百度 (BIDU) 2009 Q2 法說會逐字稿

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  • Operator

  • Hello and thank you for standing by for Baidu's second quarter 2009 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, Mr.

  • Victor Tseng, Baidu's Investor Relations Director.

  • Please proceed sir.

  • Victor Tseng - IR Director

  • Hello everyone and welcome to Baidu's second quarter 2009 earnings conference call.

  • Baidu's earnings release was distributed earlier today and you can find a copy on our website as well as our 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, our Chief Operating Officer, and Haoyu Shen, 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 obligation to update any forward-looking statement, except as required under applicable law.

  • As a reminder, this conference is being recorded.

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

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

  • Robin Li - CEO

  • Hello everyone, and thank you for joining us today.

  • The second quarter of 2009 was an exciting one for Baidu.

  • Strong execution drove improvements in customer satisfaction and user experience and helped us realize revenue growth of more than 35% quarter on quarter.

  • During the second quarter, natural economic conditions remained challenging, even after we began to see some signs of recovery in the Chinese economy.

  • That said, we're pleased that through relentless execution and of the user and customer funds, we were able to drive a strong performance.

  • Chinese companies continue to realize the superior ROI offered by our P4P platform and are spending more with us.

  • While SMEs remain our core revenue contributors, we are also seeing larger companies shifting marketing dollars more to our platform.

  • In addition to P4P solutions, we are actively engaged with the customers to explore various innovating marketing solutions to comprehensively fulfill their needs.

  • For example, we most recently leveraged our popular Baidu Post Bar community product to place targeted ads for Nike on middle school community sites and we explored arrangements to market the promotion directly on Baidu's home page, such as the one we recently completed with Intel.

  • As you know, in April, we officially launched Baidu Online Marketing Professional Edition and enhanced the bidding platform for online marketing customers, also known as Phoenix Nest.

  • While still very much in its early stages, customer acceptance was very encouraging.

  • Online marketers are appreciating the greater options in keyword tools and searching capabilities, as well as Phoenix Nest enhanced tools for measuring online.

  • During this quarter, the rollout of Phoenix Nest went very well and we are pleased with the progress to date.

  • As we continue to educate our customers and improve upon this product, we expect the benefits of Phoenix Nest to ramp up in the quarters to come in terms of enhanced monetization as well as improved ad relevancy.

  • Looking at our recent work on user experience, we are encouraged by our progress on project Aladdin which we launched in April as well.

  • As an initiative to uncover useful parts of the hidden web, Aladdin offers a powerful open platform for producing richer search results.

  • We are working closely with webmasters to create tools for content inclusion and display format to expand the utilities of the platform.

  • As more and more content is picked up by Aladdin in Q3 and beyond, we will continue to see a better search experience with quicker access to dynamic information, such as weather conditions and currency exchange rates.

  • In addition, for an increasing percentage of queries, we are generating locally relevant results, meaning that the results are dynamically tied in relevancy to the location where the search was performed.

  • In the context of providing dynamic and relevant information, Baidu aims to always stay ahead of the rapidly evolving needs of our users and customers.

  • Ecommerce in China is an emerging space, with fast-growing activities.

  • While we continue on our work in this regard Youa, we see the B2C sector in particular as having tremendous potential.

  • We aim to work with major retailers to develop their online commerce.

  • For example, we recently worked with Suning to develop its online B2C youth business using our Aladdin technology.

  • Baidu stands to support more brand retailers to establish and conduct transactions online.

  • Large retailers usually have more ad budget.

  • As more and more large retailers establish their independent presence on the web, Baidu is well positioned to be a major beneficiary of the B2C ecommerce growth in China.

  • On the sales front, during the second quarter we continued to work closely with our distributors, rolling out a standard CRM system that has significantly improved customer satisfaction and sales efficiency.

  • We also worked with some established distributors to expand into less developed areas in China.

  • These are important future growth markets for Baidu and we are confident that we have the right model and strategy in place as well as a significant first mover advantage.

  • One of Baidu's key assets is our strong brand value and name recognition, and we are committed to building upon our strong base through ongoing investment in marketing.

  • Aladdin and Phoenix Nest are our main technology innovations for the year, and we are excited to host the Baidu World Forum, our yearly technology exposure in the third quarter to showcase our achievements.

  • In summary, by focusing on execution and staying ahead of the needs of our users and customers, Baidu has remained on a growth track in the last couple of quarters, despite turbulent economic conditions.

  • Looking forward, we have good reason to feel confident about our future and we are ready to see more growth opportunities that will come as the economy recovers.

