百度 (BIDU) 2010 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 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.

  • Victor Tseng - Director IR

  • Hello, everyone, and welcome to Baidu's fourth quarter and full year 2010 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 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 20-F.

  • 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 measures.

  • Our press release contains a reconciliation of the unaudited non-GAAP measure to the unaudited most 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 welcome to today's call.

  • 2010 was an exciting period for Baidu.

  • The year marked the five year (inaudible - technical difficulty).

  • Underpinning these results were a combination of factors.

  • These include the successful migration to our enhanced online marketing platform, Phoenix Nest; strong macroeconomic conditions; customers' growing appreciation for search engine marketing; and continued (inaudible - technical difficulty).

  • On the user side, we continued to drive our box computing initiative through improvements to Aladdin, Baidu's open data platform, and we are the first general search engine in the world to embed applications in search results with the production of Baidu's open application platforms.

  • Together, these two platforms serve to enrich our search results with dynamic information and interactivity that were not readily available through search previously.

  • As of today, Baidu open applications library has accepted over 27 Android applications.

  • These include not only games but also books, tools, and a range of entertainment applications.

  • The application library is designed to give users the convenience of using the applications they search for right on the search result page and give application developers more exposure.

  • As we develop this initiative we are exploring ways to support more developers and grow our platform.

  • We believe that by integrating search with other online activities box computing related initiative will revolutionise user experience across all aspects of online activity and further bring forth Baidu's position as a centre of China's international ecosystem.

  • According to CNNIC, in 2010 search became the number one internet application in China for the first time, surpassing music, news, and instant messenger.

  • And as the leader in search we are seeing lots of opportunities to integrate search with a variety of online activities like social networking and e-commerce.

  • Social networking in particular became a very significant element of the internet market outside of China in 2010.

  • In China, since our early days in 2003 we have been evolving our products to integrate search with user social interactions online.

  • For example, we pioneered a hugely popular query based discussion forum platform Baidu Post Bar.

  • Our industry leading Q&A platform - Baidu Knows - has answered about 118 million questions.

  • Today, our social search product, like Baidu Post Bar, Baidu Knows, as well as Baidu Encyclopaedia, are significant drivers of traffic growth and (inaudible).

  • Collectively, they represent about a quarter of Baidu's total traffic, and they have been integral to Baidu's success through the years.

  • We will continue to invest to further evolve these vibrant social products and integrate them with web search so that users will increasingly rely on Baidu as the starting point in their online experience.

  • Looking at fourth quarter results we were pleased to see a 94% revenue increase and a 171% net income growth year-over-year.

  • Top line growth was driven by an increase in traffic, growing customer understanding of Phoenix Nest and the rapid growth of spending from online retail sector.

  • Spending by online retail customers grew by close to 200% in Q4 compared to a year ago.

  • Even though are revenues are growing robustly, only a small percentage of businesses in China are taking advantage of search engine marketing.

  • Therefore we will need to further promote SEM among China's business community.

  • To do this we have established a qualification program to train online marketing professionals to understand SEM and to help online marketing customers navigate Phoenix Nest features and maximise return on investment.

  • We believe such training will help expand our customer base and improve our ARPU.

  • Also in Q4 we launched several new user products.

  • Baidu Wenku, our document sharing platform (inaudible) data and hosts more than 17 million documents now.

  • We also launched a mobile version of Baidu Map and expanded our partnerships.

  • To date we partnered with the majority of leading handset makers, including Nokia, Samsung, Motorola, SOS, leading Chinese mobile operators to provide Baidu search services on mobile devices and recently we expanded some of these partnerships into a much deeper level.

  • Qiyi.com - our online video venture - is off to a good start, gaining traction on both the user and advertiser front.

  • Just eight months after its launch the number of unique monthly users has surpassed 100 million, equating to close to a quarter of all internet users.

  • Talent development is very important to Baidu and I'm delighted to highlight the promotion of two great people to Vice President.

  • Wang Mengqiu has been with us since 2002 and before this promotion served as Senior Director Engineering.

  • Zhu Guang joined us in 2008 as Senior Director of Marketing and Public Relations and will continue in a similar but broader role as VP, taking on responsibility for government affairs as well.

  • For over 10 years our deep understanding of China's internet, our commitment to continuously improve user and customer experience, and our relentless execution has allowed us to build market leadership.

  • This will remain a reliable road map for our future success.

  • But in a fast changing industry like ours, constant innovation and aggressive investments are key to ensuring that we continue to lead the market and benefit from emerging internet trends.

  • In 2011 we look forward to further integrating search into our users' lives and drive results for customers with many exciting new innovations and increased investment.

  • Particularly we will invest aggressively in infrastructure and key hires, especially in R&D as well as customer and user education campaigns.

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

  • Jennifer Li - CFO

  • Thank you Robin.

  • Hello everyone.

  • As Robin mentioned, Q4 2010 was a superb quarter for Baidu with very strong top and bottom line growth.

