百度 (BIDU) 2011 Q2 法說會逐字稿

Hello and thank you for standing by for Baidu's second quarter 2011 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 Investors Relations Director.

Hello, everyone, and welcome to Baidu's second quarter 2011 earnings conference call.

We distributed Baidu's second 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 answer your questions.

Before we proceed, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provision 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 risks 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 in this call include discussions of certain unaudited non-GAAP financial measures.

Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directed 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 be available on Baidu's corporate website at ir.baidu.com.

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

Hello, everyone, and welcome to today's call.

I'm pleased to tell you that our top and bottom line results, as well as our margins, were all extremely strong in the second quarter.

This performance was largely driven by increases in overall traffic and ARPU.

Our customers continued to spend more of their marketing budget with us.

Baidu is at the center of China's increasingly sophisticated internet market and our efforts to foster an ecosystem around that are paying off.

The results can be seen in many areas, like e-commerce where we have been a major beneficiary of the recent group buy spending trend.

At the heart of this ecosystem strategy is Box Computing which constantly improves user experience by incorporating dynamic data, content and applications directly into search results.

Specifically, our open applications platform is progressing well.

I'm proud to report to report there is many developers taking advantage of these offerings.

We now generate about 20 million clicks per day in less than one year of the platform's launch.

Social search features also remain a big part of Baidu's user experience.

Baidu Post Bar and Baidu Knows maintain healthy growth rates.

We have added a lot of new features to make Post Bar easier to use and speedier while increasing social interactions between users.

Our large and expanding social search user base provides us a solid foundation for socially flavored products moving forward.

Recently we've added Baidu Ting, our social product for music.

Baidu Ting allows users to find, listen to and manage their music.

We are inventing features for users to share and personalize music files to enable social interaction.

I'm proud to report that Baidu Ting has gained support from virtually all major music labels, including EMI, Universal Music, Warner Bros and Sony Music.

We expect the service to connect users to a large database of both international and Chinese songs.

Complementing this internal initiative, we've made a number of strategic investments and partnerships.

Earlier this month we announced a new partnership with Microsoft Bing for English language search.

Last week we began displaying Bing's top organic results on our pages for most of the English queries we get.

We have bolstered our lending page strategy with strategic partners and investments in premium virtual players.

Our objective is to ensure our users the same great experience after they click through our search results to the most popular virtual websites.

As part of this strategy, we have a partnership with CRIC to drive the real estate vertical and have invested in GE to gain a foothold in the online video space.

I'm happy to report that GE now has more than 160 million (inaudible) unique visitors.

We have more recently expanded to travel search through our investment in Qunar.

This will provide users with an even better experience in the sector that has long been one of our most popular query verticals.

For example, shortly we will launch intense hotel-related content with Qunar.

When you search for hotels, we will have Qunar information at the top of our result page if it is relevant.

After clicking through to Qunar, you will be met with the same high quality information on the landing page.

Each vertical partner in our lending page strategy shares the characteristic of having developed a premium database of content.

These high quality partnerships enable us to monitor related traffic more efficiently.

We are enabling searching and accessing rich information and making the decision to transact a similar process with the lending page strategy.

In terms of monetization in the second quarter, we continue to see increases in customer spending.

Our customers benefited from improvements in our web search monetization platform relating to key word coverage, clicks rates, quality of paid clicks and a growing understanding of search engine marketing.

I also want to highlight that our revenue growth is driven more by growth in paid clicks than by click price appreciation.

We also benefited from strong momentum in e-commerce.

First the online retail sector continued to see triple digit growth.

Second, spending by group buying sites increased rapidly in the past quarter.

This was the main driver for our outperforming guidance this past quarter.

Having said that, we are getting broad-based, healthy revenue contributions across all industry verticals.

We have also recently upgraded our front end customer interface.

This streamlines the purchasing process for more than 15 steps down to a simple five steps.

The easier navigation benefits all customers and is particularly important for SMEs who typically do not have sophisticated in-house marketing teams.

As mentioned during the last earnings conference call, we continue to develop our back end CRM system to improve the sales process for our customers.

Also, we are making improvements in the structure and quality of our customer acquisition and service teams to provide our customers with the most efficient experience possible.

On the customer acquisition side, we had a successful 157 city search engine marketing tour and will continue this effort to develop the market.

Encouragingly, our Box Computing initiative is beginning to demonstrate its revenue potential.

Our partnership with Bitauto, China's leading auto-related information website, is an example of how we can monetize the open data platform within the Box Computing context.

