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Operator
Hello and thank you for standing by for Baidu's Third Quarter 2010 Earnings Conference call.
[Operator Instructions] I would now like to turn the meeting over to your host for today's conference, Victor Tseng, Baidu's Investor Relations Director.
Please proceed.
Victor Tseng - Director Investor Relations
Hello everyone and welcome to Baidu's Third Quarter 2010 Earnings Conference call.
We distributed Baidu's Third Quarter 2010 Earnings release earlier today.
You can 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 Haoyu Shen Senior Vice President of Business Operations to answer your questions.
Before we carry on, please note that the discussion today will contain forward looking statements made under the Safe Harbor provision of the U.S.
Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from our current expectations.
Potential risk 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 statements 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 most directly comparable GAAP measures and is available on our IR website at ir.baidu.com.
As a reminder this conference call is being recorded.
In addition a web cast of this conference call will be available on Baidu's corporate website.
I will now turn the call over to Baidu's CEO, Robin Li.
Robin Li - CEO
Hello everyone and welcome to today's call.
The team worked hard and delivered another outstanding quarter of results.
During the Third Quarter both our ARPU and customer base increased healthily which directly contributed to the robust top line increase.
With our Phoenix Nest platform fully implemented we continue to improve monetization and provide new value added tools to help customers optimize account management and improve ROI.
As we focus on building out our sales force and engaging with customers more deeply and comprehensively, both larger companies and SMEs are becoming more sophisticated online marketers and spending more with us.
By driving awareness and further enhancing functionality of Phoenix Nest's platform we are confident in seeing further growth and improvements here.
During the quarter we also made significant progress on a number of box computing related initiatives.
In particular in September at Baidu World we introduced the Baidu open application platform.
This idea grew out of our recognition that over 30% of user queries were for applications and not just information.
On this platform we can intelligently embed not only useful information but also a wide range of applications such as web-based games, e-books and popular software that are directly and dynamically accessible in our search results.
We are the first search engine company to integrate this function.
We are already seeing strong developer interest and have amassed hundreds of the apps including virus protection software, photo editors, games and more.
But computing is technology intensive, involving natural language processing, machine learning, high performance computing and smart ranking of premium content and applications.
Our boxed computing initiatives currently including both Baidu's Open Data platform also known as Aladdin and Baidu's Open Application platform are the cornerstone of our vision to revolutionize user experience.
We believe this will further solidify Baidu's position at the center of China's internet.
Beyond improving our overall user experience and core marketing platform we are pushing forward on several other fronts.
We are putting increasing emphasis on our contextual adspins business.
This quarter we rolled out an updated version to promote better relevance and targeting.
We are hopeful this area can become a meaningful growth contributor in the future.
On the mobile front we are seeing strong momentum in mobile query growth and we have many initiatives underway that will leverage our leadership into this increasingly important and growing market.
Baidu has been a key enabler and beneficiary of China's e-commerce industry.
In Q3, the number of online retail companies advertising with us more than doubled year over year representing one of our highest growth areas.
Our joint venture with Rakuten is one of the many initiatives underway to foster growth of the e-commerce ecosystem in China.
Looking to the Union business, our new revenue sharing policy has been effective in enhancing union traffic quality and controlling traffic acquisition costs.
We are encouraged by the faster growth in our organic traffic versus union.
In the near term we expect to see TAC stabilizing with moderate fluctuations caused by market conditions and union partner mix.
Clearly the opportunities ahead of us to build on our core search leadership and take the lead in strategic emerging businesses are enormous.
One of the keys to this is hiring and retaining great talent.
We've been very successful in the past quarter, adding roughly 200 sales staff and 700 engineers.
We are continuing to compete fiercely for top talent wherever it may be.
In conclusion, we have achieved great progress in both user and customer related initiatives but we are still at the beginning of the story.
Even though the majority of the population and businesses are still offline, China is already the largest internet market in terms of users.
We believe we are going into the right direction with a search engine that goes beyond pure information base to results.
As our business continues to scale up, as we attract and retain top talent, and as we encounter challenges before anyone else we are going to be making more and more innovations that create value to our users and customers.