  • Our improvements to Phoenix Nest have driven improved monetisation and we look forward to continued growth, both in terms of monetisation and customer base.

  • Our performance in 2010 as a whole was exceptional with accelerating revenue growth and record levels of profitability despite aggressive investment.

  • Into 2011 we will continue with your strategy of investing aggressively in hardware, head count and marketing as we look to reinforce our leading position by building the strongest team in the industry and creating tools that enhance search and improve user experience.

  • Now let me take you through fourth quarter and full year 2010 financials before taking your questions.

  • The amounts mentioned are in RMB unless otherwise noted.

  • For the fourth quarter total revenue were RMB2.5 billion, representing a 94% increase year-over-year.

  • Total revenues for the full year 2010 were RMB7.9 billion, an increase of approximately 78% from 2009.

  • During the fourth quarter Baidu had approximately 276,000 active online marketing customers, a 24% increase from the corresponding period in 2009 and a 1% increase from our two previous quarters.

  • Revenues per online marketing customers for the fourth quarter was approximately 8900, a 56% increase from the corresponding period in 2009, and an increase of 7% from the previous quarter.

  • For the full year 2010 active online marketing customers increased by 30% and revenue per online marketing customers increased by 37% over the full year 2009 figures.

  • Traffic acquisition cost, as a component of cost of revenue in Q4 was RMB 199 million or 8.1% of total revenues, as compared to 16% in the corresponding period in 2009 and 8.9% in the third quarter of 2010.

  • The slight sequential decrease over Q3 reflects the continued impact of our profit optimisation efforts from previous quarters.

  • Full year 2010 TAC as a percent of revenue were 9.6%, down from 15.7% in '09, primarily due to the impact of union traffic optimisation efforts.

  • Bandwidth costs and depreciation costs, as a percent of revenue, both decreased in the fourth quarter compared to the corresponding period in '09, primarily due to stability of our network.

  • SG&A expenses in Q4 were RMB 313 million, an increase of 41% year-on-year.

  • Total SG&A expense for 2010 were RMB1.1 billion, a 35% increase from '09 mainly due to increased personnel costs and marketing expenses.

  • In terms of marketing, as you have heard, we will be launching a major marketing campaign in Q1 during the Chinese New Year period to promote search and we expect that the incremental marketing spend for this upcoming Q1, related to this campaign, will be at a similar level to that of the Chinese New Year campaign we did in Q1 2009.

  • R&D expenses in Q4 were RMB232 million, an increase of 86% over the corresponding period in '09, primarily due to increased head count.

  • Total R&D expenses for 2010 were RMB718 million, a 70% increase from '09 reflecting our continued emphasis on investing in our R&D capabilities.

  • Share-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to RMB28 million in Q4 from RMB19 million in the same period in '09.

  • SBC for 2010 increased 9% over 2009 levels.

  • Operating profit for Q4 was RMB1.3 billion, an increase of 176% over Q4 2009.

  • Operating profits for the full year of 2010 increased 147% from '09.

  • Total head count, as of 31 December 2010 was about 10,900, roughly 900 more than at the end of the previous quarter.

  • The increase in head count mainly came from R&D and sales.

  • In 2011 we will continue to increase head count aggressively with more emphasis on R&D expansion.

  • Income tax expense was RMB160 million for the fourth quarter.

  • The effective tax rate for Q4 was 12.1% compared to 13.6% last quarter.

  • For the full year our effective tax rate was 13.2% compared to 11.8% in '09.

  • For 2011 we expect our effective tax rate to be in the low to mid-teens.

  • Net income for Q4 was RMB1.2 billion, a 171% increase from the corresponding period in '09.

  • Basic and diluted EPADS for the fourth quarter of 2010 amounted to RMB3.33 and RMB3.32 respectively.

  • Net income for the full year increased by 137%.

  • Net income, excluding share-based compensation in non-GAAP measure for Q4 was RMB1.2 billion, a 166% increase year-on-year.

  • Basic and diluted EPADS, excluding share-based compensation expenses, both non-GAAP measures were RMB3.41 and RMB3.40 respectively.

  • As of 31 December 2010 the Company had cash, cash equivalent and short-term investment of RMB8.2 billion.

  • Net operating cash flow and capital expenditures for the fourth quarter of 2010 were RMB1.8 billion and RMB362 million respectively.

  • Full year net operating cash flow and capital expenditure were RMB4.7 billion and RMB895 million respectively.

  • In 2011 we plan to aggressively expand our server network and office capacity.

  • As part of our international strategy we continue to focus on leveraging a centralised architecture that will allow us stability and transferability.

  • Japan is part of our overall international strategy.

  • Japan expense in 2010 was RMB27.6 million, versus a planned RMB30 million - represents a small portion of our overall expense.

  • Given that our base continues to grow, rendering that this expense is increasingly immaterial, we will not separately disclose this going forward.

  • Now let me provide you our top line guidance for the first quarter 2011.

  • We currently expect total revenue for the first quarter of 2011 to be between RMB2.38 billion and RMB2.45 billion which would represent an 83.9% to 89.3% year-on-year increase.