  • China's Internet user population continues to grow fast, reaching 338m or 26% of the total population by the end of second quarter 2009.

  • So with an enormous potential market still ahead of us, as China's leading search engine, Baidu should continue to develop and educate the market, execute and deliver strong results.

  • Thank you once again for your continued support.

  • And now I will turn the call over to Jennifer for financial results.

  • Jennifer Li - CFO

  • Thank you Robin.

  • Hello everyone.

  • As Robin says, we are encouraged by our strong ability to execute on our strategy during challenging economic times.

  • While we stay focused on our growth plans, we're also improving profitability through efficiency management and economies of scale.

  • We'll continue with our balanced approach to controlling costs while investing in important initiatives.

  • Now let's look at some of the financial highlights for the quarter.

  • The amounts mentioned are in RMB unless otherwise noted.

  • For the second quarter total revenues were CNY1.1b, at the high end of our guidance and represents a 35% increase over Q1.

  • During the quarter, Baidu had approximately 203,000 active online marketing customers, a 12% increase from the corresponding period in '08, and a 10% increase from the previous quarter.

  • Revenue per online marketing customers for the second quarter was approximately CNY5,400, a 23% increase from both the corresponding period in '08 and the previous quarter.

  • Traffic acquisition cost, as a component of cost of revenue, was CNY175m, or 16% of total revenue, as compared to 12.7% in the corresponding period in '08, and 15.3% in the first quarter of 2009.

  • The slight sequential increase over Q1 reflects the continual fast growth of our Union business.

  • Going forward, we'll place our focus on optimizing the quality of Union traffic to strengthen the contribution of this business.

  • We'll also extend revenue opportunities through higher-quality contextual ads.

  • Bandwidth cost and depreciation cost as a percent of revenue both continue to decrease in the second quarter on a year-on-year basis.

  • This demonstrates efficiency improvements as well as increased visibility of investment and capital expenditure.

  • We will continue to invest to ensure we have efficient infrastructure and sufficient capacity to serve the growing and evolving Internet development.

  • Selling, general and administrative expenses in Q2 was CNY180m.

  • Over the past few quarters, we have focused on sales force productivity.

  • With the ongoing rollout of Phoenix Nest, we expect to increase sales headcount to support the effective implementation of this new platform.

  • In addition, the Baidu World Forum, as Robin mentioned earlier, will also take place in Q3 as opposed to Q2 of last year.

  • As such, different from last year, we expect Q3 SG&A expense to be higher sequentially than the Q2 level.

  • R&D expenses increased 35% over the year-ago period, primarily due to increased headcount.

  • Operating profit for the second quarter was CNY423m, an increase of 53% over Q2 '08, primarily driven by decrease in bandwidth and related depreciation expense and the scalability of the operating expense structure that we have.

  • Total headcount as of June 30, 2009, was about 6,300, roughly 100 more than the previous quarter.

  • Income tax expense was CNY51m for the second quarter.

  • The effective tax rate for the first (sic - see press release) quarter was 11.8% as compared to 9.7% in the corresponding period in '08, and 12.9% in the previous quarter.

  • Net income was CNY383m, a 45% increase from the corresponding period in '08.

  • Basic and diluted EPS for the second quarter of '09 has amounted CNY11.09 and CNY11.02 respectively.

  • Net income, excluding share-based compensation expense, a non-GAAP measure, was CNY406m, a 38% increase year over year.

  • Basic and diluted EPS, excluding share-based compensation expense, both non-GAAP measures, were CNY11.75 and CNY11.68 respectively.

  • As of June 30, 2009, the Company had cash, cash equivalents and short-term investments of CNY3.4b.

  • Net operating cash inflow and capital expenditures for the second quarter of 2009 were CNY519.1m and CNY81.7m, respectively.

  • Now, let me provide you our top line guidance for the third quarter of 2009.

  • We currently expect total revenues for the third quarter of 2009 to be between CNY1,260m and CNY1,290m, which would represent 15% to 18% sequential growth.

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

  • I will now open the call to questions.

  • Operator

  • Your first question comes from the line of Mr.

  • James Mitchell.

  • Please proceed, sir.

  • James Mitchell - Analyst

  • Great.

  • Thanks very much for taking my question.

  • I wonder if you could talk a little bit more about the sequential increase in traffic acquisition cost as a proportion of revenue.

  • And also you're guiding for faster sequential revenue growth in third quarter '09 than you achieved in third quarter '08.

