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Operator
Hello and thank you for standing by for Baidu's first quarter 2011 earnings conference call.
(Operator Instructions) I'd now like to turn the meeting over to your host for today's conference, Victor Tseng, Baidu's Investor Relations Director.
Please proceed sir.
Victor Tseng - Investor Relations Director
Hello everyone and welcome to Baidu's first quarter 2011 earnings conference call.
We distributed Baidu's first quarter 2011 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 proceed, please note that the discussion today will contain forward looking statements made under the safe harbour provisions of the US 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 (inaudible).
Baidu does not undertake any obligations to update any forward looking statement except as required under applicable law.
Our earnings press release and this call will include discussions of certain (technical difficulty) non-GAAP measures.
Our [release] contains a reconciliation of the unaudited non-GAAP measures to the unaudited directly comparable GAAP measures on our IR website at ir.baidu.com.
As a reminder this conference is recorded.
In addition a webcast of this conference call will be available on Baidu's corporate website at ir.baidu.com.
I will now turn the call over to Baidu's CEO Robin Li.
Robin Li - CEO
Hello everyone and welcome to today's call.
Our continuous focus on execution as we heralded another quarter of very strong top and bottom line results driven by solid traffic growth and improvements to our monetization platform.
On the user front, traffic volume growth remains strong with organic and [union] traffic both growing (inaudible).
To date China's internet penetration rate is still on the 35% and search is now the most likely used internet application in the country.
This gives Baidu plenty of room to further develop the market.
We will accomplish this by enabling our users to fulfil more and more of their day to day needs on our platform.
I would like to talk briefly about some of our work under the Box Computing banner, which builds upon our search leadership and enhances user clearance.
As you may know our vision for Box Computing is at a simple [command box] while increasingly fulfil users needs.
Box Computing is powered by a sophisticated understanding of user intent and powerful natural language programming and benefits from an increasingly sophisticated online ecosystem.
As a result of this initiative we now incorporate a world of dynamic data, content and (technical difficulty).
In fact, Baidu queries returning Box Computing results have grown to over 60% of the total queries now.
We are particularly excited about the progress of our open applications platform, which is integral to our Box Computing mission.
We launched this in September of 2010 [apps] embedded in the search results page, now generates millions of clicks per day.
Some of the best performing apps include [micro-games], [eBooks] and videos as well as practical tools such as [NMR] software and express delivery tracking system.
We continue to push the bar on innovations through Box Computing.
For example, over the past quarter we launched a new feature that automatically distinguishes between regular search queries and (inaudible) intended for posting micro-blog content, micro-blog accounts.
The feature then lets users simultaneously publish their posts on multiple micro-blog accounts.
This product improvements that enable user activities on the search platform.
We are continuing to develop the resources toward educating users about how to use search more effectively and about new ways of using search.
Another important way we improved user experience is by evolving our array of social search products.
Traffic on our social search products such as Baidu Post Bar, Baidu (inaudible) continues to grow healthily.
Registered users have grown at a rate of 10 million per month as we added more and more social features such as connect and like to our existing product.
As we continuously enhance our products we are very encouraged that so many users are becoming increasingly engaged with our platform and actively creating quality content.
This serves as a solid foundation for future Baidu social product.
In parallel, te.com continued to grow strongly on the user front with over 150 million monthly unique users in just 12 months after its launch.
This is by far a record for online video sites in China.
On the monetization front, we continued to enhance Phoenix Nest.
Better key word coverage and better [paid clicks] relevance drove paid click growth of 56% year over year in 2010.
This trend continued in Q1 and this highlights the increased value that customers are seeing from their marketing spend.
At the same time online retail has continued its trajectory of triple digit growth year on year.
Baidu (technical difficulty) only a small (inaudible) tens of millions of SMEs in China.
We will need to keep working hard to educate the market about the benefit of online marketing results.
We will continue our annual nationwide search engine marketing campaign this year reaching over 150 cities.
Another focal point is ensuring that our existing customers know how to optimise the search engine marketing process.
We aim to enhance customer know how through hiring more customer service representatives, improving the sales process through CRN implementation and developing and deploying better tools for customers to optimise their search engine marketing.
We've seen in the past that as customers better understand the advantages of our online marketing platform, they tend to allocate more of their advertising spending to us.
In addition to increasing sales head count, expanding our R&D [talent pool] is another focus.
Most of the 800 staff we hired this past quarter were for R&D.