  • I do wish to emphasise 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

  • The question and answer session of this conference call will start in a moment.

  • In order to be fair, all callers who wish to ask questions, we will take one question at a time from each caller.

  • If you have more than one question, please re-join the question queue again after your first question has been addressed.

  • Please press star one to begin.

  • Our first question comes from James Mitchell with Goldman Sachs.

  • Please proceed.

  • James Mitchell - Analyst

  • Great.

  • Thank you for taking my question.

  • You showed very strong revenue growth in the fourth quarter of 2010, but you added fewer advertising customers than you added the previous quarter or the new added in the fourth quarter of 2009 when you had the Phoenix Nest disruption.

  • Could you talk a little bit about the customers' additions rate and also why the customer deposit growth was so fast?

  • Haoyu Shen - VP Business Operations

  • Hi James, this is Haoyu.

  • Our new customer net adds - one observation we had since we had Phoenix Nest on the market for over a year now, we're seeing that the [sophistication] harder to manage a new (inaudible) system has increased, meaning some of the smaller advertisers are less able to compete with the big advertisers.

  • So over time we are seeing some attrition of smaller advertisers, and especially in the early days of Phoenix Nest, a lot of product features we added they directly benefit the big advertisers, so that sort of made that situation even worse.

  • But having said that, I think going forward we're going to continue our focus on retention and launch product features that will help the small advertisers to improve their experience with Phoenix Nest.

  • So that's probably why you are seeing some softness in that add in Q4.

  • As far as customer deposit, I'll refer to Jennifer.

  • Jennifer Li - CFO

  • Typically it's the seasonal nature of our customers' product trends, means that you would normally see the Q4 customer deposits compared to the other three quarters are stronger.

  • This is the same case for last year and the year before, and which it really shows that the normal patterns of the underlying driver for our revenue growth continues to be very robust and there's nothing really unusual that's going on with the normal trend.

  • James Mitchell - Analyst

  • Thank you.

  • Operator

  • The next question comes from Dick Wei with JP Morgan.

  • Please proceed.

  • Dick Wei - Analyst

  • Hi.

  • Thanks for taking my questions.

  • My question is can you give an update on the contextual search, how many customers are using contextual search and how many of the union members are carrying the contextual search features?

  • Haoyu Shen - VP Business Operations

  • Hi Dick.

  • This is Haoyu again.

  • The contextual we will continue to work on this and we've made a lot of progress in 2010 and we now have a new platform.

  • I think the key now is to improve the algorithm on the platform, so we have pretty high expectation for that product in the next two years.

  • A lot of - actually we already have a lot of advertisers on this platform.

  • We have fewer - of course we have fewer advertisers than the advertisers on search, but it's a very sizeable customer base already.

  • As far as the publishers are showing contextual ads, we Baidu unions, as we said many times, is the largest ads internet ad network in China, so we have tens of thousands of publishers on this network showing all contextual ads.

  • Dick Wei - Analyst

  • I just wonder, as far as to the number of (inaudible) union member penetration, is there any number on that that you are able to share?

  • Haoyu Shen - VP Business Operations

  • No, it's actually a very long tailed business - you know, hundreds of thousands of websites in China and a lot are publishers, and our penetration in terms of percentage has increased over the past year, but again it's a very long tailed business.

  • Even the number of website penetration has increased, it doesn't tell you much.

  • Dick Wei - Analyst

  • Okay.

  • Great.

  • Thank you very much.

  • Operator

  • Our next question comes from Jin Yoon with Nomura.

  • Please proceed.

  • Jin Yoon - Analyst

  • Good morning everyone.

  • Let me just piggyback off Dick's question regarding contextual ad.

  • Can you talk about how - a bit on TAC and contextual ads and how fast that contextual ads business is actually progressing?

  • I know that you mentioned in the past that the contextual ads will probably be one of the growth drivers going forward, but yet TAC has been virtually halved over the last year.

  • Does that mean maybe the contextual ads business is not growing as fast or the customer optimisation continues to remain intact?

  • So how much can we really see TAC costs going further down from these levels and at the same time continue to increase greater exposure in contextual ads as a percentage of revenues?

  • If you could elaborate on that, that would be great.

  • Thanks.

  • Haoyu Shen - VP Business Operations

  • Hi Jin, this is Haoyu.

  • That's a loaded question.

  • It's about TAC.

  • So, you're right that contextual, typically on contextual ads the payout is higher than our payout on search.

  • As I said we have made a lot of progress in 2010, but mostly on the platform on infrastructure.

  • As far as revenue has not increased dramatically yet, so the TAC, a percentage decline in 2010 is largely driven by our affiliate search business.

  • That has been a dominant factor.

  • Going forward, our expectation is contextual will become a bigger slice of our business and in turn that will drive up our total TAC amount.

  • So compared with search it's a small - right now it's a small percentage of our revenue, so it's - you know when the day comes when our contextual business grows dramatically and we pay out a lot of TAC, in fact the total TAC number that probably means we're making huge progress on contextual ads.