With that let me turn the call over to Jennifer for financial highlights.
Jennifer Li - CFO
Thank you Robin.
Hello everyone.
In line with Robin's points we're very excited about the opportunities that lie ahead, and we're committed to investing aggressively for the long-term growth.
In the third quarter, we delivered strong revenue growth and maintained healthy margins, despite upward investments in marketing, headcount, technology and CapEx.
The rest of the year we will maintain our investment focus on building out our sales and marketing and R&D teams as well as purchasing necessary network equipment.
Now let's look at the financial highlights for the quarter.
All amounts mentioned are in RMB unless otherwise noted.
Online marketing revenue for the third quarter of 2010 were RMB2.26 billion, a 76% increase year over year.
Baidu had around 272,000 active online marketing customers in the third quarter of 2010, a 26% increase from the corresponding period in 2009 and a 7% increase from the previous quarter.
Revenue per online marketing customer in the third customer reached approximately RMB8300, a 41% increase from the corresponding period in 2009 and an 11% increase from the previous quarter.
The increase in ARPU is attributable to our customers' appreciation for search engine marketing and our improved marketing platform.
Traffic acquisition cost as a component of cost of revenue was RMB202 million or 8.9% of total revenue, as compared to 15.3% in the corresponding period in '09 and 9.7% in the second quarter of 2010.
The sequential decrease in TAC as a per cent of total revenue is attributable to strong organic traffic growth.
We expect it to remain at approximately this level for this year with moderate fluctuations.
Bandwidth as a component of cost of revenue were RMB85 million, representing about 4% of total revenue compared to 4% in the corresponding period in 2009.
Depreciation costs as a component of cost of revenues were RMB84 representing 4% of total revenues compared to 5% in the corresponding period in 2009.
We expect bandwidth and depreciation cost to grow as we invest in more network equipment.
Selling, general and administrative expenses in Q3 were RMB296 million, an increase of 50% year on year, primarily due to increased sales headcount and marketing spend.
Research and development expenses were RMB205 million, a 75% increase from the year ago period, primarily due to increased cost associated with R&D headcount.
Share-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to RMB24 million in the third quarter of 2010, from RMB21 million in the corresponding period in 2009.
Operating profit was RMB1.18 billion, a 127% increase year over year.
Total headcount as of 30 September 2010 was about 10,000, roughly 1000 more than the previous quarter.
The increase in headcount comes mainly from R&D and sales.
In the coming quarters we will remain focused on investing heavily in R&D and sales to drive growth in our business.
Income tax expense was RMB165 million for the third quarter.
The effective tax rate for the third quarter was 13.6% as compared to 9.1% for the corresponding period in 2009.
Net income was RMB1.05 billion, a 112% increase from the corresponding period in 2009.
Basic and diluted earnings per ADS for the third quarter of 2010 amounted to 3.01 and 3.00 respectively.
Net income excluding share-based compensation expenses a non-GAAP measure, was RMB1.07 billion, a 108% increase from the corresponding period in 2009.
Basic and diluted earnings per ADS, excluding share-based compensation expenses, both non-GAAP measures, were RMB3.08 and RMB3.07 respectively.
As of 30 September 2010, the company had cash, cash equivalents and short-term investment of RMB6.9 billion.
Net operating cash flow and capital expenditure for the third quarter of 2010 were RMB1.26 billion and RMB246 million respectively.
As we mentioned earlier, we plan to keep aggressively investing in infrastructure and equipment.
Now let me give you our top-line guidance for the fourth quarter of 2010.
We currently expect total revenues for the fourth quarter of 2010 to be between RMB2.37 billion and RMB2.44 billion, which would represent 88% to 93.5% in over year growth.
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
Your first question comes from the line of James Mitchell with Goldman Sachs.
Please proceed.
James Mitchell - Analyst
Great, thank you very much for taking my question.
Now that you have digested the first batch of Phoenix Nest changes, I assume that your engineers can work on the next batch of monetization initiatives.
For example I think you've shifted a lot of your revenue generation from the main panel on the left-hand side of the results page to be off the panel.