In particular, I would like to highlight Mr Lee Liu who has recently joined as VP of Human Resources.
Mr Liu brings impressive credentials to Baidu, having previously served as Vice-President of Human Resources at Motorola.
Looking ahead, we will maintain our focus on improving our offering to users and customers, providing additional functionality through Box Computing and continuing to make improvements to our online marketing platform.
As part of this, we will continue to invest in R&D, in sales resources as well as network infrastructure.
With that, I'll now turn the call over to Jennifer for financial highlights.
Jennifer Li - CFO
Thank you Robin.
Hello everyone.
As Robin outlined, the Chinese internet marketplace continues to hold great growth potential for Baidu and we're investing at all levels of our company to ensure strong and steady business expansion.
Now let's look at financial highlights for the quarter.
All months mentioned are in RMB unless otherwise noted.
Online marketing revenues for the first quarter of 2011 were RMB2.4 billion, an 88% increase year over year.
Baidu had around 274,000 active online marketing customers in the first quarter of 2011, a 24% increase from the corresponding period in 2010 and a 0.7% decrease from the previous quarter.
Revenue for online marketing customers in the first quarter reached approximately RMB8900, a 51% increase from the corresponding in 2010 and flat compared to the previous quarter.
Traffic acquisition cost as a component of cost of revenue was RMB199 million or 8.2% total revenue as compared to 13.2% in the corresponding period in 2010 and 8.1% for the fourth quarter of last year.
Bandwidth cost as a component of cost of revenue was RMB122 million representing 5% of total revenue compared to 4.5% in the same period last year, appreciation cost as a component of cost of revenue was RMB123 million, representing 5% of total revenues compared to 5.1% in Q1 2011, in 2010.
Selling, general and administrative expenses in Q1 were RMB333 million, an increase of 55% year over year.
This increase primarily reflects increased personnel cost and marketing expenses.
Research and development expenses were RMB239 million, a 96% increase from the year ago period.
This increase primarily reflects increased personnel costs.
Share based compensation expenses, which were allocated to related operating cost and expense line items, increased in aggregate to RMB31 million in the first quarter of 2011 from RMB20 million in the corresponding period in 2010.
Operating profit was RMB1.2 billion, a 125% increase year over year.
Total head count of March 31 2011 was (technical difficulty) roughly 800 more than the previous quarter.
Income tax expense was RMB181 million for the first quarter.
The effective tax rate for the first quarter was 14.5% as compared to 12.8% for the corresponding period in 2010.
Net income was nearly RMB1.1 billion, a 123% increase from the corresponding period in 2010.
(Technical difficulty) basic and diluted earnings per ADS for the first quarter of 2011 amounted to RMB3.07 and RMB3.06 respectively.
Net income excluding share based compensation expenses, a non-GAAP measure was slightly over RMB1.1 billion, a 120% increase from the corresponding period in 2010.
Basic and diluted earnings per ADS excluding share based compensation expense of non-GAAP measures were RMB3.16 and RMB3.15 respectively.
As of March 31 2011 the company had cash, cash equivalents and short term investments of RMB8.6 billion, net operating cashflow and capital expenditure for the first quarter of 2011 were RMB977 million and RMB387 million respectively.
Now let me provide you with our top line guidance for the second quarter 2011.
We currently expect total revenue for the second quarter of 2011 to be between RMB3.23 billion and RMB3.3 billion, which would represent a 68.7% to 72.4% year over year growth.
This forecast reflects Baidu's current and preliminary yield, which is subject to change.
I will now open the call to questions.
Operator please go ahead.
Operator
(Operator Instructions) Your first question is from the line of Mr James Mitchell with Goldman Sachs.
You may proceed Sir.
James Mitchell - Analyst
Great, thank you very much.
You mentioned that paid leads growth of 56% year on year in 2010 and continues at a fast rate in first quarter 2011.
Is the growth in paid leads similar to the growth in queries or has the ratio of paid leads queries increased and then maybe it's related to that, but the 110% growth in bandwidth costs year on year, was that unusually fast increase because of very fast query growth or is bandwidth use query increasing because of the Box Computing results and the queries?
Robin Li - CEO
Hi James.
Let me answer the first question about traffic versus amount of clicks.
In 2010 our paid clicks grew by 56% versus 2009 and that leads to growth of traffic growth in 2010.
We're seeing that trend continuing into Q1 and (inaudible) it really shows the power of our new (inaudible) system.