  • We don't give forecasts or guidance on TAC going forward, but our affiliate search business, the optimisation or rationalisation efforts are largely done by Q3.

  • You are seeing TAC ratio decline again in Q4, that's really impact of the actions we took on Q3.

  • So going forward we're not going to see dramatic differential with the traffic growth of organic and affiliate traffic.

  • So in that I think TAC ratio should stabilise going forward.

  • We don't give guidance, but you know, if you look at the TAC numbers - the TAC percentage numbers in the past three quarters, those are probably good numbers to look at for next year - for this year - 2011.

  • Dick Wei - Analyst

  • Perfect.

  • I have a follow-up question regarding that - what percentage of your network by the union members is actually exclusive, just particularly to the [Baidu] (inaudible)?

  • Thanks guys.

  • Haoyu Shen - VP Business Operations

  • Some of them are.

  • I don't have the exact count, but many of them are not.

  • For them it's really a matter of, you know, how - who can [modify] it better for them.

  • So we don't require exclusiveness and many of them are not, but some of them are.

  • Dick Wei - Analyst

  • Great.

  • Thanks guys.

  • Operator

  • Our next question comes from Eddie Leung with Banc of America Merrill Lynch.

  • Please proceed.

  • Eddie Leung - Analyst

  • Good morning guys.

  • Could you give us an update of the relative impotency of the various factors behind the increasing customer spending in the fourth quarter, mainly click through rates, traffic, coverage ratio, pricing et cetera?

  • And also could you give us the contributions of revenues from your top advertiser categories, including perhaps online retailers?

  • Thanks.

  • Haoyu Shen - VP Business Operations

  • Hey Eddie, it's Haoyu.

  • We don't break out as monetisation matrix, but if you look at each of them, coverage, click through rate and CPC, they're all growing very healthily.

  • So as far as Phoenix Nest it gives us better coverage, but the algorithm is just prepare them before, giving us better coverage and given better coverage it even gives us better click through rates, so that's very good.

  • And CPC - we've talked about this many times - growing at a healthy rate.

  • We're not worried about it.

  • So you know we can't give out the exact numbers for every quarter.

  • As far as important sectors, I will have Jennifer give the break outs of the top ones, but as far as online retail, it's going very fast, as I think Robin mentioned in his remarks.

  • It grew by close to 200% over a year ago - last quarter.

  • So it's becoming a more meaningful, a more material part of our business, but it's still small in our view.

  • It has a lot of potential going forward.

  • Jennifer Li - CFO

  • Eddie the top five sectors for the quarter are the typical ones - medical health care, machinery, equipment, education, travel - and what actually broke into the top five category this quarter was software and games online, so this is in that regard.

  • Just as Haoyu mentioned, we've seen tremendous growth on the online retail sector, but it's not close to the top five.

  • So there's still a lot of - we have very strong sectors; the traditional sectors continue to grow very fast.

  • Operator

  • As a reminder ladies and gentlemen, please keep it to one question.

  • Our next question comes from Ming Zhao with SIG.

  • Please proceed.

  • Ming Zhao - Analyst

  • Thank you for taking my call.

  • So Robin you mentioned the social network assets that you have - the community assets like Baidu Tieba, Baidu [Baiku] and Wenku - could you comment on how are you going to monetise these assets?

  • For those external network sites do you have any plan to partner with them?

  • Thank you.

  • Robin Li - CEO

  • Okay, like I mentioned - social search products represent a significant portion of our total traffic, and they continue to grow at a very rapid speed.

  • The original purpose of this product was to strengthen or solidify our position, market leadership position in web search.

  • But as time passed by we realised that the commercial value of these products themselves are also very meaningful, so we are developing products - commercial products or ads products for this kind of social search services and going forward we do expect to better monetise such kind of traffic.

  • But again I think that the main purpose of these products, along with web search, is really strengthen our position, the centrepiece of Chinese internet users' online experience.

  • As to external partnerships - we will keep our minds open if anything makes sense for our overall strategy we will do it, but our current position in social I think is already very strong.

  • Probably on all the media search engines in the world we have the strongest social flavour so to speak.

  • So I think we're fine at the current level.

  • Ming Zhao - Analyst

  • Thank you.

  • Operator

  • Our next question comes from Andre Glukhov with Brean Murray.

  • Please proceed.

  • Andre Glukhov - Analyst

  • Yes, thank you for taking the question.

  • If I may follow-up on one of the earlier questions - Haoyu I think you mentioned that you guys are this year going to be putting in place a set of measures to sort of help with advertiser churn.

  • Can you guys maybe talk us through a direction of what some of those measures are and how immediate are some of those benefits for your advertiser account growth going to be?

  • Thank you.

  • Haoyu Shen - VP Business Operations

  • Right Andre, so yes retention will continue to be a strong focus for us in 2011.

  • We never break out churn numbers, but I think we can improve on that front.