  • Is that primarily because there's no Olympics this year or is it because the macro environment is improving sequentially, or is it Phoenix Nest or something else?

  • Thank you.

  • Robin Li - CEO

  • Haoyu, can you take on the TAC question?

  • Haoyu Shen - VP, Business Operations

  • Yes.

  • So the TAC increased sequentially against Q2 as I think Jennifer mentioned in her prepared remarks.

  • It still continues to be mostly due to the faster growth of our revenue that comes from Baidu Union.

  • So the same as before, the payout ratio is stable and we are seeing some of our Union partners performing very well.

  • So that's by and large the reason.

  • James Mitchell - Analyst

  • So the individual Union partners are growing faster?

  • It's not just that you're adding more and more Union partners?

  • Haoyu Shen - VP, Business Operations

  • In this quarter, mostly because some of the existing partners are doing well.

  • James Mitchell - Analyst

  • Okay.

  • Robin Li - CEO

  • Regarding to the -- James, regarding to the sequential growth of revenue for Q3 compared to last year, yes, the main reason is Olympics during Q3 of last year.

  • We are happy with the progress of Phoenix Nest so far, but we're not ready to say that Phoenix Nest will have a very positive revenue impact at this time because we are pushing out some of the paid results from the classic edition which would reduce the revenue generation.

  • Once this final process is completed, we will start to see net positive impact from the Phoenix Nest.

  • James Mitchell - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Your next question comes from the line of Mr.

  • Jeffrey Lindsay with Sanford Bernstein.

  • Please proceed.

  • Jeffrey Lindsay - Analyst

  • Thank you for taking my question.

  • Could I ask, how -- which advertising sectors are looking strongest in your advertising business?

  • And how much further has Phoenix Nest to go?

  • Are you at the very beginning at Phoenix Nest or are you part way through the implementation?

  • And how much longer will the implementation take?

  • Thank you.

  • Jennifer Li - CFO

  • It's Jennifer.

  • I'll take the first question.

  • In general, the overall sector has a normal pattern in terms of the relative behavior.

  • We do see in the economic down cycles some B2C sectors, like medical, particularly are more resilient.

  • Education performs very strong in relative terms.

  • But all these during this seasonal times are not out of normal patterns.

  • And the second question?

  • Haoyu Shen - VP, Business Operations

  • I'll just take that question.

  • Yes, yes.

  • First just to add more color to what Jennifer said.

  • I think one thing is seasonality.

  • And also I think we're starting to see better performance of B2C sectors and B2B sectors, which is slightly different than what we saw at the end of last year.

  • When the slowdown came last year, we saw a drop of those B2C sectors and the B2B sectors.

  • Now we're seeing B2C regaining the growth advantage over B2B sectors.

  • On Phoenix Nest, we see very good adoption rate right now.

  • And it is -- I think the way to characterize it is probably we've gained strong footing already for this product.

  • The customers who are using Phoenix Nest, although their spending on Phoenix Nest is still a small part, a minority of their total spending with us, but they're happy with what we -- what they saw in terms of ROI.

  • But as Robin mentioned, right now we are still replacing some of the pay links that we had before in our old system with the new Phoenix Nest links, Phoenix Nest paid links.

  • So to be able to see a positive or material positive impact on our revenue, it will probably still take a few more quarters.

  • Jeffrey Lindsay - Analyst

  • That's great.

  • Thank you very much.

  • Operator

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

  • Please proceed.

  • Gene Muster - Analyst

  • Hi, good morning.

  • A couple of quick questions.

  • The first in terms of the operating margin, almost 39% versus 34% a year ago.

  • Could you give us some thoughts in terms of the sustainability of that higher margin?

  • And second, the ChinaJoy Conference is going on right now.

  • You guys have some events there too, which surprised me a little bit.

  • Maybe you could talk about what your strategy is in online games in China.

  • Jennifer Li - CFO

  • Hi, Gene.

  • It's Jennifer.

  • I'll take your first question and allow Peng Ye and Haoyu to answer your second.

  • Operating margin improved this quarter, as I mentioned earlier.

  • It's because of the continued leverage of our overall cost structure as well as efficiency improvements that we have been able to implement, both on the equipment side as well as the overall operating expense structure side.

  • We have mentioned many times that this business model has inherent very strong margin capabilities.

  • However, what we need to be mindful is this -- China's Internet industry is still in its early stage and we need to make investment in important initiatives.

  • We've mentioned a couple of important initiatives in the past, such as Aladdin, such as Phoenix Nest, such as some of the marketing and branding activities that we're putting more focus on.

