possible products to our growing user base.

  • As the core of search, we emphasize a long-term focus and we continue to invest in and improve our algorithms and tools for customers.

  • We believe our platform is more targeted, more measurable, more effective and more cost-efficient than many other means of advertising.

  • Baidu is well-positioned in China's Internet landscape and we remain confident in our future growth prospects.

  • This quarter, we made two important additions to our executive management team, bringing on board Yinan Li as Baidu's Chief Technology Officer and Toshikazu Inoue as President of Baidu Japan.

  • Mr.

  • Li took on the role of CTO just this month, bringing 16 years of technology management experience to Baidu.

  • In the past, Mr.

  • Li has led large technology teams and has been at the helm of many new products and technologies that saw successful reception in the marketplace.

  • Mr.

  • Inoue is a recognized pioneer in the Japanese search market.

  • Before joining us in July, Mr.

  • Inoue successfully served as Vice President of Yahoo Japan search business and CTO of Excite Japan.

  • We are confident that Baidu Japan will benefit greatly from his leadership.

  • We make it a priority to assemble the best possible leadership teams.

  • And I'm excited to welcome both aboard, and look forward to working with them.

  • In the third quarter, Beijing hosted the Olympic Games.

  • An event of this scale and popularity was a powerful driver for products, services and infrastructure of the Internet in China.

  • As China's largest search engine, we created improved functions for Olympic-specific keyword search.

  • When users searched for an Olympic athlete or an event on Baidu, the first hit was a link to bundled information on competition times, results, medal counts and other Olympic updates.

  • Our improvements were well-received by our users.

  • During the third quarter, we continued to make improvements in scale -- in sales operations.

  • Both our transition to direct sales and the consolidation of sales vendors have allowed for higher efficiency.

  • We will continue our effort on efficiency and productivity as there is still more room for improvement.

  • Staying ahead of the development curve by listening to our users and developing products that address real needs is at the core of Baidu's success.

  • Last week, we launched the beta version of our C2C platform, which complements paid search and enables transaction fulfillment among our users.

  • E-commerce is emerging in China and people are becoming more comfortable with shopping online.

  • As China's largest search engine, we have superior technological capabilities and a deep understanding of user needs.

  • We see e-commerce as a great opportunity because of these synergies with search.

  • Our enormous user base also gives us a strong and unique competitive edge in e-commerce.

  • Another development in this quarter was our leap -- our partnership with UITV.

  • The transaction transferred operations of Baidu's Internet TV channel to UITV.

  • Baidu Internet TV is unrelated to our video search business, which is on our website on our home page.

  • We see this cooperation as a win-win for both parties involved.

  • Baidu is able to continue to focus on our core competencies in search, and UITV their specialty in conference platform operation.

  • Together, we will utilize our respective strengths to deliver a better online experience for users.

  • We expect the deal to close in the fourth quarter of this year.

  • Both of these recent developments reflect Baidu's focus on our core competency in search to fuel user and customer needs in an ever-evolving Chinese Internet market.

  • I will now turn the call over to Jennifer Li to take our -- to take you through the financial highlights.

  • Jennifer Li - CFO

  • Thank you, Robin, and hello everybody.

  • As you have just heard, it's been a solid quarter for Baidu.

  • Now I'd like to highlight a few areas of financials with more detailed explanations.

  • This quarter, we generated total revenues of CNY919m, amid the expected changes in user behavior and user spending during the Olympic Games.

  • Our results were up 85% from the year-ago period.

  • We increased our number of active online customers by approximately 36% year-over-year and increased the revenue per active online customer -- marketing customer by 34% year-over-year.

  • Overall, we have continued to see improved profitability this quarter.

  • Specifically, adjusted EBITDA, a non-GAAP measure was CNY457m for the third quarter, a 105% increase from the year-ago period.

  • And operating profit was CNY368m, a 119% increase over the corresponding period in '07.

  • Traffic acquisition costs, a component of cost of revenue in the third quarter, were CNY109m, or 12% of total revenue, a small decrease from Q2 '08, primarily reflecting our review and update of business relationships with some union members.

  • Cost of revenue, excluding TAC were CNY201m, representing 22% of total revenue, compared to 24% in the corresponding period of '07.

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

  • In addition, during the Olympic period, we delayed equipment purchases, resulting in lower depreciation for the quarter.

  • Cost of revenue, excluding TAC, before share-based compensation, was CNY200m.

  • Total operating expenses were CNY551m, a 68% increase from the year-ago period.

  • Specifically, SG&A increased 48% over the year-ago period due to expansion of our direct sales force and increases in our customer service staff to serve our growing customer pool.

  • R&D increased 109%, mainly due to an expansion in headcount.

  • Excluding share-based compensation expenses, SG&A rose 42% year-over-year and R&D increased 113% year-over-year.

