百度 (BIDU) 2009 Q4 法說會逐字稿

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  • Operator

  • Hello and thank you for standing by for Baidu's fourth quarter and full year 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.

  • Tseng of Baidu.

  • Please proceed.

  • Victor Tseng - IR Manager

  • Hello everyone and welcome to Baidu's fourth quarter and full year 2009 earnings conference call.

  • Baidu's earnings release was distributed earlier today and you can find a copy on our 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 Haoyu Shen, Senior 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.

  • Forward-looking statements are subject to risks and uncertainties that may cause the actual results to differ materially from our current expectations.

  • Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20F.

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

  • Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures.

  • Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited, mostly directly comparable, GAAP measures, and is available on our IR website at ir.baidu.com.

  • As a reminder, this conference is being recorded.

  • In addition a webcast of this conference call will also be available on Baidu's IR website.

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

  • Robin Li - CEO

  • Hello everyone and thank you for joining us today.

  • We are pleased to have ended 2009 with another quarter of solid results.

  • In an initially challenging and later transitional year, I am proud of the strength, dedication and strong execution of our team.

  • Baidu continues to innovate and improve our product to drive the development and growth of the search engine market.

  • One of the exciting developments for us this past quarter was the better than expected transition to Phoenix Nest.

  • All keyword auctions have been conducted on Phoenix Nest since the migration was completed on December 1 and customer feedback continues to be encouraging.

  • Now our focus is twofold.

  • One, further educating customers so that they can realize the full benefits of the new platform's many tools and features, and two, optimizing the Phoenix Nest algorithm.

  • So as we focus on this element, we expect customer acceptance to continue to ramp up gradually in the quarters ahead.

  • We are optimistic about the positive impact this new platform will have on our users and customers as well as on our monetization capabilities.

  • In Q4 we continued to witness the percentage increase of revenue coming from large customers who have tended to be the earliest beneficiaries of Phoenix Nest.

  • We look forward to growing this business as large customers increasingly value the measurable ROI of our P4P platform and the enhanced tools that Phoenix Nest provides.

  • During the fourth quarter we also remained focused on improving search experience through Baidu open search platform, codenamed Aladdin.

  • Today I'm pleased to say that a big portion of our search queries generate dynamic results from Aladdin.

  • This result includes both content and applications from external providers as well as user-generated content from Baidu's own verticals.

  • I'll give you an example.

  • Many of you are aware that Chinese New Year is right around the corner and hundreds of millions of people will be traveling home and spend holidays with family and friends.

  • This year users who go to baidu.com and search for 'huo che piao' or train ticket will be met with a control panel where they can input departure and destination locations right on the Baidu search result page.

  • And our engine will deliver an updated timetable.

  • This is just one example.

  • We have developed many more capabilities on Aladdin that allow our users to access comprehensive information or resolve their needs through various application layers.

  • This sort of applications are part of the vision of box computing, which aims to elevate the traditional web search so it becomes ubiquitous and an even more important part of our users' lives.

  • Core to our mantra of emphasizing the development of useful products that fulfill user needs, we continue to push ahead on this front by improving our existing verticals, such as Baidu Maps and Baidu Encyclopedia.

  • Both of those, in fact, were recently moved to the Baidu home page, which reflects their increasing popularity.

  • And we made strides in our mobile search strategy, entering partnerships with leading telecom carriers, handset manufacturers to provide mobile search technology and access to popular Baidu verticals.

  • A recent example is that Motorola has integrated Baidu as the default search engine on all of their Android phones sold in China.

  • We are also witnessing strong growth in our mobile search traffic.

  • In fact Baidu Post Bar is one of the most popular and fastest growing mobile applications for Chinese wireless Internet users.

  • Now let's move into some of our current strategic initiatives.

  • As China's Internet base continues its rapid growth, we are seeing new areas for growth that complement our existing strategy.

  • In developing these new areas we are choosing to cooperate with experienced partners whose insight can help us develop the best possible offerings.

  • An example of this is the completely licensed online video service we are creating.

  • Mr.

  • Gong Yu, an Internet veteran, will be heading up this independent company.

  • We believe search engines are the biggest beneficiaries of e-commerce activities.

  • So we do our best to cultivate e-commerce in China.

  • On this front you have seen that we recently announced our partnership with Japan's leading B2C platform, Rakuten.

  • By leveraging Baidu's unique vantage point on China's internet users and Rakuten's expertise in e-commerce, this joint venture aims to fill the increasingly sophisticated online shopping needs of merchants and consumers.

  • Having just celebrated our 10th year anniversary last month, we are reminded of how far we have come.

  • Today, according to iResearch Q3 data, Baidu has captured over three-fourth of traffic share in China.

  • But this is just as a beginning.