  • So going forward, we do have a very disciplined approach to cost, but we do not have a margin target per se.

  • Going into Q3, as I mentioned earlier, we are picking up some investment in sales force capability buildup and resources buildup, and we'll also continue to invest in the equipment side to make sure we capture and we meet the market demand as well as to stay ahead of the game, the curve.

  • Marketing also going into Q3, I mentioned, the Baidu World Forum will occur this year as compared to Q2 of last year.

  • So sequentially you should anticipate some SG&A expenses to go up.

  • So on an ongoing basis, Gene, back to the question, is tremendous margin capabilities.

  • We do not focus on short-term margin targets.

  • We'll manage our cost base on a very disciplined approach, and our focus is to drive revenue growth and capture, stay ahead of the Internet development in China.

  • And I'll take -- pass over to Peng and Haoyu to comment on the ChinaJoy event.

  • Haoyu Shen - VP, Business Operations

  • So Gene, this is Haoyu.

  • Actually Peng and I are still stuck in Shanghai right now because of flight cancellation.

  • Yes, we are at the ChinaJoy event.

  • And the reason is gaming has become a big sector for us as far as paid search customers.

  • So it's a good opportunity for us to get to know more about this sector, to really talk to our customers and organize an event, almost a marketing and social event with our customers.

  • What we did was we gave these games awards based on the search carry volume on Baidu.

  • So that's what we're doing.

  • Peng Ye - COO

  • Yes, we carry to the very popular, so-called the top popular games in China during the last year, based on the search queries.

  • Gene Muster - Analyst

  • But you guys aren't interested in getting into the gaming business, per se?

  • Robin Li - CEO

  • We currently do not have any plan for getting into the games business.

  • Gene Muster - Analyst

  • Okay, great.

  • Thank you and congratulations.

  • Robin Li - CEO

  • Thank you.

  • Operator

  • Your next question comes from the line of Mr.

  • James Lee with Sterne Agee Capital Market.

  • Please proceed.

  • James Lee - Analyst

  • Hi.

  • Jennifer, I was hoping you maybe can talk about some of the cost structure going into third quarter.

  • You have said that expenses will go up because you are hiring more sales people for the Phoenix Nest system and also for the Forum.

  • Is that in percentage of revenues or is that the absolute amount?

  • And can you give us any idea how much of movements of increasing cost from 2Q to 3Q?

  • And also along with TAC, do you expect simply trying to manage the TAC going forward to acquire high-quality traffic, should we expect the TAC rate to be somewhat stable or do we expect that to creep up in the second half of the year?

  • Thank you.

  • Jennifer Li - CFO

  • James, I'll take your first question and I'll allow Haoyu to elaborate on the second.

  • In Q3, basically there are two things that's happening.

  • One is I mentioned we're going to step up our sales force hiring to support Phoenix Nest implementation so it will be more people cost related in the cost structure.

  • In addition, we'll host the Baidu World Event, particularly due to that happened in Q2 last year.

  • This Q3 versus Q2 will kind of break the expense trend a little.

  • Last year, if you noticed, our Q3 SG&A expense was actually lower than Q2.

  • And to answer your question, in terms of how directionally you should think about that, if you look at the Q1 and Q2 SG&A expense relationship in absolute dollar amount, that gives you an indication of the marketing-related expense change going into Q3.

  • And obviously this year we are stepping up on the headcount hiring effort compared to last year.

  • So you should take a little bit of that in the picture for Q3 as well.

  • I also want to caution you, going into Q3, I mentioned in the past, is typically the students graduate from school and will join on board from an R&D perspective.

  • So typically the seasonal pattern is R&D headcount will also increase in the later part of the summer months.

  • And Haoyu, can you take the TAC question?

  • Yes?

  • Haoyu Shen - VP, Business Operations

  • So James, on TAC, you probably noticed that we revisited our TAC payout policy recently and revised some of the terms.

  • What we do is really to differentiate different types of partners, different types of traffic and give different payout rates.

  • And the principle here is we want to reward partners that are loyal to us.

  • We want to reward partners that bring incremental traffic to us.

  • We want to reward partners who are -- who can give complementary search access points to our Baidu organic search.

  • So this policy is just recently published.

  • So we will carefully monitor market response.

  • My guess is some of the -- this will definitely encourage people to give us higher-quality traffic so that they can get the high payout rate.

  • On the one hand, this might have impact of even increasing the proportion of search traffic that comes from partners.

  • But on a payout front, I think it will be stable, if not going slightly lower going forward.

  • So these two factors combine together.