  • Our Japan operation is making progress and we're excited to welcome Mr.

  • Inoue aboard.

  • Baidu Japan incurred operating costs and expenses in the third quarter close to CNY33m.

  • And we expect the Q4 expense to approximate the Q3 level, likely slightly higher.

  • The third quarter of -- in the third quarter of 2008, our income tax expense was approximately 35% CNY (sic - see press release).

  • The effective tax rate for the quarter was 9.1%.

  • Year-to-date, we have had an effective tax rate of 8.9%.

  • Net income for the quarter was CNY348m, a 91% year-over-year increase.

  • Net income, including -- excluding share-based compensation expenses, a non-GAAP measure, was CNY365m, a 95% increase from a year ago.

  • Basic and diluted EPS, excluding share-based compensation expenses of non-GAAP measures was CNY10.65 and CNY10.49, translating roughly to $1.57 and $1.54, respectively.

  • Now moving on to the balance sheet.

  • We ended the third quarter of 2008 with cash, cash equivalent and short-term investment of CNY2.3b or $338m.

  • Operating cash flow for the third quarter was CNY482m, representing a year-over-year increase of 89%.

  • Capital expenditure on a cash basis for the third quarter was around CNY85m.

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

  • Compared to prior quarters, CapEx is lower.

  • This is due to greater optimization of existing equipment, as well as slowed equipment purchases and campus construction during the Olympic period.

  • We ended the third quarter with approximately 6,800 employees, largely flat versus last quarter.

  • We continue to grow our R&D workforce while further consolidating sales, marketing and customer service staff.

  • The consolidation is going well.

  • And as Robin mentioned, we have started to see improved efficiency and will continue to focus on improving productivity.

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

  • We currently expect total revenue to be between CNY1,025m to CNY1,055m, which would represent year-over-year growth of 80% to 85% and quarter-over-quarter growth of 12% to 15%.

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

  • I now turn the call back to operator, who will invite you ask questions.

  • Operator

  • Ladies and gentlemen, the question and answer session of this conference will start in a moment.

  • (Operator Instructions)

  • Your first question will come from Gene Munster with Piper Jaffray.

  • Please proceed.

  • Gene Munster - Analyst

  • Good morning and congratulations.

  • Robin, if you could talk a little bit about the -- I know you addressed some of the bigger picture questions about some of the economic.

  • Obviously, for those who follow Google, they've been impacted by a slowdown in paid clicks and just total queries.

  • Can you talk about just the paid click trends with Baidu?

  • And also how you feel that the broader economy is impacting Baidu's business?

  • Thanks.

  • Robin Li - CEO

  • As I just mentioned before, China is still a growing market.

  • So far we have not felt any material impact from the financial crisis that happened in the US.

  • Granted, there are some companies, small and medium businesses in the coastal cities who do export businesses.

  • They have been hurt quite badly, starting from probably the beginning of the year.

  • But as I mentioned before, we have a very large and diverse customer base.

  • And more and more companies realize the benefit of paid search.

  • So they are shifting more -- in general they are shifting more marketing dollars to the Baidu platform.

  • So of course we're keeping a close eye on the macroeconomic condition changes.

  • But so far, we don't see anything material.

  • Maybe Haoyu can talk about the paid click trend.

  • Haoyu Shen - VP of Business Operations

  • Hi.

  • Yes, this is Haoyu.

  • As far as click through rates, we haven't -- in third quarter, we haven't seen any major changes from previous quarter.

  • Gene Munster - Analyst

  • Okay.

  • Just one other follow-up question, is that the operating margin was well above our targets.

  • Is this kind of a 40% the level we should be thinking about going forward?

  • Or should we consider maybe bringing that back in, going forward?

  • Jennifer Li - CFO

  • Gene, it's Jennifer.

  • Thanks for the question.

  • Operating margin did improve this quarter.

  • And as we mentioned, gross margin improved.

  • The primary driver was TAC.

  • And you might meet Haoyu later on to get more color on that.

  • And on the SG&A expenses, obviously we believe in a lot of -- in the inherent scalability in our business model.

  • As we mentioned, we continue to invest in the R&D capabilities and in the staff, and manpower.

  • But at the same time, we believe there is more efficiency to be gained on the SG&A side.

  • So overall, there is a lot of scalability in our business model.

  • However, we don't want to lose sight that Baidu is investing in this business over the long term.

  • China's Internet market is still emerging.

  • There will be a lot of opportunities that Baidu will have to participate in.

  • So we never really have a long-term margin target, per se.

  • Gene Munster - Analyst

  • So should we, just to be -- to play it conservative, model for margins to come down slightly?

  • Or is this a good base level moving forward?

  • Jennifer Li - CFO

  • I think in the near term we shouldn't see a significant variation of margins.