Jennifer Li - CFO
Go ahead James.
James Mitchell - Analyst
I was just going to ask.
So if the traffic growth is less than 56%, the reason why bandwidth cost is up 110%, is that because of (inaudible) results?
Jennifer Li - CFO
The bandwidth cost itself also includes several hosting expenses.
As you will have noticed, we have stepped up our investment in servers, acquisitions of infrastructure, networking infrastructure equipment.
So as part of the bandwidth cost with more servers, there's more hosting costs related to that so included in bandwidth cost is traffic related and I would say most of the increase is because we have more servers.
Robin Li - CEO
Also because we also offer a lot of non-web search products including social search products, traffic for the social search products grow much faster than web search product and right now it's under-monetised.
James Mitchell - Analyst
Great, thank you.
Operator
Your next question is from the line of Mr Dick Wei with JP Morgan.
You may proceed Sir.
Dick Wei - Analyst
Thank you for answering my question.
My questions are local advertising.
I think with the popularity of good [purchasing] in China, it seems more of the local SMEs started to think about advertising over the internet.
I wonder how much of Baidu's revenue currently coming from the local advertising, local advertisers, what is the plan in this area?
Should we expect more acquisitions or should we expect more of the kind of sales team to build up that?
Haoyu Shen - Senior Vice President Business Operations
Hi Dick, this is Haoyu.
Right now if you look at our customer portfolio, we don't really have a whole lot of local, local service type advertisers with us, but they're not - not many of them are buying our pay click products.
We are - right now we are exploring different ways of capturing that market going forward, but we don't have any major announcement at this point.
Robin Li - CEO
Dick, this is Robin.
Local is very long tail.
There are lots of small, very small (inaudible) and the ARPU for local is relatively lower than our typical customers.
What we have seen is that some of the aggregators for local services including those group buying sites, those classic (inaudible) sites, [50a.com] or [Gangsheda.com], those are the big or large advertisers of us.
Right now I think it's probably still early for us to directly get in touch with the local merchants.
Dick Wei - Analyst
Thank you.
Operator
Your next question is from the line of Alicia Yap with Citigroup.
You may proceed.
Alicia Yap - Analyst
Hi, good morning and good evening.
Thanks for taking my question.
I'm just wondering would you be able to share with us some of your thoughts regarding how Baidu will be playing a role in the emerging important stage of the social media marketing.
Any upcoming initiatives or view regarding the industry trend will be appreciated.
Thank you.
Robin Li - CEO
Yeah.
Like I mentioned during the prepared remark, our view on the social is that we need to integrate social with search, because search is our core (inaudible) and it's very fundamental in our user's every day needs.
Search just become - just became the most popular application for Chinese internet users.
There are still lots of growth to expect for many years down the road.
We do realize that social is becoming more and more popular.
That's why we have been embracing a lot of social features into our product.
In fact, since the year 2003 we started to add social features to our search services.
Total search services represent about a quarter of our total traffic and it's growing faster than the web search, so our approach is to integrate social with search, not to really develop an independent social network per se.
Alicia Yap - Analyst
I see.
Thank you.
Operator
Your next question is coming from the line of Yu Jin with CICC.
You may proceed.
Yu Jin - Analyst
Thank you.
Good morning Robin and Jennifer, how are you.
I have a broader question [regarding] mobile internet.
I'm curious on the user behavior of mobile internet users.
I'm not sure why that stopped as applications will be [a cyclical trend] when the bandwidth is not a problem.
Users will still go to the website to enjoy most of the internet mobile services, so I'd like to (inaudible) insight from Robin.
Thank you.
Robin Li - CEO
It's not clear.
Can you please repeat your question.
Yu Jin - Analyst
My question is I'm curious on your view.
I'm not sure why that currently the (inaudible) Star Plus application is a separate --
Robin Li - CEO
Oh sure, okay.
Yu Jin - Analyst
-- mobile internet users when their bandwidth is not a problem, so we can access the mobile internet more easily so people will still go to the website, go to the (inaudible) most internet services.
Robin Li - CEO
Okay, I've got you.
Yeah, I think that would be a long term view for mobile internet.
If you look at the PC internet in the early days, a lot of people would like to download software and going into directory.
Later on when there are too many different services on the internet available, people have to rely on search.
Mobile internet is relatively in its infant stage.
People are still very much into the app store model.