  • China's more than 384m internet users translate to less than 30% penetration rate.

  • And with a potential market of 40m SMEs in China, of which we currently work with approximately 317,000, we have plenty of room to grow.

  • As our SME customers become more sophisticated search engine marketers, through Phoenix Nest analytical and targeting tools to enhance ROI, we have reason to look forward to growth in customer spending.

  • We are optimistic about the growth opportunities for 2010 and beyond.

  • Today, while there have been some changes at the senior level, with Haoyu and Wang Zhan's promotion and Peng and Yinan's departures, I am confident we have the right team and strategy in place to bring value to our users and customers.

  • Our foundation is stronger than ever.

  • And we will invest accordingly to meet the challenges and capture the opportunities ahead.

  • With that, I will turn the call over to Jennifer for financial highlights.

  • Jennifer Li - CFO

  • Thank you, Robin.

  • Hello everyone.

  • Let me take you through our fourth quarter and full year 2009 financials before taking your questions.

  • The amounts mentioned are in CNY unless otherwise noted.

  • For the fourth quarter, total revenues were CNY1.3b, representing a 40% increase year over year.

  • Total revenues for the full year 2009 were CNY4.4b, an increase of approximately 39% from 2008.

  • During the quarter Baidu had approximately 223,000 active online marketing customers, a 13% increase from the corresponding period in 2008 and a 3% increase from the previous quarter.

  • Revenue per online marketing customer for the fourth quarter was approximately CNY5,700, a 24% increase from the corresponding period in 2008 and a decrease of 3% from the previous quarter.

  • For the full year 2009 active online marketing customers increased by 12%.

  • And revenue per online marketing customer increased by 25% over the full year 2008 figures.

  • Traffic acquisition cost, as a component of cost of revenue in Q4, was CNY202m, or 16% of total revenue, as compared to 14.6% in the corresponding period in 2008 and 15.3% in the third quarter of '09.

  • The slight sequential increase over Q3 reflects normal market fluctuations.

  • Full year 2009 TAC as a percent of revenue was 15.7%, up from 13.1% from 2008, reflecting growing Baidu Union contribution to revenues.

  • In 2010 the focus will be on drawing quality traffic from partners.

  • Bandwidth costs and depreciation costs as a percent of revenue both decreased in the fourth quarter compared to the year ago period, primarily due to improved equipment efficiency and stability of our network.

  • Selling, general and administrative expenses in Q4 were CNY222m, an increase of 26.5% year over year.

  • Total SG&A expenses for 2009 were CNY804m, a 22% increase from 2008 mainly due to increased marketing expenses and compensation costs.

  • R&D expenses in Q4 were CNY124m, an increase of 45% over the year ago period, primarily due to increased headcount.

  • Total R&D expenses for 2009 were CNY423m, a 48% increase from 2008, reflecting continued investment in R&D capability.

  • With the transition to Phoenix Nest now largely behind us, we're focusing more on selling and marketing.

  • In 2010 we'll continue to invest in both sales and marketing and R&D as we add headcount and drive new initiatives.

  • Share-based compensation expenses, which were allocated to related operating expenses, decreased in aggregate to CNY19m in the fourth quarter from CNY21m in the corresponding period in 2008.

  • SBC for 2009 increased 3% over 2008 level.

  • Operating profit for Q4 was CNY462m, an increase of 52% over Q4 2008.

  • Operating profit for the full year '09 increased 46% from '08.

  • Total headcount as of December 31, 2009 was about 7,300, roughly 300 more than the previous quarter.

  • The increase in headcount mainly comes from sales and R&D.

  • Income tax expenses was CNY71m for the fourth quarter.

  • The effective tax rate for the fourth quarter was 14.2%, compared to 9.1% last quarter.

  • The increase from last quarter was mainly due to tax benefit we received in Q3.

  • For the full year our effective tax rate was 11.8% compared to 10% in 2008.

  • The year-on-year increase reflects the expiration of partial tax holidays for some of our entities.

  • For 2010 we expect our effective tax rate to be in the mid to low teens.

  • Net income for Q4 was CNY428m, a 48% increase from the corresponding period in 2008.

  • Basic and diluted EPS for the fourth quarter of '09 amounted to CNY12.33 and CNY12.27 respectively.

  • Net income for the full fiscal year increased by 42%.

  • Net income, excluding share-based compensation, a non GAAP measure, for Q4 was CNY447m, a 44% increase year over year.

  • Basic and diluted EPS, excluding share based compensation expenses, both non-GAAP measures, were CNY12.87 and CNY12.8 respectively.

  • As of December 31, 2009 the Company had cash, cash equivalents and short-term investments of CNY4.6b.

  • Net operating cash flow and capital expenditure for the fourth quarter of '09 was CNY779m and CNY146m respectively.