  • But as I mentioned, we, to the extent we make investments for the longer-term future growth, there is -- there will be changes to the margin.

  • Gene Munster - Analyst

  • Okay, great.

  • And thanks.

  • Operator

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

  • Please proceed.

  • Jason Brueschke - Analyst

  • Thank you.

  • Good morning everyone.

  • I have a question about your C2C initiative.

  • I was wondering if you could maybe just discuss in general what the ultimate goal is of the move into C2C.

  • You clearly face a huge competitor in Taobao that has a tremendous amount of cash.

  • And I'm just wondering, should we be thinking about your effort as really an attempt to go after that market and own it, and own the associated transaction fees that may sometime develop in the future?

  • Or is it really more conceptually a way to capture advertising dollars, such that the companies that will be selling goods on a C2C platform, you'll sell them keywords directly and there will be associated page traffic to that C2C site that you can monetize with banner ads?

  • If you could put that into kind of a competitive landscape with respect to what your ultimate goal is there, that would be helpful.

  • Thanks.

  • Robin Li - CEO

  • Hi Jason.

  • This is Robin.

  • I think, as I mentioned, the rationale for our entrance into the C2C market is because of user demand.

  • We saw a lot of Baidu users searching for product-related information.

  • And we think the current Web search does not adequately meet all of their needs.

  • So we started to develop a C2C platform roughly a year ago.

  • And we just had a beta launch last week, during the weekend.

  • We understand there are competition in the market.

  • But our focus is meeting the information needs of our existing users, which probably covers more than 90% of the Internet population here in China.

  • In terms of future business model, it's probably too early to tell.

  • But such a platform definitely has a lot of synergies with our existing paid search platform.

  • As e-commerce becomes more popular in China it will certainly help to grow the paid search business.

  • And going forward, we might just consider the C2C platform as yet another advertising platform so that sellers can advertise on our C2C site.

  • It's also an educational platform that as more and more companies or merchants start to analyze the traffic of their online store or online transactions, they will be able to appreciate more of the paid search platform we are offering.

  • So it's because of the synergy.

  • And we're confident that we can deliver a very good user experience here on the C2C platform.

  • Jason Brueschke - Analyst

  • Great, thank you.

  • I could just maybe ask a really quick question.

  • You guys have about $340m in cash.

  • Have you considered doing a share buyback?

  • Jennifer Li - CFO

  • It's Jennifer.

  • We obviously are very conscious to put our cash into good use.

  • Our cash management, we have very prudent management towards the investment and cash.

  • We constantly evaluate the best opportunity to use our cash.

  • At this point we don't have any decisions that we wanted to share at this point.

  • But keep in mind that we do want to definitely put the cash into best use.

  • Jason Brueschke - Analyst

  • Great.

  • Thank you and congratulations on the quarter.

  • Robin Li - CEO

  • Thank you.

  • Operator

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

  • Please proceed.

  • Dick Wei - Analyst

  • Hi.

  • Thanks for taking my questions and congrats on the good quarter.

  • I guess a follow-up question on Jason's C2C platform.

  • There are a lot of concerns about the spending or the operating losses from the C2C platform.

  • I wonder if you can comment on the -- any spending on the C2C platform so far, the size of the team.

  • And would you be able to see it break even pretty soon, just with the increased page view from the C2C site?

  • Thanks.

  • Robin Li - CEO

  • Dick, this is Robin again.

  • And regarding to the spending on C2C, we mentioned earlier in the year that it's going to be less than what we spent on the Japan operation.

  • We're still maintaining that statement for the next couple of quarters.

  • That's because of the synergy we have between paid search and C2C.

  • We do not need to spend a lot of marketing dollars to drive traffic to our C2C platform.

  • So going forward, we don't think we're going to spend even close what our competition is planning to spend [out].

  • Regarding to the team size --

  • Jennifer Li - CFO

  • We have a good -- a very solid team of engineers, that we have leveraged off our existing R&D work force to develop the technology of the C2C platform.

  • So, so far, from a spend perspective, Dick, as you know, we haven't incurred material expense.

  • Going forward, as Robin mentioned earlier, we see a lot of synergies between the C2C platform and paid search.

  • And these two products -- platforms, are interlinked, so one will help the other.

  • And essentially, we're definitely providing better tools for merchants and buyers to transact and be able to help them.

  • And frankly, today we have so many SME customers, and that -- the C2C platform itself really helps them see the transaction through.

  • So these two platforms are interrelated.

  • And we, as Robin mentioned also, the traffic itself is kind of all within the same framework.

  • So we don't think we spend -- we will spend as much of marketing dollars as some people might expect.

  • And as the business size go up, we will invest in the platform accordingly.