When the user searches for Chevrolet Coupe, for example, our open data platform will retrieve and display dynamic information in Bitauto's database.

Another example of Box computing monetization is in the travel virtual.

For specific flight search, we offer users information provided by four different content providers under separate tasks.

Some of these tasks can be sold at a set price to only the highest quality and most relevant websites.

While Box Computing monetization remains at its very early stage of operation, we see potential for revenue growth.

We will remain highly selective in choosing content partners so that we can provide users the best possible experience.

Over the past 10 years, Baidu has achieved tremendous success by developing the right strategies and executing.

Looking to our second decade, our organization is far larger and more complex than ever.

In response, we have designed a new corporate structure.

Our four new functions consolidate reporting lines.

This will create greater efficiencies and drive more innovation.

This structure will spur new technologies and products that will foster our growth in the years ahead.

We will continue to invest heavily in all functions for our management to succeed.

Finally, I'm excited to tell you about our sixth annual Baidu World Forum which will be held on 2 September in Beijing.

It is an opportunity for Baidu to bring together some of the best (inaudible) industry experts and Baidu's loyal user base together and share our strategic initiatives and discuss China's internet plan.

I look forward to seeing many of you there.

With that, I'll now turn the call over to Jennifer for financial highlights.

Thank you Robin.

Hello, everyone.

As Robin mentioned, we achieved excellent results in the second quarter with ARPU and customer growth (inaudible) overall growth.

Investments in R&D, our talent pool and now with infrastructure will continue to be our priority.

We plan to invest even more aggressively in these areas in the second half of the year.

These investments will drive growth and innovation and ultimately deliver long term returns.

Our strategic investments; we closed the Qunar investment last week.

Qunar is growing healthily.

With the transaction, we will consolidate its financial start in Q3.

Given its current size, we do not expect material impact on our fundamental P&L structure.

GE is rounding out nicely.

As Robin mentioned, we and our investment partners will continue to support the Company.

Capital contribution will be made in the near term.

From Baidu's standpoint, the investment will continue to be recognized through equity accounting method.

As GE is loss making, any cash contribution we provide will go through our P&L in the income or loss from equity method investment line, which is below the operating profit line.

We do not expect the investment to materially affect our results of operations for the third quarter or full year of 2011.

We will evaluate, from time to time, what is the optimal strategy to pursue in our support for GE.

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

All amounts mentioned are in RMB unless otherwise noted.

Online marketing revenues for the second quarter of 2011 were RMB3.4 billion, a 78% increase year over year.

Baidu had around 298,000 active online marketing customers in the second quarter of 2011, a 17% increase from the corresponding period in 2010 and a 9% increase from the previous quarter.

Revenue per online marketing customer in the second quarter reached approximately 11,500, a 53% increase from the corresponding period in 2010 and 29% increase from the previous quarter.

Traffic acquisition cost as a component of cost of revenue was RMB269 million, a 7.9% of total revenues as compared to 9.7% in the corresponding period in 2010 and 8.2% in the first quarter of 2011.

This decrease reflects traffic mix driven by stronger organic traffic growth.

Contextual ads business is an important initiative for us and requires higher payout to Baidu union partners.

As we gain more traction in this business, we expect traffic acquisition cost as a percent of revenues to increase.

Bandwidth cost, as a component of cost of revenue, was RMB147 million, representing 4.3% of total revenue compared to 3.5% in the corresponding period in 2010.

This increase merely reflects increase in server capacity to accommodate traffic growth, new product services and higher computing requirements.

Depreciation cost, as a component of cost of revenue was RMB143 million, representing 4.2% of total revenues, compared to 4.4% in the corresponding period in 2010.

Selling, general and administrative expenses in Q2 was RMB378 million, an increase of 42% year on year.

This increase primarily reflects increase to personnel cost and marketing expense.

Research and development expense was RMB299 million, an 88% increase from the year ago period.

This increase primarily reflects increased headcount.

Share-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to RMB35 million in the second quarter of 2011 from RMB22 million in the corresponding period in 2010.

Operating profit was RMB1.9 billion, a 91% increase year on year.

Total headcount as of 30 June 2011 was about 12,800, roughly 1100 more than the previous quarter.

Income tax expense was RMB286 million for the second quarter.

The effective tax rate for the second quarter was 14.9% compared to 14.4% in the corresponding period in 2010.

Net income was over RMB1.6 billion, a 95% increase from the corresponding period in 2010.