  • Full year net operating cash flow and capital expenditure were CNY2.3b and CNY399m respectively.

  • This includes both CapEx on equipment and Baidu Campus.

  • We will continue to invest in our server networks, and expect CapEx in 2010 to be no less than the level in 2009.

  • In 2009 we spent $23.8m on Baidu Japan operations versus guidance of $25m to $30m.

  • For 2010 we plan to invest approximately $30m.

  • As you know the quarterly expense trend for our spending on Baidu Japan has largely been established.

  • And we believe we have continuously managed this investment in a disciplined fashion.

  • In addition, given the fact that our base continues to grow, rendering the Baidu Japan expense increasingly immaterial, going forward we'll not break out the quarterly expense incurred for Baidu Japan.

  • Instead we'll update only on a yearly basis, say, for instance, where there are material changes.

  • Also given our plans to build the new online video channel, our agreement with UiTV which was announced in September 2009 -- 2008 has been cancelled.

  • Now let me provide you our top-line guidance for the first quarter 2010.

  • We currently expect total revenue for the first quarter of 2010 to be between CNY1.2b and CNY1.235b which could represent a 48% to 52% year-over-year increase.

  • 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, please go ahead.

  • Operator

  • (Operator Instructions).

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

  • Please go ahead.

  • Dick Wei - Analyst

  • Hi.

  • Good morning.

  • Congrats on the very good quarter.

  • I hope that Robin can give some color in Baidu e-commerce strategy.

  • It seems like the Company has different platforms, your partnership with Rakuten and Aladdin to help merchants to make their site more searchable.

  • I wonder it is more like transition phase, that's why you have different strategy?

  • If you can give us what we can expect over next few quarters, that will be very helpful.

  • Thanks.

  • Robin Li - CEO

  • Hi, Dick.

  • This is Robin.

  • As I said during the prepared remarks, we believe that search engines are the biggest beneficiaries of e-commerce activities.

  • That's why Baidu has been working on a lot of initiatives that will cultivate and stimulate e-commerce activities in China.

  • We started with a business unit called Youa which provides better, more detailed product information for our search engine users.

  • That took off when we observed the increasing search queries from the Baidu search engine, or product-oriented queries.

  • So Youa is still moving into that direction, meaning we are aggregating a lot of product information so that the Baidu search engine users can easily find what they are looking for.

  • In addition to that, the Aladdin platform allows some of the content partners or application partners to submit relevant information to our search engine result.

  • For example the airline tickets we can allow some of the partners to provide a more interactive interface in search engine without -- so that users can easily find what they want.

  • And e-commerce providers or players can benefit from the traffic and experience we bring to them.

  • But that's not all.

  • This past quarter we struck a deal with Rakuten as a joint venture.

  • And they have a lot of experience in e-commerce in Japan.

  • And we would like them to bring their experience to China so that more and more sellers and vendors, especially those B2C-oriented providers, can grow faster and serve the Chinese consumers better.

  • We believe the more mature the e-commerce market is in China, the better our position will be.

  • Dick Wei - Analyst

  • May I have a follow-up regarding Rakuten?

  • Anything you can discuss about the business model in China for that joint venture?

  • Robin Li - CEO

  • Okay.

  • Rakuten is very much like an online shopping mall.

  • They have a platform and a lot of B2C brand sellers can be hosted on their platform.

  • They have certain customer loyalty programs.

  • They run training courses so that sellers can learn how to sell their products online.

  • And I believe that we ought just to copy the Japan model to China, which we think China needs.

  • Dick Wei - Analyst

  • Great.

  • Thank you very much, Robin.

  • Robin Li - CEO

  • Thanks.

  • Operator

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

  • Go ahead.

  • James Mitchell - Analyst

  • Great.

  • Thank you for taking my question this morning.

  • Could you talk a little bit about your guidance for revenue to decline by low single digits sequentially in what's seasonally a weak quarter?

  • Specifically, does the Phoenix Nest transition help or hurt your revenue in the first quarter versus what your revenue would otherwise be?

  • And are you seeing any revenue benefit in the first quarter from your major competitor's announcement it may change its status in China?

  • Thank you.

  • Haoyu Shen - SVP Business Operations

  • Hi James.

  • This is Haoyu.

  • As we said Q4, when we provided guidance for Q4 we said the Q4 performance would be negatively impacted by Phoenix Nest.

  • And it was negatively impacted by Phoenix Nest.

  • It's just less than we expected because Phoenix Nest performed better than expected.

  • As far as Q1, because we did the switch on December 1, so it's really very hard to quantify how much, if any, Phoenix Nest transition is still impacting the numbers we're giving today for Q1.

  • We're really -- the guidance we're giving today is really based on what we have seen so far since January 1 until today.