  • Robin Li - CEO

  • Also, as you probably all know, that there is basically no proven business model for C2C in China.

  • Nobody can charge a commission or a listing fee for -- from the sellers.

  • So from our point of view, it's more like an integrated experience for our users, so that they can do all sorts of things on the Baidu platform.

  • Dick Wei - Analyst

  • Alright, great.

  • Thanks a lot.

  • Operator

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

  • Please proceed.

  • Unidentified Participant

  • This is [Eko] sitting in for Jason.

  • My question is you -- revenue per customer increased 34%.

  • And could you break down that?

  • Which part is from pricing and how much is from an increase of Web traffic?

  • Robin Li - CEO

  • Haoyu.

  • Haoyu Shen - VP of Business Operations

  • As far as the ARPU growth, I think that comes from both traffic growth, core growth, and price.

  • I don't know the exact numbers.

  • But I would expect both are contributing to the growth of ARPU significantly.

  • I do want to point out that we don't control price.

  • We do adjust minimum bids from time-to-time based on some sectors and different information we have about the bidders.

  • But at the end of the day, the price we charge is based on how much people bid.

  • Unidentified Participant

  • You increased your minimum price in August by at least 30%.

  • And can I say that in that case, maybe pricing increase is contributing more to your quarter-over-quarter growth on revenue-per-customer?

  • Haoyu Shen - VP of Business Operations

  • No, as I said, the impact of minimum bid on the average ACP is not direct, it's not (technical difficulty).

  • It's a hurdle you have to clear to be able to show your ad on a search result page.

  • Eventually, how much we will charge is depending on how many bidders are bidding and how much they're bidding.

  • So you cannot draw the conclusion from the fact that we're raising minimum bid by 30% and ACP is increasing by 30%.

  • That is definitely not true.

  • Robin Li - CEO

  • Also I don't know, where did you get the 30% number?

  • We don't have that number in our minds.

  • Probably one thing that's worth mentioning is that we increased the minimum initial deposit for some of our sales regions like Beijing.

  • So don't be confused that's the minimum pricing.

  • It's really an initial deposit.

  • It has nothing to do with pricing.

  • Unidentified Participant

  • So basically you can't tell whether it's the pricing or the Web traffic increase?

  • I'm just trying to think whether --

  • Robin Li - CEO

  • Okay.

  • Let me tell you this, both traffic and pricing are going up.

  • It's a combination of both factors.

  • Unidentified Participant

  • Okay.

  • So Olympics really didn't impact too much on --

  • Robin Li - CEO

  • During the Game period, traffic did drop and the user behavior changed materially.

  • They spent more time on gaming and entertainment-oriented content and searched less for business-oriented content.

  • But it has come back after that.

  • Unidentified Participant

  • Okay, I understand.

  • And that TAC, what drove TAC increase?

  • What drove TAC decrease, I mean?

  • Haoyu Shen - VP of Business Operations

  • So we review the performance of our union partners from time to time.

  • So based on their performance -- because we do put into -- put performance contingencies in our agreements with them.

  • So when we review their performance, we'll adjust our TAC ratio accordingly.

  • So these things happen all the time every quarter.

  • But there -- other than that, we have a lot of other factors contributing to fluctuation of TAC ratio from quarter to quarter, such as different product offerings and signing of new partners, things of this nature.

  • And the timing is a big factor.

  • So when you look at it quarter to quarter, you might see fluctuations.

  • Having said that, we think the TAC ratio this quarter is probably on the low side.

  • The other thing I want to point out is our union business is continuing to grow at a very healthy rate and will continue to be a major contributor to our business.

  • Unidentified Participant

  • All right.

  • Thank you so much.

  • That's very helpful.

  • Operator

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

  • Please proceed.

  • Richard Ji - Analyst

  • Hi Robin and Jennifer.

  • Congrats on a good quarter.

  • And I'm very curious about your view about the competition from Google China.

  • In our observation, Google has been steadily gaining traffic and market share.

  • And recently they also rolled out its online music downloading service.

  • And I am very interested in your view about such competition, and I have a follow-up.

  • Thank you.

  • Robin Li - CEO

  • Hi Richard.

  • This is Robin.

  • I think we still have a very dominant position in the digital music market.

  • We've recently launched two improvements to our music search.

  • One is the online radio station collection or directory.

  • There's been a press release on that.

  • We have partnerships with lots of the radio stations across China.

  • Secondly is that we launched a separate section for new songs.

  • We help those record companies and publishers to promote the songs they want to promote.

  • We do not see -- at this time, we do not see any meaningful competition on this front.

  • In terms of the traffic share, we think our traffic share is at around 70% to 75%, based on various third party reports.

  • Of course we don't know the exact number from our competition, so we have to rely on the third-party reports.