Could you now look at doing more with the right-hand side panel which I think is historically under-utilized?
Haoyu Shen - Senior VP Business Operations
Hi James, it's Haoyu.
The Phoenix Nest actually managed all the areas where we display ads on the social results page.
So that includes the right-hand side, although the right-hand side as you said that is not at this point doesn't provide a big percentage of our revenue.
So we are continuing to work on that part of the property if you will.
So speaking of other monetization efforts, as Robin just mentioned, in his prepared remarks we are working very hard on contextual with putting a lot of engineer resources behind that product right now.
It's a small percentage of our revenue right now but we fully expect it to grow to a more meaningful part of our business.
James Mitchell - Analyst
Is there anything beyond contextual that you are focused on or is contextual the main focus for your engineers?
Robin Li - CEO
This is Robin.
I would say the main focus is still Phoenix Nest as there are still lots of areas that we can improve, not only in the fundamental infrastructure of the system but also those kind of value-added features.
How to help our customers to manage their account and how to educate them to better take advantage of the Phoenix Nest system.
There are a lot of things that we can do in the existing Phoenix Nest system.
James Mitchell - Analyst
Great, thank you.
Operator
Your next question comes from the line of Andrey Glukhov with Brean Murray.
Please proceed.
Andrey Glukhov - Analyst
Yes, thanks for taking the question.
I guess if you guys think of the dynamic of this quarter when we had an unusually long holiday in sort of late, late September, early October.
What did you see towards the end of the quarter in new customer acquisitions?
Were there any perhaps delays and kind of push-out in the decision making towards October.
Kind of mi-October when that pent up demand opens up?
Haoyu Shen - Senior VP Business Operations
Right, in the holiday towards the end of the quarter and the Moon Festival and also the national holiday does impact our business as any long holiday does, so business is a bit slow.
That probably impacts the speed of our position, customer position as well.
But it's not major, it's not like the Chinese New Year, so I don't think you will see meaningful pent up demand from that period.
Andrey Glukhov - Analyst
Great, thank you.
Operator
Your next question comes from the line of DickWei with JP Morgan.
Please proceed.
Dick Wei - Analyst
Hi, thanks for taking my question.
Robin, you mentioned earlier that the e commerce traffic is quite strong.
I wonder what is the revenue of queries contribution from the e-commerce related queries and advertisers.
In addition what are the initiatives for Baidu to drive more of the e-commerce traffic and also the integration strategy with Rakuten.
Thanks.
Robin Li - CEO
I don't have the numbers at hand.
What I said during the prepared remarks is that the number of online retail companies advertising with us more than doubled year over year.
We definitely have seen a faster increase both in terms of e-commerce related queries and e-commerce related companies or customers.
What's happening here in China is that lots of companies, especially those established companies offline start to realise that they need a presence online.
That they need to set up an online e-commerce site.
Once they start doing that they will almost immediately start to advertise on Baidu because we are pretty much the single largest traffic source for any web sites including the e-commerce sites.
Because there are lots of goods sold on an e-commerce web site, they actually have a lot of keywords to buy, so e-commerce companies generally can spend a lot with us.
That's why we've seen a very healthy increase in the e-commerce revenue and traffic.
Dick Wei - Analyst
That's great.
What about any more integration with Rakuten with the main Baidu site?
Haoyu Shen - Senior VP Business Operations
Right, Rakuten as a site just went live a few days ago now.
There are over 2,000 registered sellers or merchants.
Not all of them are live yet, just about 1,000 are live now.
We are just starting to look at how we can help Rakuten to drive traffic and to promote their site to the extent they provide the highest quality content as relevant results.
But it's still very early.
Dick Wei - Analyst
Okay, that's great, thanks.
Operator
Your next question comes from the line of Alicia Yap with Citigroup.
Please proceed.
Alicia Yap - Analyst
Hi, thank you for taking my questions.
My question is on your new e commerce JV with Rakuten.
Could you actually share with us your expectations on this JV?
What are some of your differentiation or advantages to attract the merchants as well as the user traffic to your platform versus other platforms in the market?