  • And also the historical trends we're seeing in Q1.

  • This year's Chinese holiday is very late compared with some previous years.

  • So all these factors are in these numbers.

  • So again it's, on one hand, the transition is largely behind us as far as the number of customers moved and the ARPU trends we're seeing.

  • But, on the other hand, I think for some customers the learning curve is still steep.

  • And then, on the other hand, we're probably going to see some benefits of Phoenix Next monetization potential to materialize during the later part of this quarter.

  • So a lot of things going on.

  • There's no way for us to quantify the impact of the move for Q1 numbers.

  • As far as whether we have factored in any impact from some potential competitive moves, no.

  • We are -- we're not.

  • We're really basing it on what we're seeing on our numbers so far.

  • James Mitchell - Analyst

  • Thank you.

  • Operator

  • (Operator Instructions).

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

  • Go ahead.

  • Ming Zhao - Analyst

  • Thank you for taking my questions.

  • Good quarter.

  • I have a question on the selling and marketing expense which has been up significantly versus the previous quarter.

  • I just want to know what has caused that.

  • Is there anything you've done particularly to promote the Phoenix Nest system?

  • Is that going to be lasting to the future quarters?

  • Jennifer Li - CFO

  • Hi Ming.

  • The Q4 SG&A expenses, I would attribute two main things happening there.

  • One is we did have a Baidu Campus event.

  • And we celebrated the events and kicked off Baidu's 10th year anniversary celebration.

  • So there were marketing events and branding events happen in Q4.

  • That's one thing.

  • The other thing is you did -- you will recall that in Q3 we increased our sales and marketing -- our sales headcount in Q3.

  • And therefore Q4 we would have the full quarter's impact, having that headcount increase.

  • And we continue to add headcount on the sales side.

  • So those are the two main drivers that drove the Q4 marketing expenses.

  • There was nothing in particularly related to Phoenix Nest in terms of promotional expenses.

  • So nothing in that nature that was in Q4.

  • Ming Zhao - Analyst

  • Okay.

  • Just to follow up on that, how many sales people do you have right now?

  • And what's the plan for 2010?

  • Jennifer Li - CFO

  • We have about 4,400 sales people at this point.

  • And going into 2010, as I mentioned in the script, we'll continue to accelerate, basically hiring on the sales and marketing expense -- the headcount.

  • So that's the plan.

  • If you look back into 2009 we kind of slowed down in our sales and marketing workforce hiring in the first part of the year.

  • And as we get more and more comfortable with the transition of Phoenix Nest, we started to speed up our hiring.

  • And going into 2010, that will continue to be the plan.

  • I do not anticipate hiring for '10 will by any less than 2009.

  • Ming Zhao - Analyst

  • Thank you very much.

  • Operator

  • Our next question comes from the line of Eddie Leung with Bank of America.

  • Go ahead.

  • Eddie Leung - Analyst

  • Good morning, everyone.

  • Could you guys give us an update on contextual search, especially any plans to roll out Phoenix Nest to contextual search?

  • Thanks.

  • Robin Li - CEO

  • Hi Eddie.

  • Yes we had -- before Phoenix Nest we had our old contextual product.

  • And because of the move, our contextual product has also moved to a new platform.

  • So it is a -- traditionally, historically it's a product that we didn't really put as much resource behind it.

  • It will be -- going forward this year, next year, it will be one of our focus areas as far as our R&D and product resource deployment.

  • So right now it's a small percentage of our revenue.

  • But we fully expect it will grow to be a more material, more meaningful part of our revenue.

  • Eddie Leung - Analyst

  • Got that.

  • Thanks.

  • Operator

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

  • Go ahead.

  • Catherine Leung - Analyst

  • Hi.

  • Good morning.

  • My question is whether you'd be able to elaborate on the monthly trends in the fourth quarter in terms of your customer add numbers and the revenue per customer.

  • Despite the transition, you were still able to add about 7,000 net customers sequentially.

  • Did you feel that Phoenix Nest changed the difficulty of your acquiring new customers because there were more features and algorithms more complicated?

  • Or did it really not matter because the customers were basically just learning how to use search from scratch?

  • Similarly, on the revenue perspective, do you believe that new customers spend more or less budget when they join, considering the new budget management tool, but also everybody is just starting to compete and proving their quality rating.

  • Haoyu Shen - SVP Business Operations

  • This is Haoyu.

  • Specifically in Q4 I don't think the move to trend toward Phoenix Nest has impacted our customer acquisition that much because in the field we have two groups of people.

  • One is acquisition, the other is customer service.

  • So the move really takes the resource of field customer service people, not so much the acquisition people.