  • So some of the things - experiments or things that we're doing are, how do you improve the experience of customers in their early days, because our observation is if we can improve experience in their early days, it will be much easier to retain them later.

  • So instead of, you know, when the day comes when they decide to leave us, then do something, that's probably too late.

  • So things like that, we're rolling out some experiments in different places and we hope that will improve the retention and we do realise that if we can improve retention meaningfully it will drive our performance very materially.

  • Andre Glukhov - Analyst

  • Great.

  • Thanks.

  • Operator

  • Our next question comes from Alicia Yap with Citigroup.

  • Please proceed.

  • Alicia Yap - Analyst

  • Hi, good morning.

  • Thanks for taking my question.

  • In your previous occasion I think you have mentioned that you do plan to utilise a little bit more on your display ads.

  • Have you seen meaningful pick up of demand on display ad inventory lately and what is the current percentage of revenue contributed by display ads?

  • Haoyu Shen - VP Business Operations

  • We have display ads Baidu's number search inventory.

  • We also have display our affiliate websites in Baidu union.

  • So a lot of Baidu unions' ads used to be tax based and in 2010 well we made a lot of changes, now a lot of the ads we're showing on affiliate websites are actually already display ads.

  • In 2011 we also have pretty high expectation for display ads on affiliate websites and we think Baidu is in a very good position to become a leader in display ads in China because we have this huge Baidu union network and also we know so much about users.

  • There is a lot of targeting that we can do - some of them will be (inaudible) based targeting that we can do to improve the RLI for advertisers.

  • So display ads, it's still small.

  • I can't give you exact numbers, but it's still small, but going forward we hope it will become a bigger piece of the business.

  • Alicia Yap - Analyst

  • Thank you.

  • Operator

  • Our next question comes from Yu Jin with CICC.

  • Please proceed.

  • Yu Jin - Analyst

  • Good morning, and happy Chinese New Year.

  • Firstly let me congratulate you on the strong results.

  • I have a question related to the real time information shares.

  • So [from the money managers] on the inside on that topic, so how important is that real time information will become to the search platform and (inaudible) opportunity there and what kind of [strategy] is that for us to develop [that competitiveness]?

  • it seems that most of the real time information are hosted by some major, like maybe a micro-blog or [other] website, so that's what I mean.

  • Thank you.

  • Robin Li - CEO

  • Hi Yu.

  • This is Robin.

  • I think real time information search is important to us and we have been working on this problem pretty now much since inception.

  • I realise that the recent internet trend showed a lot of micro-blogging and social related services, generating a lot of real time information.

  • But there are also other types of real time information - for example Baidu Post Bar, there are a lot of real time information too.

  • But the problem or the issue with real time search is that it's very prone to spam.

  • If people know that something published just now can be shown on the front page of a search list without page, they won't try to spam that.

  • So real time search requires a lot of technology to ensure that the user (inaudible) is good enough.

  • It's a very hard problem, but we are working on that.

  • I think information is pretty much overloaded on the internet, being in china or elsewhere, so the problem is - but the real problem is not really to find information that's real time.

  • It's really distinguish high quality information from the low quality information in real time.

  • Now I think we have accumulated a lot of experience and technology in this front and our users information needs are met very well or are better met in the past couple of quarters than before.

  • So that's our take on real time search.

  • Operator

  • Our next question comes from Gene Munster with Piper Jaffray.

  • Please proceed.

  • Gene Munster - Analyst

  • Good morning and congratulations.

  • I want to talk a little bit about video - how you - Robin you briefly mentioned it earlier, but just in terms of any investments I guess in Qiyi and potentially there's been some reports that you may spin that out as a separate company - any thoughts on that would be helpful.

  • Thanks.

  • Robin Li - CEO

  • Gene, this Robin.

  • Qiyi is actually an independent company, controlled by Baidu.

  • We have a controlling interest, but we also have another investor, so it's already a separate entity.

  • It has been doing very well and we do think it has a very bright future going forward.

  • It's got a significant investment initially when we launched earlier last year, but going forward we will decide our capital needs and make our decision accordingly.

  • Gene Munster - Analyst

  • Yes, I guess the question is would you potentially list that in the future?

  • Robin Li - CEO

  • List?

  • Yes, yes I think so.

  • As an independent company we could list it in a public market going forward.

  • Gene Munster - Analyst

  • Great.

  • Thank you.

  • Operator

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

  • Please proceed.

  • Eric Wen - Analyst

  • Hi, thanks very much for taking my question.

  • My question really just has been asked by Gene, but I would like to follow up with the overall strategy in the video market.

  • I notice that, Robin, your competitor last night just reported pretty good growth margins in its video business and we notice that Qiyi since its launch has experienced a very rapid growth in traffic share.

  • It's almost one third of Tudou as of this point.

  • I just want to seek your comment in addition to is Baidu's investment in Baidu TV - that was a while ago - and whether Baidu TV and Qiyi together is going to allow Baidu to capture more revenue share than its traffic share in the video market.