How much do you expect the JV to contribute by year end or maybe next year?
Thank you.
Haoyu Shen - Senior VP Business Operations
Right, we don't want to talk what specific in terms of targets we're setting.
But as far as the advantage that this joint venture has in getting to e-commerce in China are two fronts.
From Baidu's perspective there are a lot of users searching for shopping related queries every day on Baidu.
So that is the advantage we have.
From Rakuten's side they are very, very successful in Japan.
They have a lot of expertise in how to manage a B2C mall and how to come up with loyalty programs.
How to make sure that the buyers get the best experience.
We hope a lot of those expertise can be exported to China.
So by combining our advantages and their expertise from Japan we think they can be a very viable contestant in the e-commerce landscape in China.
Alicia Yap - Analyst
Can I just follow up.
Who actually will be in charge of the main operation?
Will that be Rakuten side?
Haoyu Shen - Senior VP Business Operations
Yes, Rakuten.
Robin Li - CEO
Yes there's this joint venture, Rakuten in Japan has the controlling interest and their founder and CEO is very, very determined to make this a success.
Alicia Yap - Analyst
I see, okay, thank you so much.
Operator
Your next question comes from the line of Jin Yoon with Nomura.
Please proceed.
Jin Yoon - Analyst
Hi, good morning everyone.
Just a couple of questions regarding Phoenix Nest and now that it's fully transitioned over and it's up and running.
What percentage of your revenues on search is actually coming from [B2B] related searches versus B2C or C2C, now that we are fully transitioned over compared to a year ago this time?
Outside of Rakuten's joint venture what percentage of actual search revenues on Baidu.com is actually coming from e-commerce?
I'll stop there, thanks guys.
Haoyu Shen - Senior VP Business Operations
So the split between B2B and B2C I think we mentioned a few times in previous calls we see that growth as B2C customer spending on our stand, the spending from B2B customers, we don't really have any C2C customers per se.
So I think Phoenix Nest probably even helped this trend.
Just because the 2C kind of customers probably benefited more from Phoenix Nest just because they have more keywords to choose from.
They probably tend to be more sophisticate pay search users.
As far as the percentage of e-commerce customer spending on Baidu we can't disclose that number.
But as Robin mentioned, it's growing very fast and we expect it to be as a percentage of our total revenue will grow to a much bigger percentage than today.
Robin Li - CEO
It's very hard to distinguish e-commerce related queries from the rest parts of the queries.
For example when people search for flowers or search for travel is that considered e-commerce?
We are a comprehensive search engine and users used to rely on us to find any information that they want.
It's probably easier to classify customers into different industries or categories.
It's harder to classify queries.
Jin Yoon - Analyst
Okay, perfect, thanks guys.
Operator
Your next question comes from the line of Ming Zhao with SFG.
Please proceed.
Jennifer Li - CFO
Hi, Ming, We can't hear you.
Operator
Your next question comes from the line of Gene Munster with Piper Jaffray.
Please proceed.
Gene Munster - Analyst
Good morning and congratulations, this has just been unprecedented growth in the past year.
A couple of quick questions, next year with the major leverage in terms of growth you mentioned contextual, but also maybe you could talk a little bit about maybe the video opportunity or other areas?
I know Japan was an area a while back that has been kicked around.
Maybe those two in particular, how you see video playing out and maybe the opportunity in Japan.
Thanks.
Robin Li - CEO
I would say that next year the main growth driver will still be the Phoenix Nest related businesses.
Though there might be some smaller areas that have a faster growth rate, contextual should be one and the video should be another.
But video is probably going to be even smaller.
The video business actually I suppose you mean Qiyi which is a relatively independent entity and controlled by Baidu.
Their main goal at this stage is to really accumulate users and provide the best user experience.
Revenue should come later on and so I don't expect a significant contribution on the revenue front from this venture.
But like I mentioned there are lots of improvements we can make on the main Phoenix Nest system going forward.
Gene Munster - Analyst
And Japan?
Robin Li - CEO
Japan I think we need more patience in Japan and it's a mature market it takes time and the cost is under control and we have seen some encouraging signs of some of our Japan-related products.