They like to download apps and play with it, but going forward when there are tens of millions of apps, hundreds of millions of apps, I think people will increasingly have to depend upon search to find what they want.
So longer term I think be it mobile or land line, users will have a lot more choices than they do today and they will be increasingly dependent on the [broader] based user interface or search in particular.
Yu Jin - Analyst
Thank you.
It's helpful.
Operator
Your next question is from the line of Eddie Leung with Merrill Lynch.
You may proceed.
Eddie Leung - Analyst
Good morning guys.
Thanks for taking my questions.
Could you share with us some update on your development from your next contextual [ads] system?
Related to that, have we seen the percentage of advertising revenues from contextual has changed, especially in the past six months or so?
Thanks.
Robin Li - CEO
Hi Eddie.
Yeah, we mentioned I think in previous calls that we moved our contextual product to a new platform (technical difficulty) so since then we've been building upon that improving our [rhythm] and really pushing the product to small and - small advertisers and [brand] advertisers, so in Q1 we've seen a lot of progress but we still have a long way to go.
Eddie Leung - Analyst
Sorry (inaudible), just a follow up question on that.
At the moment would you describe the key focus is to increase your reach of your partners or is more about pushing it or selling it to advertisers?
Robin Li - CEO
It's not so much getting more publishers because we have a pretty good reach already in terms of (inaudible) publishers.
It's really improving the product (inaudible) side and also educate different customers on how they can use the contextual versus search.
Eddie Leung - Analyst
Got that.
Thank you.
Operator
Your next question is from the line of Gene Munster with Piper Jaffray.
You may proceed.
Gene Munster - Analyst
Good morning and congratulations once again.
A question regarding Phoenix Nest, which I know we're not supposed to (inaudible) but I guess with just a little bit over a year throughout anniversary, the revenue growth continues to be strong.
If we look at paid clicks up 56% year over year, by our math, CPCs were up in the mid-20s.
Is there another leg to I guess the CPC monetization story post Phoenix Nest or is this kind of the new equilibrium that we're at?
Robin Li - CEO
Hi Gene.
I'm not quite sure if I get your question, but if you compare - if you look at the number of clicks versus CPC, we apparently had tremendous growth of number of clicks last year due to Phoenix Nest.
Now we still have the lasting effect.
We've had our anniversary already but in Q1 we're continuing to see great growth of the number of clicks and CPC (inaudible) last year, I think we're probably in the mid-teens instead of mid-20s in terms of growth rate.
The CPC didn't really grow faster or slower pre and post Phoenix Nest and I think going forward that will continue to be the case.
Gene Munster - Analyst
(Inaudible - multiple speakers).
Robin Li - CEO
I think the most important thing to bear in mind is that the search market in China is still in its early stage.
Most of the CPC and number of clicks have a lot of room for improvement.
It's not really about Phoenix Nest.
It's about the stage we're at for the market.
Gene Munster - Analyst
Okay and just to make sure I'm on the same page here, is that Q1 just reported a quarter (inaudible) against the full, Phoenix Nest integrated quarter a year ago.
Is that correct?
Robin Li - CEO
Yeah.
Gene Munster - Analyst
Great, thank you.
Operator
Your next question is from the line of Ming Zhao with SIG.
You may proceed.
Ming Zhao - Analyst
Thank you.
Good morning everyone.
Look, a question on your (inaudible).
I don't know if you could give us the color on how much revenue you get from this navigation page and do you think in the future you can still maintain the leadership in this area?
Relating to that is you just launched your Baidu browser, what's your strategy there to grow your - the penetration of your Baidu browser?
Thank you.
Robin Li - CEO
Hi Ming.
(Inaudible) your question on (inaudible).
We can't - we don't disclose the exact per cent of revenue from (inaudible) but it is the most popular home page in China followed by consumers and we'll continue to improve the product, differentiate the product and maintain the leadership position.
In terms of revenue, it really comes from two sources.
One is search on (inaudible) search is the default search, the search box is Baidu search so we gain revenue from search and also because it's such a very popular directory site we get some ad revenue from it as well.
In any case, we can discuss the number of (inaudible).
From the Baidu browser, we haven't really officially launched the browser yet but we see opportunities there, I think, in China.
Internet Explorer is not very competitive.
It is our other opportunities for customized browsers.
Having control of the browser would certainly help us to drive traffic to Baidu search.
We currently have partnership deals with some of the browsers and we like to see if we can offer better user experiences through our own.