  • As far as ARPU, the ARPU in December for those customers who stayed with us, who -- or, in other words, who moved to Phoenix Nest, we're seeing very good trends of ARPU which means after the move to Phoenix Nest, because of the tools we're providing, because it's a better system, they are, on average anyway, they are spending more money with us, for those who moved.

  • Over longer time, the move to Phoenix Nest will impact the customer position from the standpoint of it's a better product.

  • It gives the customers a chance to realize the potential of paid search more fully, more attractively.

  • So gradually I think that will work into the system to make our acquisition more effective.

  • As far as ARPU, definitely it will be a good driver for ARPU growth going forward.

  • Catherine Leung - Analyst

  • Okay.

  • I'm sorry, if I could follow up.

  • On the new customers, the brand new customers that you've acquired, compared to the new customers who joined under the classic system, the new customers joining under the Phoenix Nest system, did they initially put more budget?

  • Is there any kind of meaningful change compared to under the old system?

  • Robin Li - CEO

  • There's not enough data to draw conclusions at this point.

  • Catherine Leung - Analyst

  • Okay.

  • Thank you.

  • Operator

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

  • Go ahead.

  • Wallace Cheung - Analyst

  • Hi.

  • Thank you for taking my questions.

  • Just quickly on -- can you give us some more color on your strategy on the online video segment movement?

  • So how much would you be spending going forward?

  • And are you going to form a -- introduce more after the new joint venture?

  • Robin Li - CEO

  • Okay.

  • As said -- this is Robin.

  • As I mentioned, the online video thing is done through an independent company because we think the nature of that business is somewhat different from our core business.

  • We are looking to raising some money from external resources to fund this business venture.

  • We have a business plan and most of the initial costs will be spent on buying content.

  • The exact amount has not been finalized.

  • Wallace Cheung - Analyst

  • Thank you.

  • Jennifer Li - CFO

  • We will provide you relevant information as we get ready for it.

  • Right now, as Robin mentioned, the deal has not been completely finalized.

  • But we will certainly look forward to providing you relevant information.

  • Operator

  • Our next question comes from the line of Eric Wen with Mirae Asset.

  • Go ahead.

  • Eric Wen - Analyst

  • Hi, good morning.

  • Can you hear me?

  • Robin Li - CEO

  • Yes.

  • Eric Wen - Analyst

  • Hello?

  • Jennifer Li - CFO

  • Yes, we can.

  • Eric Wen - Analyst

  • Okay, thank you.

  • Good morning and congratulations on a good quarter.

  • Just if you can shed some light on the traffic growth.

  • On the fourth quarter I think there's some slowdown in the growth of web paid search.

  • And do you think that is temporary?

  • Or do you see it's a more slowdown going forward in terms of search, web paid search traffic in China?

  • Thanks.

  • Robin Li - CEO

  • Well, I would say that the search traffic growth is also seasonal.

  • Usually during the first quarter, right after Chinese New Year, we see a dramatic growth in search traffic.

  • Then for the rest of year the growth will be much slower.

  • So for Q3 and Q4 we saw growth, but it is much slower than the trend we saw in -- after the Chinese New Year.

  • It's been like this for a couple of years.

  • There's nothing significantly different this year or this past Q4.

  • We do realize that sometimes the government may run certain campaigns to clean up the content on the Internet landscape.

  • Some of the online sites, the websites could be shut down here and there.

  • We just need to bear with that.

  • I think overall that the government understands Internet is good for the Chinese society and for Chinese economy and traffic should come back when things are settled.

  • Eric Wen - Analyst

  • Okay.

  • Thanks Robin.

  • Operator

  • Our next question comes from the line of Aaron Kessler with Kaufman.

  • Go ahead.

  • Aaron Kessler - Analyst

  • Hi.

  • Good morning.

  • Can you maybe just give us a little detail on which vertical you thought may strengthen in the quarter?

  • And in terms of the Shanghai Expo what are your thoughts on the potential impact to the business?

  • How do you think that would impact Baidu at all, on either revenues or do you plan any marketing around that?

  • Thank you.

  • Haoyu Shen - SVP Business Operations

  • We -- as far SME sectors, the verticals are -- the performance of verticals are very seasonal.

  • Travel, education, those are very seasonal, depending on the nature.

  • So we haven't -- in the past Q4 we haven't seen any meaningful changes in that seasonality pattern.

  • As far as the Shanghai Expo, a lot of brand advertisers will gear up for this event.

  • But right now, as far as the contribution to our revenue, despite some brand advertisers, it's still a very small percentage of our total revenue.

  • So the positive impact from this event on Baidu will be fairly limited.

  • Robin Li - CEO

  • And we have no plans for any significant marketing activities during the next quarter either.

  • Aaron Kessler - Analyst

  • Just a smaller question about other income.

  • It's a little higher than expected.

  • Is this tax rebates or is there something else in the quarter?