But the revenue we don't expect any meaningful contribution for next year yet.
Haoyu Shen - Senior VP Business Operations
Hi, Gene, I just wanted to add to what Robin said about Phoenix Nest.
I don't want people to have the notion that it's gone, it's over.
Phoenix Nest provides a much more flexible platform for us to improve our algorithm more efficiently and more effectively.
So we'll continue to benefit from this new platform going into next year.
Although the trajectory that you saw the CPM or monetization growth trajectory you saw especially in Q1 and Q2 is probably largely behind us.
But the improvement will be steady, will be there, will be gradual.
Operator
Your next question comes from the line of Richard Ji with Morgan Stanley.
Please proceed.
Richard Ji - Analyst
Hi, Robin, Jennifer, how are you, good morning.
Robin Li - CEO
Good morning.
Richard Ji - Analyst
I have a question regarding your 4Q outlook and obviously you guided for revenue acceleration in the 4Q and what is you know, a quite a pleasant surprise.
Can you help us understand a little bitter what are the drivers for the accelerating growth, other than further monetization of Phoenix Nest ?
Should we expect any other medium term and revenue contributions from other areas of
Robin Li - CEO
Richard, this is Robin.
First of all I think when you look at the fourth quarter of last year we had the flip over from the legendary system to Phoenix Nest so the growth rate for that quarter was impacted negatively.
If you do a year-over-year comparison naturally the growth rate should be higher than last quarter.
More importantly I think is once Phoenix Nest has had a good foundation there are lots of things we can do like we mentioned a couple of times on this call.
There are lots of gradual improvements we can do, so overall we are quite pleased that we can guide you on a very high growth rate for the fourth quarter.
Operator
Your next question comes from the line of Eddie Leung with Bank of America, Merrill Lynch.
Please proceed.
Eddie Leung - Analyst
Hi, good morning everyone.
Could you give us an update of your advertiser mix?
What are the top five categories?
Could you also talk a little bit about their relative growth?
Thanks.
Jennifer Li - CFO
Eddie, our top five sectors largely remain the same, those ones that you are familiar with, namely; medical, machinery equipment, education, travel, franchising etcetera.
What we have seen increasing performance from gaming, software, business services.
So these businesses are growing strongly and the orders haven't really changed much.
There is a little seasonality in nature in some of the sectors like travel and education.
But all in all they are growing pretty much in pace with the general growth trend that you are seeing.
Operator
Your next question comes from the line of Ming Zhao, with SFG.
Please proceed.
Ming Zhao - Analyst
Thank you, good morning.
I have a question on the Box Computing.
So on this open apps platform, can you give us a little bit more color there, such as how users accept these new search results embedded in the apps?
Do they spend more time on your pages?
How do your customers like it and how do you want to monetize that?
Thank you.
Robin Li - CEO
Yes I think users like this kind of embedded apps very much they are definitely spending a lot more time on this new kind of search engine with our page.
We have seen very high interest from the developer community and our users apparently also like that.
Going forward I think that the first priority for the open application platform is to better satisfy our user's needs.
Whether it's information needs or needs related to applications.
So we basically open up a whole new area for our users and the goal is to let our users more dependent on Baidu services or the Baidu search box.
That is why our mission is Box Computing.
As for business opportunities or revenue opportunities.
I think in the near term there should be no direct revenue benefit or revenue generation from this kind of embedded application.
If there are opportunities to charge the user or anything that generates revenue we would very much like to share those kinds of revenues with our developers.
For Baidu I think the true benefit we are getting is that users are increasingly dependent on the one box provided by Baidu for any need they have.
So indirectly we should get a lot of benefit from these kinds of initiatives.
Operator
Your next question comes from the line of Aaron Kessler with ThinkEquity LLC.
Please proceed.
Aaron Kessler - Analyst
Yes, hi guys.
A couple of questions.
First can you give us an indication of how the CPC pricing was on a sequential basis?
Also just what is your outlook from a sales and marketing and continued R&D investments over the next few quarters?
Thank you.