Ming Zhao - Analyst
Thank you.
Robin Li - CEO
But the key is that we can share revenue with people so we have the distribution power when we want to distribute certain type of (inaudible) software.
Ming Zhao - Analyst
Thank you very much.
Operator
Your next question is coming from the line of Jiong Shao with Macquarie.
You may proceed.
Your line is open Jiong.
Jiong Shao - Analyst
Sorry, can you hear me okay?
Robin Li - CEO
Go ahead.
Jiong Shao - Analyst
Sorry, I was on mute.
Thanks for taking my question.
First to clarify what Robin said earlier in the prepared remarks.
I think Robin you mentioned that 60% of your total queries come back with results with some of the Box Computing sort of information embedded.
I just want to make sure I heard that right.
My question is also on Box Computing.
Could you please give us an update on like how many partners you know have - what's your target for the number of partners by the end of the year and the monetization top line etc.
Thank you.
Robin Li - CEO
Okay.
Yeah, you heard it right.
Roughly 60% of the first result pages now contain Box Computing result.
Such a result includes both the open data platform and open application platform.
We have about (technical difficulty) partners right now.
Some of the partners provide very popular services such as calendar services or weather reports, those kind of services, which should represent a very large number of queries so the 60% coverage is right and I think going forward the coverage could go up continuously.
In terms of monetization, it's still too early although we have found certain tasks with the above computing infrastructure and advertisers are very happy.
We've done a number of deals but right now monetization is not focused for the Box Computing mission.
Jiong Shao - Analyst
Okay, thanks.
I'm going back to the queue.
Operator
Your next question is from the line of Philip Wong with Morgan Stanley.
You may proceed.
Philip Wong - Analyst
Good morning Robin and Haoyu.
Thanks for taking my question.
Could you please provide us more color about your mobile strategy and based on these commanding about 80% of android smart phones will be (inaudible) default engine?
I'm particularly interested in the economics behind that, for example with Baidu in (inaudible) per handset or via revenue sharing in the form of traffic (inaudible).
Thank you.
Haoyu Shen - Senior Vice President Business Operations
Hi, it's Haoyu.
Yes, I think that the (inaudible) all the android phones shipped in China, 80% of them have Baidu as default search engine so these are affiliate agreements that we entered with device makers and so it's a revenue sharing arrangement.
We work with the handset makers so that the search could either be (inaudible) home screen or some of the other devices we pre-install Baidu, Baidu [client-side] software to those devices.
Robin Li - CEO
For the overall mobile strategy to put it in a single term, it's also Box Computing.
I think in the future - at the moment a user (inaudible) mobile phone.
He or she will immediately see a box that can do everything.
We are working very hard towards that mission.
Philip Wong - Analyst
Thank you.
Operator
Your next question is from the line of Alex Yao with Deutsche Bank.
You may proceed.
Alex Yao - Analyst
Good morning everyone and thank you very much for taking my question.
Can you give us an update on the Baidu union business and how should we think about the traffic acquisition cost in the rest of the year?
Thank you very much.
Robin Li - CEO
Yeah, so as we talked about many times before we have two -- we have two businesses within Baidu (inaudible).
One is search, the other is [contractual] and so a lot of the TAC costs, (inaudible) due to our rationalization of (technical difficulty) search business and those initiatives by now are largely behind us and the other business is contractual where we see tremendous growth potential going forward but we have a long way to go and if you look at these two businesses, contractual tend to have a higher payout ratio.
So if contractual grows to a bigger percentage of total unit business then you will see TAC ratios going up but again it will be a gradual process.
If you look at Q1 TAC as a percentage of total revenue it's flattish versus Q4.
So looking out to the rest of the year we think our TAC ratio will fluctuate but it will be a relatively narrow range.
So again the search business is all about competition.
If someone gets more competitive our (inaudible) we probably need to react and if we do very well on contractual that will have implication on TAC as well.
Alex Yao - Analyst
Right.
Thank you very much.
Operator
Your next question is coming from the line of Aaron Kessler with Think Equity.
You may proceed.
Aaron Kessler - Analyst
Hi, guys.
Just a couple of questions.
If you can just clarify, I was hearing in the quarter that there was maybe some reduction in agency commission fees.
If you can comment on that and also just picking up about maybe you're looking to clean up some of the advertiser base, maybe on the heels of the Alibaba issue in terms of some (inaudible) advertisers?