  • Jennifer Li - CFO

  • Yes.

  • Typically in Q4 you would see that in prior years too.

  • There will be some government subsidies, some rebates, just some government support subsidiaries -- subsidies that would come in.

  • Aaron Kessler - Analyst

  • Great.

  • Thank you.

  • Operator

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

  • Go ahead.

  • Richard Ji - Analyst

  • Hi Robin, Jennifer and Haoyu.

  • And congrats on a good quarter.

  • Robin Li - CEO

  • Thank you.

  • Richard Ji - Analyst

  • Sure.

  • One positive development during the quarter is obviously you started to attract more large corporate customers.

  • And are they spending significantly more than the small and medium enterprises?

  • And also what is roughly the revenue contribution from these large corporate customers?

  • And I'm also curious to find out what are the top categories for these large customers.

  • And should we expect, because a lot of them are in the budgeting process right now, should we expect more budget allocations and for brand building in Baidu in 2010?

  • Haoyu Shen - SVP Business Operations

  • The growth of -- hi Richard, this is Haoyu.

  • The growth of revenue from advertisers has been going up, not in the past quarter, not in the past year.

  • I think in the past two years we're seeing faster growth of spending from these big advertisers.

  • So if I have to pick the -- they spend some money with us on display, but mostly it's still on search because they've come to appreciate the value of search to their -- either to their business, to their sales or even to their branding efforts.

  • If I have to pick big sectors, I think auto is definitely growing very fast.

  • On a per -- on ARPU basis they definitely spend much more than the SMEs.

  • And you're right, we're -- in the beginning of the year, we are in the process of signing so-called framework agreements with these big advertisers, just like the (inaudible).

  • And we're seeing -- we're definitely seeing good growth potential still going into this year.

  • If we look at the average size of the agreements we're signing with them compared with last year, we're very happy about it.

  • Robin Li - CEO

  • And real estate is also a good area.

  • Richard Ji - Analyst

  • Okay.

  • Great.

  • A related question is regarding your Baidu Union growth which has been growing faster than your organic paid search over the past one year or two.

  • And given the transition of Phoenix Nest has largely been completed, should we expect the reacceleration of your organic paid listings versus your Baidu Union growth?

  • And, if so, should we expect you're deploying more resource to acquire the Baidu Union members in 2010?

  • Haoyu Shen - SVP Business Operations

  • Baidu Union contribution, revenue contribution has -- Baidu Union has accounted for a bigger portion of our revenue.

  • But the differential, the growth differential of organic versus Baidu Union has come down in the past few quarters.

  • And we expect that differential to further narrow going into this year.

  • What our focus -- I don't think Phoenix Nest, the migration to Phoenix Nest so much impacts the dynamic between organic and affiliate revenue.

  • But we are, starting from last year and definitely going into this year, we will put more focus on really differentiating the kind of traffic we're getting from partners.

  • We need to reward those partners who can bring us valuable incremental traffic to us and really treat them differently as far as TAC payout ratio goes.

  • So that will be our focus this year.

  • Richard Ji - Analyst

  • Great.

  • Very helpful.

  • Thank you.

  • Operator

  • Our next question comes from the line of Yu Jin with CICC.

  • Go ahead.

  • Yu Jin - Analyst

  • Thank you for taking my questions and congratulations on the strong quarter, and I think an even stronger guidance for the first quarter.

  • I have two questions related to Baidu Union.

  • The first one is in the past several months, I have been observing that Chinese government regulators and as well the mobile carriers are taking more strict regulations over the websites and that many small to medium websites were strictly examined or even shut down.

  • So did you see any impact or do you expect any effect on your Union business, where you do partner with many small and medium websites?

  • And the second question is also related to the Baidu Union business.

  • I found that in the past several years, actually we have seen that the Company recorded higher TAC ratio in the fourth quarter.

  • So my question is is it mainly because in this quarter we will see more contributions from the Union business?

  • Or is that because in this quarter we share more [payout ratio] with the partners, so like we may reward some good partners with bonus?

  • So that's my question.

  • Thank you.

  • Haoyu Shen - SVP Business Operations

  • As far as the cleanup impact on our Union business, if I look at the numbers, there's no meaningful impact on our total numbers in the past quarter.

  • As far as the TAC ratio, it tends to be higher in the first quarter.

  • A big part of this is probably coincidence because, from quarter to quarter, some quarters we add some new partners or big partners, so from quarter to quarter you do see these fluctuations.

  • The only other factor that might be driving this, but probably not a big part, is in Q1 the contextual business tends to be less impacted by seasonality than the search business.

  • And we do have a higher payout ratio on the contextual side than the affiliate search side.

  • So that could be a reason.

  • But I don't think that's a driving factor so most probably it's probably a coincidence.