  • Thanks.

  • Robin Li - CEO

  • Eric, this is Robin.

  • I think Qiyi has only been in the market for like eight months.

  • We are not in a hurry to monetise this and Qiyi also has its position which it's really designed for long videos, licensed, high quality content, that's different from the YouKu's and Tudou's of the world.

  • And Baidu TV, it's a relatively different product.

  • It's pure advertising system with Baidu investment.

  • Going forward I think consumers increasingly spend longer term on online video, and media time almost immediately implies that advertising dollar will flow through that area too.

  • We have very strong advertiser network.

  • We have very strong and unique monetisation capabilities.

  • I think we can help Qiyi and other entities to monetise their traffic better than anyone else.

  • Haoyu do you have anything to add?

  • Haoyu Shen - VP Business Operations

  • No, other than just clarify more on Baidu TV.

  • Baidu TV is a video add product that we display our affiliate websites, so it's sort of different than Qiyi.

  • Operator

  • Our next question comes from Steve Weinstein with Pacific Crest.

  • Please proceed.

  • Steve Weinstein - Analyst

  • Great thank you.

  • So looking at the spend per advertiser - and I think it had the most growth that you've shown in several years - based on your commentary it sounds like you think there's still a lot of room to go.

  • I was hoping you could help us understand those drivers a little bit more in terms of how much of it is really coming from just people buying more terms versus just increasing volume versus pricing?

  • You kind of alluded to it, but given the magnitude of growth and how important that is for forecasting 2011 I was hoping you could rank order those or give us a little more colour.

  • Haoyu Shen - VP Business Operations

  • Hi Steve, this is Haoyu.

  • It's really hard to rank all these factors, plus we don't break out the detailed matrix of DPN, but I can just talk about them at a high level.

  • So first of all traffic drives up ARPU.

  • Right, we have very healthy growth of traffic throughout the year in 2010.

  • And of course customers, after Phoenix Nest, customers are buying more key words, just because the system is more capable.

  • It can help the advertisers to find more relevant key words.

  • So that will drive up ARPU as well.

  • Also budget, I think budget is - so some customers they do set a budget, a daily budget for their spending.

  • As they get ROI out of Baidu paid search some of them will increase their budget and that naturally will flow through to become ARPU.

  • Also, another factor that's driving ARPU is big advertisers are really spending more but benefiting from Phoenix Nest more.

  • They're buying more key words or setting higher daily budget, and that drives a mixed shift.

  • So that will also drive the eventual ARPU network.

  • Steve Weinstein - Analyst

  • Thank you.

  • Operator

  • Our next question comes from Mayuresh Masurekar with Kaufman Brothers.

  • Please proceed.

  • Jennifer Li - CFO

  • Operator, we have probably lost the caller.

  • Maybe we can move on to the next one.

  • Operator

  • Okay, our next question is from Alex Yao with Deutsche Bank.

  • Please proceed.

  • Alex Yao - Analyst

  • Good morning everyone and congratulations on a very strong quarter.

  • Just got one follow-up question on the bulk computing initiative.

  • What do you think is the biggest challenge right now to pursue this initiative and how should we think about monetisation into '11?

  • Thank you.

  • Robin Li - CEO

  • Alex, I think that the main purpose for box computing is to retain users or satisfy all kinds of users' needs, not just information needs, but they also from time to time have needs on [fact], applications and things like that, so we are integrating all kinds of stuff - including applications data, content, into one search box so that users don't need to go elsewhere to find what they want.

  • The biggest challenge for the box computing is technology and ecosystem growing.

  • On the technology front it's very difficult to accurately analyse user needs.

  • For the same meaning we have probably you know 200 different ways of expressing it and our technology needs to be able to find out exactly what the user means, then deliver the right content, right fact or right application to the user.

  • On the ecosystem we rely on - because we operate an open platform, it is an open data platform or open application platform; we rely on third party to provide the data applications to us.

  • So our influence on the industry and our capability to monetise or to benefit our developers will also be essential to the success of the box computing initiatives.

  • Alex Yao - Analyst

  • Thank you very much, and how should we think about monetisation this year?

  • Robin Li - CEO

  • I don't think for this year you would count on the monetisation, although we are exploring ways for our developers to make money from our platform, but you know Baidu side, we do not expect to directly benefit from this yet.

  • I think the key is to really provide the best things for users so that they will come to Baidu more often and search more.

  • So indirectly we will all be able to benefit from this.

  • Operator

  • Our next question comes from Philip Wan with Morgan Stanley.

  • Please proceed.

  • Philip Wan - Analyst

  • Good morning Robin, Jennifer, how are you - and Victor?

  • First of all congratulations on very strong quarter, and thanks for taking my call.

  • Very quickly, could you share with us the progress of your e-commerce (inaudible), for example an operating matrix which has (inaudible) value of a registered user?

  • That would be very helpful.

  • Haoyu Shen - VP Business Operations

  • Hi, this Haoyu.

  • We can't report the details of numbers yet.