  • Those reports may vary by one or two percentage but that's like a statistical error.

  • So we cannot say whether we are gaining or losing by 1% or 2%.

  • But we are quite confident that we have a dominant position in music search, Web search, and many other type of searches.

  • Richard Ji - Analyst

  • Thank you.

  • And my follow-up question is regarding your Japanese venture.

  • And obviously in the most recent quarter, you have strengthened your leadership over there, which is clearly a plus.

  • But going forward, what are the new initiatives that will be in place, and especially given that you are fighting a difficult battle, if not an up-hill battle against the incumbent leaders, such as Google Japan and also Yahoo Japan in the search business?

  • Robin Li - CEO

  • Right.

  • We just have hired a President for Baidu Japan.

  • We are quite confident we have assembled a good team to tackle this issue.

  • I understand there are strong competition in the Japanese search market and we are a latecomer.

  • But I also think that there is still a lot of room to improve for the Japanese search, because there is basically no local player and no local development team -- R&D team to really work on the fundamentals of Japanese search.

  • We believe that our technology strength and our reliance on local talent to set product directions will give us an edge going forward.

  • Having said that, you probably know that the Japanese market is a little bit different from the Chinese market in the sense that consumers usually are not that quick to embrace a new brand.

  • So we need to have some patience for this venture.

  • Richard Ji - Analyst

  • Thank you.

  • Operator

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

  • Please proceed.

  • C. Ming Zhao - Analyst

  • Thank you for taking my call.

  • Good morning.

  • I have a question about the business revenue from the big advertisers versus the SMEs.

  • If I look at your accounts receivable, it grew faster than the revenue.

  • Would you say this is because of more revenue coming from the big advertisers or the accounts receivable days becoming longer?

  • And talking about TAC ratio, is that because there's more revenue coming from the big advertisers, so that your TAC ratio has come down?

  • Robin Li - CEO

  • Jennifer.

  • Jennifer Li - CFO

  • Hi Ming.

  • In terms of revenues earned from large clients, as you know, we started last year to focus the efforts to grow our revenues from the large clients.

  • As we worked from a smaller base, obviously we expect faster growth in the large customers' account.

  • From our perspective, the average outstanding base for the receivables has not increased.

  • So it's purely a reflection of really strong revenue growth that's coming from the large customers.

  • Our TAC ratio, as Haoyu explained earlier, that is not the reason for the TAC ratio to go down.

  • Despite the fact that we are growing our large customers, it's still not the majority.

  • It is not still a very material part of our business.

  • Our P4P platform supporting the SMEs are still going very strong and that's a major contributing revenue -- factor for our revenue.

  • C. Ming Zhao - Analyst

  • Thank you.

  • Operator

  • (Operator Instructions) Your next question will come from the line of Eddie Leung from Merrill Lynch.

  • Please proceed.

  • Eddie Leung - Analyst

  • Hi.

  • Good morning guys.

  • Could you give us more color on the customer mix on your platform, from the perspective of industries?

  • I know that you guys have a very diversified platform.

  • But has the customer mix been changed in the past year?

  • And how would that affect your revenue growth, given the economic slowdown?

  • Thanks.

  • Haoyu Shen - VP of Business Operations

  • As we (technical difficulty) many times before, we have a very diverse portfolio of customers, a lot of B2B customers and we have a lot of B2C customers.

  • And typically you see in second-tier cities, there are more B2B customers.

  • In first-tier cities, there are more B2C customers.

  • I think both are growing still at a very healthy rate.

  • So in recent quarters, I don't think we have seen a major shift in the mix.

  • Eddie Leung - Analyst

  • Okay, thanks.

  • Operator

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

  • James Lee - Analyst

  • Good morning.

  • I just want to follow-up on Eddie's question.

  • Is it fair to say that your B2B customer base might be more vulnerable, given the economic slowdown, versus the B2C space?

  • And if that's the case, how do you guys plan to defend -- to deal with that potential weakness?

  • And also I was looking at your customer growth for third quarter was slower than what you did versus last year, I believe.

  • Is that a function of maybe you are finding on more larger customer their sales cycle are a little bit slower?

  • Thanks.

  • Haoyu Shen - VP of Business Operations

  • So we are not economists, so it is very hard for us to predict how this difficult economic situation will impact B2B versus B2C.

  • What we do know is as a lot of businesses are facing tougher situations, they will probably come to appreciate marketing channels with a higher ROI and a higher effectiveness, so we're pretty confident that -- in the power of our model.

  • So as far as the customer addition, I don't think we added fewer customers than before.

  • Of course, we have a much bigger base now.

  • Jennifer Li - CFO

  • One of the things, Jim, is on the customer growth side, last few quarters we have had between 40% to 45% year-over-year customer growth.