  • Yu Jin - Analyst

  • Okay.

  • Thank you.

  • Operator

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

  • Go ahead.

  • Elinor Leung - Analyst

  • Hi.

  • Thank you for taking my question.

  • And my question is regarding Google's potential exit from China.

  • Have you seen any changes in the advertising market because of their announcement?

  • And also in your first Q guidance, is there any revenue benefit from their exit that you have seen already?

  • Robin Li - CEO

  • Like we mentioned before, we have not factored in any potential change, material change in the competitive landscape.

  • But what we have seen in the market is that our customers, our partners' confidence level on Baidu is certainly higher.

  • And we think we would benefit from that.

  • Elinor Leung - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Our next question comes from the line of Jin Yoon with Nomura.

  • Go ahead.

  • Jin Yoon - Analyst

  • Hi.

  • Good morning, everyone.

  • Just a quick question regarding the ARPU side of Phoenix Nest.

  • I know that when you talked about your classic edition in the past that I guess revenue per customer is pretty well distributed, where it's not the 80/20 rule where 80% of revenue comes from 20% of the customers.

  • Because it's even more evenly skewed, can we expect the same thing from Phoenix Nest going forward?

  • Or it will -- can you give us some direction in terms of ARPU per customer in terms of the skewness?

  • I'll stop right there.

  • Thanks guys.

  • Haoyu Shen - SVP Business Operations

  • As I said, we're seeing good trends of ARPU for those -- in December until today, for those who've moved to Phoenix Nest.

  • And I'm trying to think whether Phoenix Nest structurally will impact the distribution or the skewness of ARPU.

  • But there's -- I don't think there's any reason.

  • I think it will continue to be an 80/20 situation.

  • Jin Yoon - Analyst

  • It will be 80/20 or won't be?

  • Haoyu Shen - SVP Business Operations

  • It will be, yes.

  • Jin Yoon - Analyst

  • It won't be?

  • Haoyu Shen - SVP Business Operations

  • It will be, positive.

  • Jin Yoon - Analyst

  • So are you saying -- I'm sorry, I must have misunderstood.

  • So it will be more of an 80/20 rule?

  • Robin Li - CEO

  • It has always been an 80/20 situation.

  • Jin Yoon - Analyst

  • Okay.

  • All right.

  • Thanks guys.

  • Operator

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

  • Go ahead.

  • Catherine Leung - Analyst

  • Hi.

  • I was wondering if I could ask what would be the potential financial impact from Rakuten in the first half of this year.

  • And also is there any expected -- should we factor in any increased marketing expense related to CCTV Spring Gala this year again?

  • Jennifer Li - CFO

  • In our announcement we mentioned the platform itself will be officially launched second half of the year.

  • I do not anticipate any material expense related to the venture in the first half of the year.

  • For the whole year, Rakuten, this is a JV and Baidu does not hold the controlling interest.

  • So from accounting and P&L standpoint, we'll more likely account that on the equity accounting basis and the overall impact on the Baidu platform from a P&L standpoint this year will be small.

  • It will not be material.

  • Robin Li - CEO

  • And we have no plans to spend significant money to advertise for the Spring Festival Gala this year.

  • Catherine Leung - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Our next question comes from the line of Vivian Li with Piper Jaffray.

  • Go ahead.

  • Vivian Li - Analyst

  • Hi.

  • If we look at the driver of your revenue growth going forward, do you expect it to be the growth in number of customers or the increase in ARPU?

  • There's still a large market out there with the 40m SMEs in China.

  • Can you give us some color on how you anticipate new customer acquisition will be in the next couple of years?

  • Do you continue to expect single-digit sequential growth or will it grow at a faster rate?

  • Thank you.

  • Robin Li - CEO

  • Well, this is Robin.

  • I think both metrics should grow.

  • As Phoenix Nest has set a solid foundation for a paid search platform, we expect ARPU to grow.

  • On the other hand, because the transition is over, we are going to invest to -- enabling the sales force to acquire new customers more aggressively.

  • I think it's really up to our execution.

  • We think on both sides there are a lot of room for growth.

  • Vivian Li - Analyst

  • Okay.

  • Thank you.

  • Operator

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

  • Go ahead.

  • Stephen Ju - Analyst

  • Good morning everybody.

  • So there have been reports in the media saying that Baidu is set to open a new South China headquarters in Shenzhen.

  • How much do you think that will cost?

  • And regarding the online video initiative, the ownership structure for the Company is not that clear to me.

  • So I'm wondering if this will be consolidated or deconsolidated from the Baidu P&L.

  • Thank you.

  • Jennifer Li - CFO

  • On the South China Baidu headquarter, I would think that, as part of the overall business that we conduct in the country, you do know that we do have footprint in the major cities, like Beijing, Shanghai and Guangdong provinces.