Haoyu Shen - Senior VP Business Operations
Hi, this is Haoyu, I'll take the CPC question.
We never disclose detailed information about CPC growth What I can tell you is it's been growing in the past few years at a pretty steady rate and it didn't really accelerate or decelerate for that matter after Phoenix Nest.
So we're comfortable with how fast CPC is growing at this point.
Jennifer Li - CFO
In terms of sales and marketing and R&D expenses and head count increases.
If you look at what we have done in this year between Q1 to Q3, you know we have added over 2,000 people.
You know in Q2 in particular we added 1,100 and this quarter we added about 1,000 (Company corrected after the conference call).
The mix is about 200 in sales and about 700 plus in R&D.
Going forward that pattern will continue in the near term.
So we will continue to invest heavily in the R&D talent as well as building up the sales force.
Operator
Your next question comes from the line of Eric Wen, Mirae Assets.
Please proceed.
Eric Wen - Analyst
Hi good morning, thanks for taking my questions.
Jennifer you mentioned that Baidu is getting onto a CapEx cycle and I did notice that for the quarter CapEx as a percentage of revenue did go up 2 percentage points.
Can you comment on how are we at the cycle of this CapEx spending?
Do you expect that is almost over by this quarter or will continue - you will be upgrading your servers during the next two or three quarters?
Thanks.
Jennifer Li - CFO
Yes, thanks, Eric.
We are at the early stage of the CapEx investment.
You did see we stepped up CapEx spending between Q1 and up to Q3.
The step up will continue and be probably more aggressive in the near term.
CapEx does come in very long, but I would say this is far from the end of it.
Operator
Your next question comes from the line of Stephen Ju with RBC Capital Markets, please proceed.
Stephen Ju - Analyst
Good morning everybody.
I think you've said in the past only 40% or so of your total traffic is for search.
So what kind of monetization vehicles are you putting in place for the remaining 60%?
Can you give us an update on your initiatives for display advertising?
Thank you.
Haoyu Shen - Senior VP Business Operations
Right, yes the majority of our traffic is actually non-web search.
You know where we have Baidu Knows, Baidu Post Bar and things like that.
We do monetize that traffic by putting on contextual ads also by putting on display ads for brand advertisers.
These revenues are a small percentage of total revenue at this point so it does have some potential to further grow.
As far display, so we have display on our proprietary non-web search traffic as I just mentioned.
On our contextual ads front, we are also increasing the percentage of display versus text ads and we've been doing that this year and going into next year as we keep working on our contextual products we would expect our display ads on affiliate sites will continue to go up.
Operator
Your next question comes from the line of Wendy Huang with Royal Bank of Scotland.
Please proceed.
Wendy Huang - Analyst
Thanks for taking my question.
I just wondered if you can share your thoughts on the generic search engine and how the general search engine with Baidu to differentiate from other vertical search engines which may not have as much traffic as Baidu but they are specializing in certain areas.
For example in the travel area we have the (inaudible) and in the e-commerce we have the Qunar.
How can Baidu differentiate from that and what is the strength Baidu currently have?
Thank you.
Robin Li - CEO
Wendy, this is Robin.
I've been in the search engine industry for quite a long time, probably over 15 years.
Over the last 15 years I have seen a lot of tries in all kinds of virtual areas.
A lot of people try to provide vertical searches and none of them have been successful.
I guess the reason is that the majority of the users are lazy.
They really only want to rely on one search box to satisfy their information needs, all kinds of information needs.
So the vertical search services they may have a group of loyal users but the entry point may very well come from the Baidu search result, the links on the Baidu search result page.
Other than that I don't see significant build up in organic traffic from those vertical search services.
So going forward I still believe that the super majority of users and in most cases they may well first come to Baidu to look for what they are looking for and vertical searchers are generally niche players.
Operator
Your next question comes from the line of Paul Wuh with Samsung Securities.
Please proceed.
Paul Wuh - Analyst
Thank you very much for taking my question.
Just a quick question on the Box Computing again.
I know that you said that there is a lot of interest from developers.