  • This year, as we came into the quarter, we anticipated an altered consumer behavior and customer spending behavior.

  • So the fundamental driver for revenue, as you know, is number of customers and ARPU.

  • So it's natural for us to see this level of customer growth rate.

  • Robin Li - CEO

  • Also, don't forget that during the Olympics, it's very hard for our sales force to sign up new customers.

  • So we probably lost roughly a month of time in many of the sales regions in China.

  • James Lee - Analyst

  • Okay.

  • Is it fair to say, Robin, that your B2B base may be more defensive than that of Alibaba?

  • Maybe a lot of your B2B customers are domestic-driven as opposed to export-driven?

  • Maybe that explains that you may have stronger customer growth on the B2B side in general than that of Alibaba.

  • Robin Li - CEO

  • Like I mentioned before, some of the export-oriented small and medium businesses in the coastal cities was -- were hit very hard.

  • But other than that, we continue to see more and more companies come to our platform because we just have a better performance for their investment.

  • James Lee - Analyst

  • Thank you.

  • Robin Li - CEO

  • Thank you, Jim.

  • Operator

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

  • Please proceed.

  • Stephen Ju - Analyst

  • Good morning, everybody.

  • Sorry to keep circling back on the TAC issue.

  • But I think you had talked about business review with some union members in the prepared remarks and I think Haoyu, you talked about the performance criteria.

  • Should we take this to mean that you are cutting off some of the affiliates with say, lower quality traffic, or even decreasing the TAC payout contingent upon traffic quality?

  • And also, when did Taobao remove paid listings from Baidu?

  • And do you think their blocking of Baidu crawlers on the natural search results impacts your traffic to the extent that users are probably not finding as much product in the search results as usual?

  • Haoyu Shen - VP of Business Operations

  • I'll take the TAC question.

  • So there are two things.

  • So we review the performance of partners from time-to-time because a lot of these agreements we have with them have performance contingencies.

  • And as they -- if they meet certain performance metrics, the TAC will be at this level.

  • If not, at a different level.

  • And we have scheduled review of their performance and if they're not meeting the criteria, we'll adjust the TAC down.

  • And sometimes we need to do some catch-up for some previous quarters.

  • So that's what happened.

  • The other thing is on traffic quality.

  • That is definitely something that we've been focusing on.

  • We definitely want to make sure that the traffic generated, the click generated on our platform are of the higher quality, are of the high ROI for our advertisers.

  • So we do that on an ongoing basis (technical difficulty) factor this quarter.

  • Robin Li - CEO

  • So on the Taobao question, we -- in the past we did not direct many traffic to that site.

  • So after the block we also did not see any sensible impact to our users.

  • Plus, although we just rolled out the beta version of our own C2C for less than a week, we already have more than 1m items listed.

  • So consumers will be able to find information on other e-commerce platforms from Baidu's site.

  • Stephen Ju - Analyst

  • Okay, thank you.

  • Operator

  • Your next question will come from the line of Troy Mastin with William Blair & Company.

  • Please proceed.

  • Troy Mastin - Analyst

  • Thank you.

  • Good morning.

  • I guess this relates to the TAC question a little bit more.

  • Can you tell us what is growing faster, Baidu proprietary properties or Baidu union properties, to help us gauge the relative performance?

  • Haoyu Shen - VP of Business Operations

  • So the question is whether union revenues is growing faster or organic revenue is growing faster, right?

  • Troy Mastin - Analyst

  • Yes.

  • Haoyu Shen - VP of Business Operations

  • Okay.

  • So as we said in previous few quarters, our union business has been growing a little bit faster than our organic business.

  • And I think that continues to be the case.

  • But it is not as -- the differential is not that big.

  • Troy Mastin - Analyst

  • Okay, great.

  • And then I wanted to follow-up on the SG&A to understand if there may have been an Olympic impact there, because you did have sequential decline in total SG&A spend.

  • And if there are any other notable Olympic influences on the P&L, if indeed there was one on SG&A?

  • Jennifer Li - CFO

  • On the SG&A side, there's no particular Olympic-related impact.

  • This quarter actually, as you noticed, the primary driver that drives SG&A are our headcount.

  • And our headcount stayed relatively the same.

  • During the quarter, we did have a lot of new staff join us, primarily the R&D workforce.

  • At the same time, we further consolidated our sales force.

  • So some reduction on the sales side.

  • So overall, these two factors were not Olympic related.

  • So SG&A has demonstrated the scalability of the business model and we continue to focus on improving the productivity of this workforce.

  • Troy Mastin - Analyst

  • It's fair then to assume that there were no SG&A -- there was no SG&A spending that would have been pushed out into the fourth quarter?

  • That this is just natural leverage in the model.

  • Jennifer Li - CFO

  • Yes.