  • And so we have established a presence in Guangdong already.

  • And I would say the South China headquarter is more an effort to consolidate furthermore and intensify our focus in that region.

  • I would not carve out this initiative as a separate initiative away from our main business.

  • So this is part of the overall picture.

  • In terms of the online video, as I said, the deal has not been completely finalized.

  • So we will provide the relevant information as it becomes available.

  • And we'll certainly do that.

  • Stephen Ju - Analyst

  • Okay.

  • Thank you.

  • Operator

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

  • Go ahead.

  • Wallace Cheung - Analyst

  • Hi.

  • Can you give us an update about the top five advertising sectors?

  • Thank you.

  • Robin Li - CEO

  • Sorry, we didn't hear you.

  • Wallace Cheung - Analyst

  • I'm sorry about that.

  • Can you give us an update about the top five customer sectors, industry groups?

  • Jennifer Li - CFO

  • Top five customer sectors.

  • I think Haoyu mentioned that earlier.

  • There will always be, quarter over quarter, some seasonal nature of the sector contributions.

  • The top sectors continues to be, I guess, what everybody is familiar with, namely healthcare, medical equipment, education, travel and franchising.

  • One of the sectors that we do see are taking some traction is business service.

  • And this is more like recruiting, translation.

  • So those are mainly the top sectors.

  • Wallace Cheung - Analyst

  • Thank you.

  • Operator

  • Our next question comes from the line of Jake Li with GJS.

  • Go ahead.

  • Jake Li - Analyst

  • Hello.

  • Could you give some comments about online games strategy?

  • I know that there's an online game website.

  • Could you give any explanation about the business model?

  • And do we have any plans to build out a research team or operation team?

  • Thank you.

  • Haoyu Shen - SVP Business Operations

  • Hi.

  • This is Haoyu.

  • We've been co-operating some online games and web games for a few quarters now.

  • Now we are -- starting from this year we are just putting more resource behind it.

  • We're not going to have our own R&D staff.

  • We are going -- our focus is on web games.

  • We'll license some of the good web games to operate and we'll share revenue with the game owners.

  • Robin Li - CEO

  • So we don't have plans to develop an R&D capability for the game sector.

  • But in addition to that, I think we are a big beneficiary of the game industry because quite a significant amount of money has been spent on the Baidu paid search platform from the game operators.

  • Jake Li - Analyst

  • Okay.

  • Currently do we have any impact on the top line and our cost?

  • Could you give me some color about this?

  • I mean currently do you have any contribution or any cost for this?

  • Haoyu Shen - SVP Business Operations

  • It's still a very small revenue contribution.

  • It is very small, although we have pretty big -- pretty good, high expectations for this business.

  • As far as cost it's really the revenue sharing model.

  • So we don't really incur much cost.

  • It's really the people we hire to operate these games.

  • Jake Li - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Our next question comes from the line of Eric Wen with Mirae Asset.

  • Go ahead.

  • Eric Wen - Analyst

  • Thanks very much for taking my questions again.

  • I really appreciate it.

  • I have a question regarding online payment and e-currency.

  • I know this has been a hot growth area, especially in the B2C sector.

  • And what puzzles me is that Baidu has not made too much strategic inroads into B2C sector.

  • My question is do you think online payment, third party payment, electronic currency is strategically important to Baidu, or Baidu will actually stay in the, [what is] core B2B area, B2B area, focusing on corporate and that will be big enough for Baidu's future growth?

  • How do you view this issue of online payment in the overall strategic map of Baidu?

  • Thanks.

  • Robin Li - CEO

  • Eric, as I mentioned during the past conference calls, we believe that payment is no longer a huge obstacle for Chinese e-commerce activities.

  • There are quite a number of online payment systems.

  • The users and consumers now do not have any problem to use those methods to pay online.

  • Having said that, Baidu does have our own payment system, called Baidu Pay, which has been going nicely.

  • But our overall strategy is that we would like to cultivate all kinds of e-commerce activities, and every sector, every part of the value chain of the e-commerce growth should help us.

  • So we would like to see more transactions done online.

  • We would like to see more B2C e-commerce activities happen.

  • And even today I think Baidu already draws a lot of revenue from B2C e-commerce players because they just cannot find any other market platform that can drive enough amount of traffic to them and build an independent brand for them as an online retailer.

  • So we would be happy to see the payment system to grow and mature and we will certainly benefit from that.

  • Our addressable market is currently not limited to the B2B sector.

  • B2C actually probably already represents a larger percentage of our revenue.

  • Operator

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

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

  • Robin Li - CEO

  • Thank you again for joining us today.

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

  • Operator

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

  • This concludes the presentation.

  • You may now disconnect.

  • Good day.