  • It's very hard to say the percentage of total revenue where TAC will be going forward.

  • But as we mentioned a few times before, we do not anticipate -- it's a very competitive business.

  • We also manage this business on a net of TAC, revenue net of TAC basis.

  • James Lee - Analyst

  • Got it.

  • And I just want to clarify Jennifer's answer regarding SG&A.

  • It seems like we're going back to 1Q level in terms of SG&A, then we also need to add in new recruiting of the new employees though the third quarter so the level of the total SG&A will actually be higher than the CNY28.3m that you posted in 1Q.

  • Jennifer Li - CFO

  • I think directionally that's right.

  • James Lee - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question comes from the line of Mr.

  • Eddie Leung with Bank of America - Merrill Lynch.

  • Please proceed, sir.

  • Eddie Leung - Analyst

  • Good morning, everyone.

  • A couple of questions.

  • The first one is could you guys talk a little bit about the increase in accounts receivable in the quarter?

  • And the second question was on the usage traffic trends.

  • Could you let us know the user traffic trend changes within the second quarter and into the early part of the third quarter?

  • Thank you.

  • Jennifer Li - CFO

  • Yes.

  • Eddie, it's Jennifer.

  • I'll take your first question.

  • Increased accounts receivable is there's nothing abnormal going on there.

  • It basically reflects the increased revenue, particularly associated to the businesses that we do with large customers.

  • In our traditional P4P business with SMEs, you know we basically have a prepayment kind of payment terms and we do have credit lines with the large clients.

  • And the increase of AR basically reflects higher revenue that we basically earned during Q2 and some of the payment terms that flow through the balance sheet.

  • So the payment terms is standard.

  • The total quality of the outstanding accounts is normal, so basically AR is in line with revenue growth.

  • Robin Li - CEO

  • On the user traffic front, we have seen very healthy traffic growth during the past quarter.

  • When we compare with the previous years, in '08 and '07, we saw nothing unusual.

  • The traffic pattern has been very, very consistent with previous years.

  • So we believe we have a solid footing on the traffic share front.

  • We maintained if not gained traffic share during the past quarter.

  • Eddie Leung - Analyst

  • Got that.

  • Thank you very much.

  • Operator

  • Your next question comes from the line of Mr.

  • Richard Ji.

  • Please proceed.

  • Richard Ji - Analyst

  • Hi, Robin, Jennifer, Haoyu, and morning.

  • And my first question is regarding your Phoenix Nest.

  • And what I'm just curious about is the penetration rate of Phoenix Nest among all your keywords.

  • In other words, what potential approximately of your keywords have already used Phoenix Nest?

  • And also based on the initial feedback from your customers, are you seeing positive feedback across all or there as a few areas that your customers wanted you to improve?

  • And my related question is regarding your development income attracting large corporations such as Intel as well as Nike, and which are typically, let's call it, atypical advertiser for paid search.

  • And I'm just curious about whether you are offering more competitive terms and especially relative to your paid listing rate and the offers to small companies, and also versus the so-called traditional online brand advertisers.

  • And what does it look like here?

  • Robin Li - CEO

  • Haoyu on Phoenix Nest.

  • Haoyu Shen - VP, Business Operations

  • Yes.

  • So the adoption is rated -- it's very high if you look at number of customers.

  • And I think on a given day of out of 100 customers who have received paid clicks from us, about half of them receive some Phoenix Nest clicks.

  • But, as I said, the spending on Phoenix Nest is still a relatively small percentage of total spending.

  • And one reason is not all the keywords, they have -- the customers, a lot of customers have now put all of their keywords, all of their potential keywords on Phoenix Nest yet.

  • So that's one of the areas we're focusing on going forward into the next quarter.

  • As far as feedback, I think we have previous feedback across the board, although some customers who spend more on Phoenix Nest, the feedback is more comprehensive because they feel it, they feel the impact of Phoenix Nest.

  • They feel the clicks are bringing them good conversion.

  • For those who are not spending much yet, it is still unclear just because of the sheer amount they're spending with us is small.

  • But again, the overall, the general feedback is very positive.

  • Peng Ye - COO

  • Hi, this is Peng Ye to take your second question.

  • Regarding the branded customers, I think to some extent you're right.

  • The SMEs, they measure the ROI in a much more simple way, using our marketing platform.

  • But the branded customers, they measure ROIs in terms of their marketing spendings in much more comprehensive ways.

  • So we offer them with much more comprehensive and completed online marketing solutions, not only P4P but also our community putouts.