  • The site as you all know has been live for a few months now.

  • It started in October.

  • We have a sizeable team on the ground already.

  • You can go and check out the site - it's a B2C business model, which Rakuten have a lot of success in Japan.

  • So we are fully behind this initiative in the cooperation with Rakuten but they are really the driver behind the seat so to speak for this joint venture.

  • As we make more progress going forward we will probably give you more updates.

  • Philip Wan - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Our next question comes from Aaron Kessler with Think Equity.

  • Please proceed.

  • Aaron Kessler - Analyst

  • Thanks.

  • Couple of questions - on the travel sector, can you give us an update what you saw within travel in the quarter, maybe then going into Q1 as there's been some reports that you've seen a bit of a slowdown.

  • And also in terms of your smaller advertisers you talked about churning off a little, is there anything you can do maybe simplify the bidding for those smaller advertisers, like a fixed fee per month type of bidding?

  • Haoyu Shen - VP Business Operations

  • Hi, this is Haoyu.

  • On travel, it's still very exciting sector for us; a lot going on there.

  • It's very competitive.

  • A lot of players out there, some more (inaudible) ones, some smaller ones.

  • So many will probably continue to see typical seasonality during the year, so there's been nothing new there.

  • As far as small advertiser attrition, I don't, you know, we're exploring different ways to improve that - make it simpler for them, but we're probably not going to make some fundamental changes to the mechanisms of our option system.

  • So, for example, one of the things that was mentioned by Robin in his prepared remarks were we have this qualification program - external qualification program which we use to train external people to use SEM, to use search to help customers manage their search campaigns.

  • So that could be, indirectly anyway, help some of the less sophisticated customers to take advantage of paid search.

  • So, on our side we're also probably going to make more tools available to small advertisers to improve their experience.

  • Robin Li - CEO

  • Yes, let me just add a few words on this - I think - in the of Baidu's paid search platform, advertisers, large or small, usually needs a lot of hand holding from us, and last quarter was no exception.

  • What's different was that demand from large advertisers was really, really strong for last quarter, so we probably spent a lot more time to help the larger advertisers last quarter.

  • Operator

  • Our next question comes from Vivian Hao of Credit Suisse.

  • Please proceed.

  • Vivian Hao - Analyst

  • Hi, morning, this is Wallace from Credit Suisse.

  • Just quickly on the balance sheet items - I think the investment line has jumped from around RMB50 million in the third quarter to around RMB287 million in fourth quarter.

  • Does it relate to the Rakuten joint venture investment?

  • Also there's a line for the long stable non-current RMB86 million - can you (inaudible) further?

  • Thank you.

  • Jennifer Li - CFO

  • Yes, Wallace, the investment line - the sequential increase did reflect in part to the Rakuten investment or continued funding and also we had other M&A activities during the quarter and that would be captured on this line as well.

  • The RMB86 million that you refer to is a loan that or an interest-free loan that we get from some of the projects.

  • Now we participate in government sponsored research projects, so this is an interest-free loan that the government granted to us because we were supporting on some research projects.

  • Wallace Cheung - Analyst

  • Thank you.

  • Just quick follow-up - there's some news where you talked about you have set up an investment fund around RMB100 million to invest in the online game business.

  • Has this pertained to the investment line yet?

  • Operator

  • Our next question comes from Mayuresh Masurekar with Kaufman Brothers.

  • Please proceed.

  • Mayuresh Masurekar - Analyst

  • Hello.

  • Congratulations on having a great quarter.

  • Third monthly reports are showing that you know search revenue growth is accelerating in the China world market, so could you talk about what is driving this revenue growth acceleration in fourth quarter, as well as in 2011 forecast?

  • And also is increasing competition actually benefiting you as the overall search by [expanse]?

  • Robin Li - CEO

  • let's put it this way, because there are a lot of, you know, good factors in 2010 that helped to drive the revenue growth, the successful transition to Phoenix Nest, the end of financial crisis, the better position of our search market leadership, so there are a lot of good factors that contributed to the revenue growth in 2010, and going forward, because we already set a very good foundation for the paid search and because China is still a growing market that internet penetration is only a third of the total population and consumers increasingly rely on search to find information and companies large and small increasingly realize that search marketing is the best way for them to promote their products and services, so we do expect that we will have a very long period of high growth going forward.

  • Like I mentioned in the prepared remarks, for the first time search became the number one application for online users in China last year.

  • So it's a long-deserved position but we just got there last year so that tells you that the potential for our business of search market in China.

  • Operator

  • The next question comes from Jiong Shao with Macquarie.

  • Please proceed.

  • Jiong Shao - Analyst

  • Thank you very much.

  • First let me say a Happy New Year to you as well and to everybody on the line who celebrates.

  • I have a quick follow-up and question.

  • The follow-up is on the Qiyi side as well.

  • Could you just also talk about sort of how you view the business model of advertising versus sort of pay per view and any comment on the content would be highly appreciated.

  • My question is on the mobile search.