If you can comment on any of those issues that will be helpful?
Robin Li - CEO
Right.
The agency [we base] in policy.
So we update all policies every year.
We look at different types of agencies and how they help us on different product lines and every year we rationalize how much we pay out to them to encourage them to serve the customers better and achieve a win-win situation with Baidu and our customer clean up that's really a continuous process.
We monitor consumer complaints and customer complaints continuously and once we find out some customers are using search to do [illegal things] we'll clean out that sector or we install stricter requirements for certain sectors.
So that's a (inaudible) there's nothing new in Q1.
Aaron Kessler - Analyst
Great.
Thank you.
Operator
Your next question is from the line of Steve Weinstein with Pacific Crest.
You may proceed, sir.
Steve Weinstein - Analyst
Right, thank you for taking my question.
When I look at the sequential growth implied in your guidance for Q2 it seems to be a little lower than what we've seen historically and I wonder if you can put that in context if it's because there were factors in Q1 that made Q1 particularly strong or if you're doing something in Q2 that might make it a little bit weaker or if this is just the business operating at this level of scale now they've seen more maturation and the flattening out of those growth rates?
Robin Li - CEO
I think a few things.
The (inaudible) in Q1 is a factor at least versus last year.
This year we had an early Chinese new year so that's a factor in terms of Q1 numbers and also as you said we are at a much bigger scale than before so that's how we got our numbers.
Haoyu Shen - Senior Vice President Business Operations
We mentioned that Q2 last year was the first quarter for Phoenix Nest at full power so from Q1 to Q2 in 2010 you will naturally see a higher sequential growth but this year I think it's more of a normal sequential growth.
Steve Weinstein - Analyst
Great.
Thank you.
Operator
Your next question is from the line of Jake Li with Guotai Junan.
You may proceed.
Jake Li - Analyst
Hi, good morning everyone.
Thank you for taking my question.
My question is regarding [HOA123].
So currently could you give us some color about the traffic contributions for HOA123?
Why I ask this is because you know 360 has a web directorate model to (inaudible) with HOA123 and they also get a lot of traffic.
So I'm wondering do you have any plan to further expand the HOA123 example to launch a vertical navigation page like the ecommerce.
Also to have [monetize it]?
Thank you.
Robin Li - CEO
No, as I said we don't disclose the exact percentage of search traffic from (inaudible) but it's quite meaningful.
So as I said we will continue to improve the product, differentiate the product going forward and we will market [Haosun] to ourselves and also to our different partners.
Haoyu Shen - Senior Vice President Business Operations
[Haosun] has very strong brand recognition among the vast majority of Chinese internet users so we enjoy an advantage when trying to distribute Haosun to partners sites and to get new users to adopt this site.
We also think there's a lot of room for improvement for a directory site like this.
Like you mentioned vertical is one direction we are coming up with certain vertical directories such as group [buying] directories which have already been launched and very well received by both users and advertisers.
Another direction we are moving into for Haosun is personalization.
Will deliver different results, different user interfaces for different users.
We think as long as we can provide the best user experience with (inaudible) recognition we will be a winning site.
Jake Li - Analyst
Okay, thank you.
Do you have any other data about the recruiters?
Thank you.
Robin Li - CEO
Yes, (inaudible) has been live for a few months now and we are -- the team is still revising the products to suit Chinese consumers' needs better in terms of interface, in terms of the transaction process and the work has been slowed down a little bit by what happened in Japan but we're looking forward to see a new sort of interface launch in a few months.
Jake Li - Analyst
Okay, very helpful.
Thank you.
Operator
Your next question is from the line of Eric Wen with Mirae Asset.
You may proceed.
Eric Wen - Analyst
Hi, good morning.
Thanks for taking questions.
There are two housekeeping questions and one follow up.
First the (inaudible) for the accounts receivable seems to go up a little bit from the first quarter.
Can you update on why that's the case?
Is it because of the large advertisers taking more share?
Second, is that can you give a brief color on the loss in the Japan subsidiary due to the earthquake during the quarter?
How much did they reduce your profit during this quarter and I have a follow up, thanks?
Jennifer Li - CFO
In terms of accounts receivable as we've mentioned our large customers continue to really benefit from the [amortization] platform and their spending with us has been growing at a fast pace.
So there is really nothing unusual going on with accounts receivable in terms of payment terms or -- like longer payment terms or (inaudible) situations.