  • Troy Mastin - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question will come from the line of Collin Gillis with Canaccord.

  • Please proceed.

  • Collin Gillis - Analyst

  • Hi, good morning everyone.

  • Robin Li - CEO

  • Hi.

  • Collin Gillis - Analyst

  • Are advertisers in Japan going to be able to buy across both the .cn and .jp domains?

  • Robin Li - CEO

  • At this time we are not monetizing the .jp site yet.

  • But companies in Japan, they can buy advertising through our Japanese office.

  • Collin Gillis - Analyst

  • Okay, great.

  • Can you give us any color about the average bid amounts on the pay-per-click terms?

  • I mean there is a school of thought out there that there's a tremendous expansion possible as clicks become more competitive over time.

  • Is there any trend or growth you could give us about the average bid prices?

  • Robin Li - CEO

  • Haoyu.

  • Haoyu Shen - VP of Business Operations

  • Yes, as we said before, it has been going up and that's probably driven by many things.

  • You know more bidders or more advertisers are spending with Baidu.

  • And more and more realizing the higher ROI compared with some other marketing channels they have.

  • But you know, for the past two quarters we do see pretty good growth of ACP and we're happy about it.

  • Collin Gillis - Analyst

  • Do you think the best is still to come?

  • Haoyu Shen - VP of Business Operations

  • I think so.

  • Collin Gillis - Analyst

  • Great.

  • Thank you.

  • Robin Li - CEO

  • Thank you Collin.

  • Operator

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

  • Please proceed.

  • Kar Kwong - Analyst

  • Hi, good morning.

  • Thanks for taking my question.

  • I was just wondering CapEx has dropped by quite a good amount this quarter.

  • How much of it was due to a push out to fourth quarter and how much was pushed out?

  • And how much was due to scalability in the model?

  • Thanks.

  • Jennifer Li - CFO

  • Kar, it's Jennifer.

  • The CapEx was lower this quarter.

  • You know we said it's two factors.

  • On one hand we continue to improve the --- or optimize the infrastructure uses and equipment uses.

  • Part of the spending related to Baidu campus normally happens on a regular basis.

  • However, this quarter, on both fronts, both the equipment and CapEx for construction related expenses were slower than before.

  • Going into next quarter, on the construction for Baidu campus side, we expect that to come back to normal.

  • On the equipment side, frankly, you know we continue to refine and improve our technology and the uses of the infrastructure.

  • You know, frankly, I think we have room for improvement in the CapEx related to the equipment.

  • Kar Kwong - Analyst

  • Thank you.

  • Operator

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

  • Please proceed.

  • Leah Hao - Analyst

  • Hi, good morning.

  • This question may or may not be necessarily a Baidu question.

  • I know you don't have any concentration among industries.

  • But I was just wondering if you see anything, any trends on the margin about keyword trends and new customer additions by specific industry.

  • You know, machinery or medical devices, that kind of thing.

  • And separately I have a very quick follow up.

  • Can you update us on number and efficiency on your sales team please?

  • Robin Li - CEO

  • So Haoyu, the first question and Peng, the second question.

  • Haoyu Shen - VP of Business Operations

  • Yes, as Robin mentioned, we do see some B2B customers, most manufacturing companies in the coastal areas are impacted more starting from this year.

  • So other than that, I think all the other industries are growing healthily.

  • And we don't see any sort of pattern, or trend, in the ACP of bidders on different subjects.

  • Peng Ye - COO

  • Hi, this is Peng Ye.

  • Regarding the efficiency of sales force, we have already started our efforts in terms of improving our productivity and efficiency.

  • And you can see the marked improvement last quarter.

  • On the other hand, there is still a lot of room for us to make improvements.

  • We believe that we can do a lot of things (inaudible).

  • Leah Hao - Analyst

  • Okay, thank you.

  • Robin Li - CEO

  • Thank you.

  • Operator

  • Your next question will come from the line of Eric Wen with Main First.

  • Please proceed.

  • Eric Wen - Analyst

  • Hi, good morning.

  • Thanks for taking my question.

  • I have two questions.

  • One is I want to take your view on how you look at the customer service aspect of C2C -- I mean your revenue, your employee mix in tapping the C2C sector.

  • Do you plan to have a large size of customer service call center employees, or you have a different model?

  • My second question is regarding balance sheet.

  • I noticed that there is a healthy increase in customer deposit as usual.

  • But there is a decline in deferred revenues in third quarter which didn't show up in last year's result.

  • Of course that's -- compared to overall revenue size it's small.

  • But I guess if Jennifer can just go over to -- go over that on what's going there with these three lines that will be much appreciated.

  • Thanks.

  • Robin Li - CEO

  • Okay Eric, this is Robin.

  • On the customer service for C2C we will initially use our in-house team to do the customer service.