  • Could you sort of talk about current thoughts on how you're going to tackle and aggressively expand in the mobile search area in terms of the monetization, market share given the rapid adoption of the smartphones and 3G.

  • Thank you very much.

  • Robin Li - CEO

  • This is Robin.

  • Qiyi is a young venture.

  • It's only been launched for eight months.

  • The current focus is really on the user experience.

  • We licensed very high quality content from all kinds of copyright holders and we are obviously open to both the advertising model and subscription model.

  • We believe that either way we will be able to benefit from this as consumers spend more and more time on Qiyi or online video sites.

  • As for the mobile search, mobile related traffic have been growing faster than PC based search services over the past few quarters.

  • We expect this will continue to be the trend going forward for the next couple of years.

  • As you correctly point out, smartphone is gaining traction in the Chinese market too.

  • We have put into a lot of resources to optimize our search services for mobile phones, particularly for smartphones.

  • Monetization for mobile search is also very promising.

  • Our initial experiments show that (inaudible) rate mobile devices are higher than PC devices, so whenever we want to monetize the mobile traffic more aggressively we can do so.

  • Right now the focus is again on the user experience side.

  • Jiong Shao - Analyst

  • Okay.

  • Thank you very much and congratulations on a great quarter.

  • Robin Li - CEO

  • Thank you.

  • Operator

  • Our next question comes from Wendy Huang with RBS.

  • Please proceed.

  • Wendy Huang - Analyst

  • Thank you for taking my questions.

  • Robin, you mentioned many times that you are seeing the aggressive spending from large advertisers recently.

  • I just wonder if you can give more color on the revenue concentration from the top or large advertisers and what kind of average spending from big advertisers versus those small search advertisers?

  • Haoyu Shen - VP Business Operations

  • Hi Wendy, this is Haoyu.

  • We're seeing especially in Q4 we're seeing great demand from large advertisers.

  • I remember a few years ago when we talk about our business we say it's largely SME.

  • Today of course it is still - SMEs contribute a larger share of our revenue but over the past three years large advertisers' share of our revenue contribution has increased a lot.

  • This is probably due to their increased awareness and understanding of [paid search] and also the maturing of the industry.

  • Their agencies are getting more familiar with paid search so their agencies can help them to leverage search better than say three years ago.

  • But overall if you look at our business, it's still a very (inaudible) business.

  • On a yearly basis we have over 300,000 customers and all of them are important to us.

  • We'll work hard on retention of all of our customers.

  • Jennifer Li - CFO

  • In general we have - the large customer pools we have, only about 1000 of those are large companies, large customers.

  • When you look at our ARPU for the quarter, it's 8900 on average.

  • There is a big disparity between the large customers and the small ones.

  • The large customers spends hundreds and thousands on average but there are only 1000 of them.

  • For the big majority of our revenue, it continues to come from SME, albeit the large customers' contribution in revenue are increasing but it's still not the major part of our total revenue picture.

  • Operator

  • Our next question comes from Gary Ngan with UBS.

  • Please proceed.

  • Gary Ngan - Analyst

  • Good morning, everyone.

  • Thanks for taking my questions.

  • I just want to get your thoughts on browser.

  • How important do you think a browser is for the entrance of a search engine?

  • Eventually what do you think you can expand on the browser application to maybe become a platform or is that really synergistic to a search engine core business?

  • Robin Li - CEO

  • Gary, this is Robin.

  • I think browser is a very important distribution channel for search but there are also other kind of distribution channels (inaudible).

  • We have web directories; we have browser; we have other type of softwares.

  • They collectively represent a relatively small percentage of our total traffic, most people who come to Baidu's own website or set our baidu.com as their home page or starting page.

  • But again (inaudible) used to do the search through their browser, through the URL address box of the browser.

  • We think that will continue and we will try and find ways to serve that portion of users.

  • Operator

  • Our last question for today is from James Mitchell with Goldman Sachs.

  • Please proceed.

  • James Mitchell - Analyst

  • Sorry to double dip with a clarification question, but could you just clarify whether the first quarter 2011 ad campaign is primarily directed at consumers or directed to the advertisers and whether it's a single quarter phenomenon like the RMB40 million [CCTV] campaign two years ago or whether it's more of a recurring expenditure?

  • Thank you.

  • Jennifer Li - CFO

  • In general, James, our focus to promote our brand and market our user product is consistent with our prior practice.

  • This Q1 marketing campaign is mainly focused on general search to drive users' better understanding of what kind of services and tools and how fine it can be to use search, so this is more user focused.

  • Obviously this is a big effort and that's why we wanted to highlight it for Q1.

  • On an ongoing basis it's going to be more consistent from a spending perspective than this may be (inaudible).

  • That's the reason that we wanted to highlight it.

  • James Mitchell - Analyst

  • Thank you.

  • Operator

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

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

  • Robin Li - CEO

  • Once again, thank you for joining us today.

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

  • Operator

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

  • This concludes the presentation.

  • You may now disconnect.

  • Good day.