Basic and diluted earnings per ADS for the second quarter of 2011 amounted to RMB4.68 and RMB4.67 respectively.

Net income, excluding share-based compensation expenses, a non-GAAP measure, was about RMB1.7 billion, a 94% increase from the corresponding period in 2010.

Basic and diluted earnings per ADS, excluding share-based compensation expenses, both non-GAAP measures, were RMB4.78 and RMB4.77 respectively.

As of 30 Jun 2011, the Company had cash, cash equivalent and short term investments of RMB10.3 billion.

Net operating cash inflow and capital expenditures for the second quarter of 2011 were RMB2.08 billion and RMB387 million respectively.

Now let me provide you both our topline guidance -- with our topline guidance for the third quarter 2011.

We currently expect total revenue for the third quarter of 2011 to be between RMB3.95 billion and RMB4.05 billion which would represent a 75.1% to 79.5% year over year quote.

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 Instructions)

Your first question comes from the line of Dick Wei of JPMorgan.

Please proceed.

Hi, morning, congratulations on your quarter and thanks for taking my question.

My first question is on the tax revenue ratio.

What was the reason for the slight decline in Q2 and what should be the trend going forward, as Jennifer mentioned in increase?

Just trying to understand the magnitude of the changes.

Hi Dick.

As I mentioned in prepared remarks, the decrease reflects basically the traffic mix driven by especially strong organic traffic growth.

It's a very healthy trend and we're happy to see that there's a normal fluctuation as typically the traffic comes in the picture.

I did mention that contextual ad business is an important initiative for us and we are making a lot of efforts on that front and developing union partners to be part of the whole business.

The business, contextual ad business itself, does require higher payout.

So to the extent the business tracks very well, you should expect the traffic acquisition cost to increase as a percent of total revenue.

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

Please proceed.

Hey, good morning everyone.

You mentioned that you were going to make some capital expenditures or capital investments into GE.

Can you talk about what kind or what monetary amount that you're talking about and when that capital expenditure or investment will start.

Second of all, you also mentioned that Qunar will be consolidating starting in Q3 and you've stocked that material.

Can you identify what kind of revenue we should expect for the run rate for Qunar as well?

I have a follow up, thanks.

On the GE investment, as we mentioned in our prepared remarks, is that important lending page strategy for us, GE offers us high quality content and within a short time of period, it's tracking very well.

Between Baidu and our investment partners, we plan to continue to support the Company and the cash contribution will be made in the near term.

As I mentioned, the cash contribution will flow through our P&L line item because we continue to account the investment in equity accounting methods and because it's still loss making, given the competitive video landscape, any investment we make and the loss that the venture generates, we will take our share of the loss through the P&L line up to the cash amount that we contribute.

As I indicated in the prepared remarks, we do not expect there will be material impact on the P&L side as a result of the contribution to the GE venture, either in the third quarter or for the full year of 2011.

For your Qunar question, in our guidance provided for Q3, we did incorporate the consolidated picture view as we provided the guidance.

The vast majority of the strong Q3 guidance that we're providing is driven by the strong fundamentals of Baidu's core business.

Qunar accounts for a very small amount, so it's very immaterial in the overall revenue guidance as well as in overall P&L structure.

Your next question comes from the line of Catherine Leung with Goldman Sachs.

Please proceed.

Hi, good morning.

Can you comment on whether Box Computing is creating these site benefits that are helping monetization indirectly which is better traffic retention or advertisers spending more to be more visible on the search results page?

I understand that you're not aggressively monetizing it directly at this stage.

Thank you.

Hi Catherine.

I think you're very right.

Box Computing is generating benefits both in terms of user experience or traffic retention, as well as certain kind of revenue potentials.

You can basically view the Box Computing infrastructure as a better way of displaying when thinking about revenue, it's a better way of displaying all kinds of different ways of displaying Box Computing results.

In most cases, it's purely just a benefit for users.

In some of the cases it will benefit the advertisers or customers too.

So we will do these kind of partnerships were we see fit going forward.

Your next question comes from the line of Eddie Leung with Bank of America, Merrill Lynch.

Please proceed.

Good morning everyone.

I have a couple of questions.

The first one is regarding your agreement with the major music label companies.

Could you share with us if there will be any costs for music rights going forward and if so, where will the costs items appear, will it be in the costs of services or sales and marketing?

Then could you also give us the top advertiser segments for the second quarter?

Thank you.