  • So we do not give them the very competitive terms and conditions, but we offer them much more complete, comprehensive solutions.

  • So so far they are very happy with our offerings.

  • Haoyu Shen - VP, Business Operations

  • To just add to what Peng said, I think it is true that when it comes to search the need from small advertisers and brand advertisers are different.

  • But we are working with the brand advertisers really to show that there's a lot of branding value that search can bring.

  • And I think that message is definitely sinking in especially with some of our innovative search products.

  • Richard Ji - Analyst

  • Very helpful.

  • Thank you.

  • Operator

  • Your next question comes from the line of Mr.

  • Dick Wei.

  • Please proceed.

  • Dick Wei - Analyst

  • Hi, good morning.

  • Just two quick questions.

  • First question is that I just wondered the customer growth seems to be slower than the ARPU growth.

  • I wonder is it going to continue and what was the reason?

  • Peng Ye - COO

  • Hi this is Peng.

  • I will take this one.

  • A couple of reasons behind this situation.

  • I think one is last year in Q3 we increased all the minimum customer deposits.

  • As a result you saw a surge, sudden growth in terms of customer growth in the last year Q2.

  • Another question is -- another issue is -- another situation is that we, during the last couple of quarters we didn't increase our sales force.

  • And on the other hand we implemented the Phoenix Nest in the customer base, and also transferred some of our existing customers to the new system.

  • So that took some bandwidth of our sales force effort.

  • And -- but on the other hand you will see the ARPU growth is very healthy.

  • That is mainly because of the -- currently the quality of our customer base is increased a lot, improved a lot.

  • Jennifer Li - CFO

  • Dick, it's Jennifer.

  • I just wanted to add a little bit more.

  • You know, Peng obviously offered some color.

  • But if you look at the prior year's sequential trend, Q2's ARPU sequential growth is always higher than the number of customer growth.

  • We do know because of the strong seasonality, the nature of Q1 with Chinese New Year there, our ARPU is typically -- particularly low.

  • And we typically enjoy very strong rebound in Q2.

  • So in general we went -- the sequential growth was 23%, this year, it was 22% sequential ARPU growth last year.

  • So the pattern is still there.

  • There's some variations, but I think the general -- the pattern is still very normal.

  • Dick Wei - Analyst

  • Maybe -- second question maybe is for Robin is that I guess Ali Baba launches some more pay-per-performance or search based advertising services on both, I guess, the top ad site Ali Mama or on the domestic B2B site.

  • And I wonder have you seen any of your customers, like B2B or B2C customers, shifting more ad budget to Ali Baba.

  • And how do you look at the ad budget changes for merchants as a market you go after in China.

  • Thanks.

  • Robin Li - CEO

  • So far we haven't seen any meaningful impact on our customers for the alternative ways of promoting their products and services.

  • I guess one of the key difference is that Baidu, as the dominant search engine, we are an open platform.

  • We direct our users, or consumers, to our customers on site.

  • We believe this is the future.

  • We believe in the future, especially on the B2B and the B2C side, the Bs usually prefer longer-term an independent presence on the Web.

  • That's why we are quite confident that our customers will continue to spend on us more and more.

  • Dick Wei - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Your next question comes from the line of Scott Tong with Oppenheimer.

  • Please proceed.

  • Scott Tong - Analyst

  • Hello, good morning.

  • I just have a quick question on Baidu Statistics.

  • Can you just let us know whether the key differences between Baidu Statistics versus Google Analytics and how it would improve monetization?

  • Thank you.

  • Robin Li - CEO

  • Haoyu could you take the question?

  • Haoyu Shen - VP, Business Operations

  • I think it's about the new tool we launched right?

  • Yes the -- okay.

  • Yes, it's codenamed 'Holmes'.

  • Official name I think is Baidu Statistics.

  • It is a web analytics tool where it -- right now we're launching it or pushing it to our paid search customers.

  • It is to enable them to monitor and track the traffic, the source of the traffic and also after the click what happens.

  • So this will really give them a much better view of ROI of their sales spending.

  • And going forward we'll integrate this tool in terms of the data exchange with Phoenix Nest.

  • And we also have plan to launch this product to our Union partner.

  • So I think this is a very important tool that really demonstrates that we think that giving customers more data, giving them more transparency, will enable them to appreciate the ROI paid search more, and eventually lead to higher spending on Baidu.

  • Robin Li - CEO

  • Does that answer your question?

  • Scott Tong - Analyst

  • Yes.

  • Operator

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

  • Jason Brueschke - Analyst

  • Thank you.

  • Good morning everyone.