If you could give us some sense of when you think you might begin to monetize this and I guess it'll be kind of an apps store like Apple had?
If you could give us some idea about if that is the model that you are thinking about and when it might start impacting your P&L?
Thank you.
Robin Li - CEO
Okay BIV are behind our application platform also the application platform is quite different from the app store of Apple.
Meaning that the main purpose of this platform is to let users more dependent upon Baidu's search box, not to drive more revenue opportunities.
But in order to incentivize the developers, we do allow them to find ways to either target the users or displaying advertisements and we are also developing a revenue sharing mechanism so that those applications on our search Baidu page can benefit.
For example the revenue generated from those search result pages can be shared with the developers who submit their applications to our platform.
So going forward there may well be a lot of - maybe not a lot but at least a number of very successful applications of developers for our platform.
But for Baidu we are not counting on this kind of revenue opportunities.
What we are counting on is that people come to Baidu more often for whatever they need and the search bar generates more queries that can generate revenue for us.
Operator
Your next question comes from the line of Gary Ngan with UBS.
Please proceed.
Gary Ngan - Analyst
Good morning everyone, thanks of taking my questions.
I just want to ask you in terms of ARPU that we see to date versus maybe before Phoenix Nest.
How would you describe the distribution of ARPU?
So is it more concentrated on the top end payers today versus maybe a year and a half ago or is that pretty much the same?
So everyone is actually increasing the money that they spend on Baidu relatively evenly?
Haoyu Shen - Senior VP Business Operations
I don't have the exact numbers but we do have a sort of 80/20 rule here as well.
As much as it's a very long tailed business there is a high spending customer to spend disproportionately quite a high percentage - to contribute a high percentage of our total revenue.
I would think that Phoenix Nest probably further reinforced this trend, but not so much.
We hear good feedback from all kinds of customers, be it big or small.
You have to remember, it's not just Phoenix Nest either.
But the query growth, the traffic growth is a very powerful driver of their spending.
Robin Li - CEO
So ARPU increase is across the board, big or small.
Operator
Your next question comes from the line of Alex Yao with Deutsche Bank.
Please proceed.
Alex Yao - Analyst
Good morning everyone and thank you for taking my question.
I have a couple of questions on the Box Computing initiative.
Firstly what could be the potential impact on the overall internet eco system from this initiative?
Secondly, I would like to understand a bit more of the costs associated with this initiative?
How much is of the R&D resource will be devoted to this initiative compared to the continuous refinements of Phoenix Nest?
Thank you.
Robin Li - CEO
On the potential impact of the internet eco system, I would say there are concerns in the internet industry that more traffic will be returned on the Baidu platform rather than directed to certain other sites.
We are not concerned about this because at the end of the day we need to provide whatever the users are looking for, whether it's on the Baidu platform or off the Baidu platform.
In terms of monetization the application developers can monetize on our platform or monetize on a third party or independent website.
So as long as they can make money out of these kinds of applications, I think that the eco system will be healthy.
On the cost side we actually have two very independent R&D teams within our company with roughly a 50/50 split in terms of resource allocation.
One team is for paid search for example Phoenix Nest.
The other team is for organic search all those non-paid content the responsibility of the latter.
For the latter team part of their job is to develop this open application platform or any other initiatives in our Box Computing frame.
But there are still lots of more fundamental relevancy works that we are doing.
So overall the priority is set by what can improve the user experience better then we will devote resources there for the latter team.
Jennifer Li - CFO
Alex, just to put it this way.
We don't separate out this cost because Box Computing is part of our main business.
We are in the search business.
We constantly anticipate what are the search results that we need to produce to meet the users' demand.
That is constantly evolving.
So our team, that is the main team's work is to surround these activities and to do work related to that.
So we don't separately identify the cost for Box Computing, that is our main business.
Operator
Your next question comes from the line of Jing Hao with Macquarie.
Please proceed.
Jiong Shao - Analyst
Thank you very much for taking my questions.
My question is on competition again.
I think some of your big competitors not necessarily in the search space such as Ali Baba and Tencent are making investments or developing their own search engines.
I was wondering what you think your market share may be over the next couple of years?