So this basically (inaudible) business of larger customers that's going at a healthy rate.
Japan is just -- I mean, we have said that we will not separately disclose the Japan financials because our business base is growing much larger, it's increasing as an expense item in material.
This past quarter there is -- you know, our business has been somewhat affected by the Japan earthquake but the expense item related to the Japanese operation is not out of line compared to historical patterns.
Eric Wen - Analyst
Okay, got you.
The follow up question is about strategy on Android.
I just wonder if the Company can give some color on whether it would be a platform or a content strategy for Baidu?
Now I understand that Android is going to be an open platform which opens the possibility for any companies to build its own flavor and stay compatible.
What is Baidu's thoughts on that?
Would Baidu be pursuing a platform strategy based on Android or based on its own technology or it will stay on the application side mostly bundling your search box or any future applications?
Any color on that it would be very helpful, thanks.
Robin Li - CEO
Okay, we work with all kinds of platforms to integrate our search box into the mobile phone or tablets so we are probably more open than anyone else.
Again our mission for the future of computing is Box Computing so we would like to see a mobile device that has nothing but a box in the future.
We would like all of the platform players to work towards this direction and if necessary we can come up with our own.
Operator
(Operator Instructions) Your next question comes from the line of Wendy Huang with RBS.
You may proceed.
Wendy Huang - Analyst
Thanks for taking my questions.
My question is regarding the number of advertiser growth.
In Q4 2010 and Q1 2011 your advertiser base has been stable and it shows no growth.
I just wonder what kind of advertiser growth is implied by your second quarter growth - second quarter guidance which is currently implying about 33% to 35% sequential growth?
Is it many from the (inaudible) growth scale or should we see any increase in the number of advertisers?
Thank you.
Robin Li - CEO
We don't give guidance, we don't break out how the revenue growth guidance into the number of customers in our pool but Q1 versus Q4 number of customers flattish comparison is normal if you look at historical numbers and if history is any indication we will see growth of a number of customers in Q2 versus Q1.
Now we're starting our annual spring campaign, again sort of a 100 city tour and that will help on the [opposition] and [seasonality] always shows that in Q4 we should have a very strong [position].
Wendy Huang - Analyst
Okay.
Operator
Your next question is from the line of Cynthia Meng with Jefferies.
You may proceed.
Cynthia Meng - Analyst
Thank you.
I have questions, one is on [TE].
When will it start to have video advertisements in terms of timing after one year of starting operations?
The second one is on tax rate for Jennifer.
Tax rates for the first quarter was 14.5% and how should we think about the full year tax rate?
Thank you.
Robin Li - CEO
This is Robin.
For TE they already started to sell video ads to (inaudible) website, embedded in the videos but TE only -- is only one year old.
As a media brand it takes some time for the revenue to catch up with the traffic.
Jennifer Li - CFO
And for tax rates you will notice that Q1 compared to last year is a slight step up.
This is normal as some [sub-entities] do enjoy favorable tax treatment.
As time goes by they migrate out of that tax status.
We have cited in the early part of last call that this year's tax rate you should anticipate low to mid 10s and the current level is very indicative for this year.
Operator
(Operator Instructions) Your next question is from the line of Muzhi Li with Mizuho Securities.
You may proceed.
Muzhi Li - Analyst
Hello, thank you for taking my questions and congratulations on the great quarter.
I would like to ask Robin what do you think the challenge of the social media to Baidu's search product?
Thank you very much.
Robin Li - CEO
Yeah, like I mentioned before our strategy to social media is to integrate social with search and we have been doing that for eight years.
This is quite different from the US case where for many, many years search was quite dominant and there were no threats from social.
But in China if you look at the landscape there are a lot of players in the social [ground], particularly Tencent, they've been there for many, many years and they are very successful.
So we start to think about how to make search better and to differ our position many, many years ago and so far it's been very successful and users are very loyal to us and they help to create a lot of high quality content on the Baidu website.
When you talk about social media by definition media means advertising.
As long as you have high quality content you can drive traffic and you can monetize that.
So I'm very happy that we did that many, many years ago and we are continuing to add more and more social features to our existing products, helping our users to create high quality content on the Baidu website.
So that would be our answer to social media.
Operator
Your next question is from the line of Wendy Huang with RBS.
Please proceed.
Wendy Huang - Analyst
Thanks for taking my follow up question.
I just wonder what's your current top price advertiser categories and also in particular has the ecommerce advertisers contribution exceeded 5% of your total revenue?