Hi Eddie, it's Jennifer.

As we have said in our press release, yes we will be paying the record label companies some fee to incorporate their assets in our services.

The amount itself is not significantly going to affect the cost picture and of any fee that we're paying them will go through the operational cost line item as part of the cost of revenue.

So it's in the gross margin picture.

In terms of your other question related to the top sectors for Q2, these mainly continue to be the typical ones, namely medical, machinery equipment, education, travel and business service and all these five top sectors, they account for a little over 50% of the total revenue picture.

Your next question comes from the line of Paul Wuh with Samsung Securities.

Please proceed.

Thank you for taking my question.

I was wondering on -- you mentioned the e-commerce and also the Group buys advertising increasing, you didn't mention those in the top five.

Did these two categories together represent over -- what percentage of revenues would these two groups together represent?

Thank you.

We have an established way of looking at our business and defining industry sectors.

Because the e-commerce business is emerging and growing very fast, it is just really take another angle and approach to look at our overall business.

When we look at e-commerce businesses, obviously that includes online purchases, whether it's physical goods or services, things like travel, for example, if you look at Ctrip, they are a part of the travel vertical and they are also part of the e-commerce travel and they provide online services.

So we have separately trapped the ecommerce contribution in the overall growth rate to give us a better understanding of the trends as we are in the fast developing internet space.

We have not separately - not misguided you.

We have not separately disclosed the percentage per se because it is just another angle to look at our industry sectors.

Having said that, we have mentioned quarter after quarter that we are seeing triple digit growth in the ecommerce sector that continues to be very strong.

But it is not a separate industry vertical that we will separately disclose.

Your next question comes from the line of Jiong Shao with Macquarie.

Please proceed.

Good morning.

Can you hear me okay?

Yes.

Okay, hi.

Thanks for taking my question.

First let me add my congrats to a strong set of results and guidance as well.

My question is on the margins.

It looks like you did extremely well across the Board for your margin profile this last quarter.

It showed a significant reduction in terms of percentage of revenue for SG&A, R&D, et cetera.

Just look forward in a sort of a intermediate term, how should we look at your margin progression going forward in terms of the further expansion from here?

Right.

We delivered very strong Q2 performance and record high margins.

It is a very strong quarter for us.

As I mentioned in my prepared remarks, aggressive investment will continue to be our priority, particularly in the areas of R&D, talent, network infrastructure and frankly, office space, as we need to accommodate more people.

We're also investing very aggressively in the strategic partnership side.

If you look at our historical margin patterns, second year - the second half of the year is typically expense heavy.

R&D expenses will be more heavily concentrated in the second half of the year, and if you look at near term in Q3 we'll have marketing events such as Baidu World.

We'll also redouble our efforts in (inaudible) brand building efforts as, you know, coming to the recruiting season.

So expense will be particularly heavy in the second half of the year.

More - in addition to that, you know, some of the strategic investments that we mentioned, these ventures do not generate very high margins.

So in total, if you look at the Q2 and Q3 margin relationships on last year, that probably serves as a good reference.

Your next question comes from the line of Eric Wen with Mirae Assets.

Please proceed.

Thanks very much for taking my questions and congratulations on a great quarter.

My first question is given that Baidu has just done a 150 city tour, and I remember that is bigger than last year's 100 city tour, do you see a fast pick up of customer growth in the third quarter or toward the end of second quarter?

And I have a follow up question.

Thanks.

Yeah.

Hi, Eric.

Yes, you know, we continued our market application efforts this year.

You know, we have increased the coverage this year and run a very successful marketing campaign.

You know, as the industry leader it's our responsibility to really develop the market and educate the customers the benefit of search engine marketing.

From what we see, you know, the campaigns are better run because we had a lot to learn, you know, over our first try last year, and we are very pleased with the results in terms of customer acceptance and their understanding of our services, and using search engine marketing as a very effective tool for them.

So on that front I think we're very happy with the marketing campaign that we conducted this year and that really helped our customer acquisition as well.

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

Please proceed.

Good morning and first let me congratulate on the strong quarter, and thanks for taking my question.

I have two quick questions.

One question is related to our third quarter guidance.

It seems that in the industry and also in the country we have very strong debate on the [second half macro] economy as we see more and more (inaudible) lot of challenge in the (inaudible).

But it seems there's little impact on Baidu's operation in the third quarter.

So I want to know what is the logic behind how we see brand advertisers are contributing more significantly to Baidu's operations than before.

Yeah, that's my first question.