Could you remind us what your market share is currently?
Related to that Google's partnership with one of the largest portal sites in China expired a few months ago.
I was wondering whether or not you are either considering to expand your partnerships with some of these leading portal sites?
Thank you.
Robin Li - CEO
Hi, Jiong, this is Robin.
I think the latest traffic share for Baidu is about 80%.
So it is a record high for our traffic share.
When you talk about competition, I guess you really mean in terms of search traffic not really revenue, because revenue-wise besides Baidu and Google probably the rest of the players are not meaningful at all.
When you look at the competition of Alibaba and Tencent, they have search services for a long time, both of them had search services for years.
We haven't seen any change in terms of trend in their traffic share.
We are very focused on improving the user experience for Baidu and we believe that our service is the best and users will stay with us.
With regard to the portal partnership, I think we are very open-minded whenever it makes sense we will strike deals with our potential partners.
We have a union business as you know and we have our own schedule or payout ratio for all kinds of different partners.
But as a trend you can see that TAC as a percentage has been decreasing over the past few quarters and the traffic or the revenue opportunity any single partner can bring to us is less and less meaningful.
Jennifer Li - CFO
Yes, I think the key in general is, you know, when you look at the competitive environment it is more meaningful to look at the size of the pie rather than the relative market share.
We are still - you know, the internet user is growing, traffic is growing, activity is growing.
Internet search engine marketing is only at the beginning, so as a market leader we are more focused on developing the market and growing the pie than worry about the relative market share positions.
Operator
Your next question comes from the line of Jake Li with Guotai Junan Please proceed.
Jake Li - Analyst
Hi, good morning everybody, thank you for taking my question.
A quick question regarding the ARPU.
As you guys just now said there are a lot of features for the Phoenix Nest and many features will be improved.
Together with other mechanisms such as broad match and also the search engine optimization you launched a few weeks ago.
So I am wondering whether the search engine optimization is helpful for the ARPU decrease or something?
So could you give me some guidance about the upgrowth in the fourth quarter.
I know the revenue growth is very, very strong and the ARPU guidance in the next year?
Thank you.
Haoyu Shen - Senior VP Business Operations
I am not sure I fully get your question.
But in search engine optimization has always been there and legitimate and illegitimate SEOs.
There is nothing new there.
We are seeing pretty strong growth in ARPU in fact in the past few quarters and driven by growth of traffic and driven by the benefit we're getting from Phoenix Nest.
That will definitely continue into the fourth quarter.
The fourth quarter guidance definitely incorporate that, but going into next year the number of customers and ARPU these two will both continue to be good value.
Operator
Your next question comes from the line of Dick Wei with JP Morgan.
Please proceed.
Dick Wei - Analyst
Yeah, thanks for taking my questions again.
My question is on the Baidu payment system Baifubao.
Given that with Box Computing and Rakuten there are probably more opportunities for the payment system.
I wonder if that system is run with its own P&L?
How does it sit within the Baidu corporate structure and if you can share what are some of the parity or strategy for the payment system that would be great.
Thanks.
Haoyu Shen - Senior VP Business Operations
Maybe Jennifer can tell you if it's run on its own P&L.
But what it does it came about together with Youa, our C2C transaction platform.
So it continues to support Youa and supports a lot of other businesses that we have as well.
For example, Rakuten, I think Rakuten payments are now going through Baifubao and potentially for Box computing.
We do have some apps that we will charge or our partners will charge users, Baifubao can definitely be a payment vehicle.
But right now it is multifunctional.
It is supporting a lot of businesses that we have.
Robin Li - CEO
What is more important is that payment is no longer a hurdle for online activities.
We here in China the payment infrastructure for e-commerce or whatever has grown very significantly over the past few years.
Consumers now feel very comfortable to pay online and there are lots of ways for them to pay.
Operator
We are now unfortunately at the end of the conference call.
I will now turn the call over to Baidu's Chief Executive Office, Robin Li for closing remarks.
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.
Operator
Thank you for your participation in today's conference.
This concludes the presentation, you may now disconnect.
Have a good day.