Thank you.
Jennifer Li - CFO
Our top five sectors are remaining largely the same.
They are medical healthcare, machinery equipment, education and travel and software services - online services.
Ecommerce, we've mentioned ecommerce in our script.
It's growing at a faster pace.
It's now making out the top five sectors and over time we'll continue to see there is a lot of potential in the ecommerce space.
Wendy Huang - Analyst
Has it been already meaningful with more than 5% of total revenue?
Jennifer Li - CFO
Yes, it's really difficult to classify exactly how you define online retail ecommerce space.
It's a very broad definition.
So I think we wouldn't want to venture into exactly what the percent of that is.
I think the online retailing sector itself is growing very fast.
It's not one of the top five sectors.
Operator
Your next question is from the line of Wallace Cheung with Credit Suisse.
You may proceed.
Wallace Cheung - Analyst
Hi, good morning.
Questions on the balance sheet.
Can you explain why the fixed assets, intangible assets and also the long term investment seems to have jumped quite significantly on a (inaudible) basis?
Thank you.
Jennifer Li - CFO
Fixed assets, Wallace, ties up with our CapEx investment.
You know that we have that (inaudible) investment in servers, network, infrastructure and fixed assets will reflect that.
In terms of intangible assets what happened over Q1 is we did acquire a piece of land in the southern part of China and we are expanding our office capacities in other parts of the country.
So the intangible asset increase basically reflects that acquisition.
In terms of long term investments these are investments that we made in other companies and what's included in here would be ventures like (inaudible) and also other long term investments that we made with other entities.
Wallace Cheung - Analyst
Does it include the new investment fund that you set up for the open platform?
Jennifer Li - CFO
Not this one.
Not in here.
Wallace Cheung - Analyst
Okay, thank you.
Jennifer Li - CFO
This one is basically M&A activities.
Wallace Cheung - Analyst
Okay, thank you very much.
[Good answer].
Operator
Your next question is from the line of Andy Yeung with Oppenheimer.
Please proceed.
Andy Yeung - Analyst
Thank you for taking my question.
My question is similar to the previous question which is about your CapEx cycle and your [depreciation] costs.
Obviously you're embarking on a very large CapEx cycle right now, so can you give us some insight in terms of areas of major investment and how we should view your CapEx cycle going forward and also where are the depreciation costs?
Jennifer Li - CFO
Okay.
In terms of CapEx you will have noticed that we have stepped up our CapEx spending.
In Q4 the number was, you know, RMB360 million and the number is about RMB390 million this quarter and this basically gives you an idea of the pace that we are going with and I think this pace will continue on as the year goes along and we anticipate to step up the CapEx spending on this front as well.
What's included in this investment is basically infrastructure, network equipment, servers and as I mentioned earlier we also acquired land.
As the year goes deeper we will also incur CapEx related to office expansion costs.
So that's basically why it's basically our investment for the future as we see great potential in the market space and we need to expand on both facilities as well as infrastructures.
Andy Yeung - Analyst
Great and just one follow up question on that, the depreciation cycle for that are you looking at the fixed assets (inaudible) was the cycle for depreciation there?
Jennifer Li - CFO
Most of the servers and infrastructure network equipment around three years, for our land that's much longer and buildings that much longer.
Most of the CapEx spending that you are seeing now are server related.
Operator
Your next question is from the line of Michelle Ma with Samsung Securities.
You may proceed.
Michelle Ma - Analyst
Hi, good morning.
Thank you for taking my question.
I have a question regarding your online video (inaudible) TE.
I'm just wondering how much percent of the traffic on TE is actually coming from Baidu and if you can share with us what's the current market share of TE in China (inaudible) business?
Thank you.
Robin Li - CEO
We drive a lot of traffic to TE but we are not going to disclose the percentage.
Baidu is the largest outside traffic source for te.com.
What we have seen happen is that TE is building its brand name, increasingly users are going directly to te.com.
Michelle Ma - Analyst
Also the current market share of TE?
Robin Li - CEO
I don't have the numbers at hand but TE is obviously a leader in the long form licensed video content.
There are larger ones that host all kinds of video content including user generated content, TE is at this time purely for long form licensed video content and I believe the user experience there is number one and the growth rate there is number one.
I'm not sure about the (inaudible).
I need to check.
Michelle Ma - Analyst
Okay.
Thank you.
Operator
You 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 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.