  • My question is on the ARPU, just a little bit of a follow up, I think, to Dick's question.

  • If we look at the year-over-year growth in ARPU this year, it seems to have decelerated from the year-over-year growth that we saw last year.

  • And I'm wondering how much of that you would attribute to the, maybe, overall still generally weak condition in the Chinese economy.

  • And maybe how much of that might be attributed in some ways to some of the customer clean up that you guys did at the end of the fourth quarter and into the early part of the first quarter.

  • Robin Li - CEO

  • Sorry we lost the operator and we didn't hear the first part of the question.

  • Jason Brueschke - Analyst

  • Yes.

  • The question involves your ARPU growth.

  • It's growing at a slower rate this year compared to the Q2 rate last year.

  • And I'm wondering how much of that is due to the weakness in the economy.

  • And if there's any lingering effect from some of the customer clean up that you guys did at the end of the year and the beginning of Q1.

  • Jennifer Li - CFO

  • This is Jason right?

  • Jason Brueschke - Analyst

  • Right.

  • Jennifer Li - CFO

  • Let me understand your question.

  • Our ARPU sequential growth this quarter was 23%.

  • It was 22% in '08 sequential rate.

  • It was 24% in 2007.

  • So I don't think I quite get your question?

  • Jason Brueschke - Analyst

  • I think it's about the year-over-year growth.

  • Robin Li - CEO

  • Yes.

  • In terms of the year-over-year number, we explained it before that the Chinese New Year happened at a later time during '08.

  • Therefore from a seasonality point of view, Q1 would be lower in '08.

  • That's why you see a stronger growth for ARPU during '08.

  • Jason Brueschke - Analyst

  • Great, thanks.

  • Operator

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

  • Please proceed.

  • Ming Zhao - Analyst

  • Thank you.

  • I have two questions.

  • First question is, following that competitive landscape question, if you look at your today's sales and the contribution from B2B and B2C, do you see a faster growth in the B2C business spending on your platform than the B2B?

  • Robin Li - CEO

  • Yes.

  • Ming, as I mentioned, since the end of Q1 we are seeing B2C sector regaining the growth advantage over B2B sector.

  • If you -- when you talk about B2C you mean B2C broadly, not online retail right?

  • Ming Zhao - Analyst

  • Correct, yes.

  • Robin Li - CEO

  • Yes.

  • So yes, we're seeing the higher growth of B2C than B2B again.

  • Ming Zhao - Analyst

  • Okay, okay.

  • Second question is we see some news about the Baidu Space.

  • So can I ask you what's the plan there?

  • How are you going to monetize that?

  • Are you going to say launch some web page games like some other competitors do?

  • Robin Li - CEO

  • Baidu Space, well Baidu Space is a social networking product offering from Baidu.

  • It's been launched for a couple of years.

  • And we continue to make improvements in the product.

  • We continue to add features.

  • We opened the platform for other application developers to add games to our service.

  • In theory there could be revenue potential from there, but right now we're not counting on that.

  • Ming Zhao - Analyst

  • Alright.

  • Thank you.

  • Operator

  • Your next question comes from the line of Mr.

  • Eric Wen with MainFirst.

  • Please proceed sir.

  • Eric Wen - Analyst

  • Hi Robin, Jennifer and Haoyu.

  • Thanks for taking my questions.

  • I just have a question regarding your partnership with Suning.

  • Number one is how is this search embedded into this product?

  • And second is Baidu thinking of continuing this approach of basically working with large retailers or more like your C2C platform, you're going to have a hosting platform for other companies to connect to your platform to sell their product?

  • Regarding whether your long term vision is towards that.

  • And number three is if you can share with us some of your early thoughts on monetization.

  • Is this going to be one-time project fee, or are you talking about revenue sharing as you're going forward?

  • Thanks.

  • Robin Li - CEO

  • Okay.

  • As I mentioned, we're seeing B2C sector start to take off during the past quarter and the Suning deal represent our effort to make things happen faster.

  • The details of the Suning deal is like this, we would pretty much function as a consultant and help them to -- give them advice on how to build their Web presence.

  • And in addition we would open a interface for them to feed their product information to our search results.

  • We'll insert those product information in the proper position of our web search results which uses the Aladdin technology.

  • So that will give our partners better exposure of their product.

  • Going forward I think this will be the main way of our effort into the B2C sector because we strongly believe that retail is all about brand and traditional retailers need to have their independent presence on the web.

  • And once they realize that Internet is going to be a major distribution channel for them, they will need to invest more.