  • Depending on how successful our C2C platform is, we will make the decision of how many people to hire.

  • We do have experience of running customer service in-house.

  • Our paid search platform hires lots of customer service people.

  • So that's not something -- that's not something unfamiliar to us.

  • But in the long run, we cannot rule out any other possibility like outsourcing.

  • Jennifer Li - CFO

  • And Eric, on your question on the balance sheet items, yes customer deposit is growing.

  • And that's really a reflection of what's in the pipeline from a revenue generating perspective.

  • Deferred revenue, the nature of deferred revenue is basically services provided but it hasn't met the test threshold for revenue recognition.

  • As an example, maybe service is provided, the agreement is all reached but we haven't had the paper documents back in the Company for us to meet all the tests for revenue recognition.

  • It did come down this quarter.

  • And at the end of September you see CNY9m of deferred revenue.

  • That's less than the prior quarter.

  • What this really reflects is a process issue.

  • It's just better process and people follow up on completing the sales transaction.

  • In itself, this deferred is primarily related to large clients.

  • Eric Wen - Analyst

  • Okay.

  • Thanks.

  • Robin Li - CEO

  • Thank you Eric.

  • Operator

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

  • Please proceed.

  • Elinor Leung - Analyst

  • Hi, thank you.

  • Good morning.

  • I have one question.

  • I see that there is increasing pressure from the music industry on your music search platform and that also LG reportedly pulled out their advertisement on your platform.

  • Can you comment on that?

  • And can you comment on what's the impact on your platform?

  • Robin Li - CEO

  • What you just said, that is not true.

  • LG did not pull out their advertising from our platform.

  • And we are not facing increasing pressure from the music industry.

  • On the contrary, we signed many cooperation deals with the record companies and we share revenue with that -- with them.

  • As a matter of fact, the -- one of the channels on our MP3 search, there's a music streaming service related to the signed record companies.

  • So that part of the revenue has more than doubled comparing to the same quarter of last year.

  • So we are very optimistic about the advertising supported music streaming service in China.

  • Elinor Leung - Analyst

  • Thanks.

  • Operator

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

  • Please proceed.

  • James Lee - Analyst

  • Robin, I was hoping that you could maybe comment about the outlook for 2009.

  • Can you sort of characterize given all the potential economic slowdown, global financial crisis, can you characterize your view heading into next year?

  • Given the fact that your industry is still relatively under-penetrated, would you see most of the growth coming from new vertical customers?

  • Or do you see, as you get more of the larger customers, the potential growth is really coming from ASP?

  • And maybe you can comment about visibility of your revenue heading into 2009 as well.

  • Thank you.

  • Robin Li - CEO

  • Hi James.

  • I think it's a little bit early to tell too much about the outlook for 2009 as we usually only give guidance for one quarter.

  • Having said that, I would say that the paid search market in China is still in its early stage.

  • And we see --- we continue to see many, many companies start to spend their marketing dollar on our platform.

  • And those more mature companies, mature meaning they have a better understanding of the Internet, generally spend more on our platform.

  • Internally, we see lots of things to be done from the sales force efficiency, to [monetization], to web search quality and to the new product and services we are offering and we plan to offer.

  • We just see lots and lots of things that we need to work on.

  • So the performance for 2009 would pretty much depend on how good we can execute and how fast we can [run].

  • Of course, we are not exempt from the macroeconomic conditions.

  • If China's economy crashes, we will be affected.

  • But if it's just a couple of percentage of fluctuation, I think we should be fine going forward.

  • Regarding to the customer mix, I think Haoyu already talked about it.

  • Companies large and small are all becoming more receptive, or start to appreciate more of our platform, especially for the larger companies.

  • In the early days of the year, larger companies rely on a big sales team.

  • Not big, but a high paced sales force to build relationships with them.

  • And we thought that was not what we -- not a priority in the early days.

  • But at this stage I think as those companies start to get ready for paid search the growth on that front should be better than the average customer.

  • Peng Ye - COO

  • Hi James, this is Peng Ye.

  • Regarding your questions, I think according to government statistics in China we have got more than 40m small and medium enterprises.

  • Among them we have got more than 4m B2B enterprises.

  • So comparing these figures with our [competitors'] customer bases, we see a lot of room for us to pick up soon.

  • Apart from Google I cannot see any other (technical difficulty).

  • James Lee - Analyst

  • Okay, thank you.

  • Robin Li - CEO

  • Thank you James.

  • Operator

  • Ladies and gentlemen, we are now approaching the end of the conference call.

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

  • Robin Li - CEO

  • Thank you for joining us today.

  • We are excited about what lays ahead and I look forward to updating you in the coming quarters.

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

  • Operator

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

  • This concludes the presentation.

  • You may now disconnect.

  • Good day.