  • And they will advertise on Baidu to drive traffic to their site.

  • So we stand to become a very large beneficiary of this trend.

  • So we do not plan to offer hosting services for large retailers.

  • We are -- our approach is to educate the market so that they will come online sooner, they will use the Internet channel sooner and better, so we can benefit from this trend.

  • Eric Wen - Analyst

  • Got it.

  • Thanks.

  • Operator

  • Your next question comes from the line of Mr.

  • James Sullivan.

  • Please proceed.

  • James Sullivan - Analyst

  • Hi.

  • Good morning.

  • And thank you very much for the call.

  • Just a very quick question regarding the outlook for the Japan business.

  • We've now seen NHN's launch in Japan.

  • Just wondering if there were any lessons learned or takeaways from that launch that you can potentially apply to your business moving forward, and what the expectation is in terms of when you'll start to see revenue recognition of the Japan business.

  • Thank you.

  • Robin Li - CEO

  • Hi this is Robin.

  • We continue to make progress in our Japan business.

  • At this point the main focus is still improvement of product quality.

  • We continue to work on our Web search.

  • We're also are working on a number of new product offerings for the Japan market.

  • Because Japan is a more mature market, at this time we do not have any plan to generate revenue because we strongly believe traffic need to grow first.

  • And before traffic it's product quality.

  • So once our product is very competitive, we will start to find ways to generate traffic and revenue will then follow.

  • We, at this time, do not have a definite schedule on revenue generation for Japan.

  • Jennifer Li - CFO

  • Next question please.

  • Operator

  • Your next question comes from the line of Mr.

  • Stephen Ju with RBC Capital Markets.

  • Please proceed.

  • Stephen Ju - Analyst

  • Morning everybody.

  • So I was wondering if you can give us an update on your mobile initiative.

  • Seems like your competitor has been stepping up its efforts in product releases and advertising as of late.

  • Thank you.

  • Robin Li - CEO

  • Yes.

  • We've been keeping a close eye on the mobile front.

  • We have partnered with quite a few large players in this space including some of the carriers China Telecom, China Unicom and companies like Samsung or Lenovo.

  • We've placed our search services in some of the mobile phones with 3G.

  • Haoyu Shen - VP, Business Operations

  • Okay.

  • Regarding to the mobile question, we have seen rapid changes in the 3G mobile market in China.

  • We are making necessary investment in all kinds of product features we're offering.

  • And we're working on some new products too.

  • But at this time there are still lot of uncertainties regarding to the wireless Internet.

  • So it remains to be seen what would be particular apps for wireless search or for mobile Internet in general.

  • But we have partnered with a number of companies, including carriers like China Telecom, China Unicom, companies like Samsung or Lenovo.

  • And we've placed search features in some of the customized 3G mobile phones in China.

  • Robin Li - CEO

  • So operator, let's take the last question.

  • Operator

  • Okay sure.

  • Your next question comes from the line of [Hu Ban] with HSBC.

  • Please proceed.

  • Hu Ban - Analyst

  • Thank you for taking my question.

  • My question is on the total number of advertiser.

  • Compared with Q1 2009 there is 18,000 new added.

  • But compared with Q2 number there is only 6000 new added.

  • And during the Q1 call you guys said that decline of customers in Q1 is due to a majority of those questionable customers were still active in Q4 but removed in Q1.

  • So could you kindly illustrate how much of new added customers in Q2 actually new added and how much are from Baidu's previous customer?

  • Thank you.

  • Robin Li - CEO

  • Haoyu and Peng, can you take on that question?

  • Haoyu Shen - VP, Business Operations

  • I didn't quite get the essence of the question.

  • But it is true that the decline in Q1 versus Q4 is because of sector clean up and the increase of Q2 versus Q1 is net addition to our customer base.

  • Hu Ban - Analyst

  • Right.

  • My question is how much of this 18,000 are truly new added and how much are from Baidu previous questionable customer coming back.

  • Haoyu Shen - VP, Business Operations

  • I see what you mean.

  • I don't think there are many customers that advertised with us before Q4 last year, that didn't in Q1, but did again in Q2.

  • So in other words, these are truly new adds.

  • Hu Ban - Analyst

  • Okay.

  • Thank you.

  • Operator

  • We are now approaching the end of the conference call.

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

  • You may proceed.

  • Robin Li - CEO

  • Once again thank you for joining us today and please do not hesitate to contact us if you have any further questions.

  • Thank you.

  • Operator

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

  • This concludes the presentation.

  • You may now disconnect.

  • Have a good day.