Thank you.

Hi, Yu.

I think Baidu's dense nature is relatively isolated from the manufacture oriented economy in provinces like (inaudible).

You can probably tell that larger customers contribute more and more of our revenue mix, and those customers typically reside in tier one cities like Beijing, Shanghai, Guangzhou and Shenzhen.

Service oriented industries, especially (inaudible) and other things like our top five industries - education medical or healthcare - those are very different from what you would see in the manufacture oriented industries in the provinces you mentioned.

So I would say that our business is relatively high quality from that part of the macro economy.

And I think more importantly the (inaudible) is just too young.

We are - you know, lots of growth opportunities for us.

As long as we can execute well we should be able to generate very good growth.

Your next question comes from the line of Philip Wan with Morgan Stanley.

Please proceed.

Hi, good morning everyone.

Thanks for taking my question.

You mentioned in your prepared remarks about the strong spending from large customers.

Would you give us some more color about the ARPU differences between large and normal customers?

Also it would be very helpful if you could comment on the revenue contribution from large customers.

Thank you.

Our customers - we really cover a very diverse pool of customers and the customers' spending level can vary a lot.

When we look at our larger businesses, some of these customers spend tens of millions a year.

Some of the SMEs can offer very long tail services, and they buy keywords and spend on maybe only, you know, a few hundred, you know, up to a few thousand RMB per year.

So we do have a very wide spectrum in terms of customer spending.

But having said that, what we have said over the past few quarters is we continue to see strong spending from the large customers.

They are particularly good at using the search engine marketing tools and they see the kind of ROI that can be generated from the Baidu platform and therefore they're spending more and more with us.

The contribution from large businesses continue to grow very strongly over the past quarter.

It exceeded the SME business.

But having said that, the SME continues to be the pretty large majority of the revenue contribution.

But we're particularly happy with the large customer adoption of our business platform and their contribution to our overall revenue picture.

Your next question comes from the line of Steve Weinstein with Pacific Crest.

Please proceed.

Great.

Thank you for taking my question.

Another question just on the growth in advertisers.

When I - I guess I was a little surprised that the growth in advertisers, in terms of year-over-year percentage and year-over-year absolute percentage of new advertisers, was already slowing down.

Can you talk about maybe where your priorities are as a company in terms of targeting larger advertisers versus building out more mass within the SMEs and the different initiatives there to help us frame how we should be thinking about growth over the next few quarters, or into the next year?

And can we also just get the head count for the quarter in number of sales people?

Okay, on the year-over-year growth in terms of numbers of customers I think it does reflect the nature of our business.

When we transformed from the Legendary system to Phoenix Nest the system became much more complicated and it did enable large advertisers or customers to do more.

And coupled with the maturity of the market our large customers increasingly realize that they benefit from search marketing.

So we were very busy serving lots of large customers.

The vast majority of SME's, it just takes them longer to get used to the new system and fully take advantage of all the functions and features of our system.

Going forward we continue to improve the customer experience online and do more hand-holding for our smaller customers.

But at the end of the day we will focus on what will benefit the Company most in terms of revenue generation and profit, all that kind of thing.

To continue to add to Robin's point, we are doing a lot more to help the customers better use our platform.

The customer base grew at a healthy rate of 17% year-on-year and we're intensing [sic] our sales and customer services and the educational process to help SMEs to master the features on our online marketing platform.

As we mentioned in our prepared remarks, we upgraded our front end interface.

That's making it easier for the customers, particularly the SME's, and to make the whole process for decision making and maneuvering down to five steps instead of the original fifteen.

So we are doing all kinds of things to try to make the sophisticated system be more user friendly.

The market potential continues to be huge.

We are doing our efforts, as we mentioned, in developing the market; at the same time we are doubling our efforts to better service the customers.

But as Robin mentioned, it generally takes a few quarters for the customers to really take benefit - take advantage of the better system and more streamlined process that they can see.

In terms of your second question, the number of sales people for Q2, at the end of Q2, was 6300.

Your next question comes from the line of Cynthia Meng with Jefferies.

Please proceed.

Thank you.

Thank you for giving me the chance for a question.

I have two questions.

Number one, Baidu has already introduced Baidu browser.

Can you share with us the overall strategy regarding client-side software and desktop applications, both the PC side and mobile side?

And any details regarding future product development would be very helpful.

Second question is regarding Box Computing.

We would like to know some more details with respect to the coverage, the percent of queries that are covered by Box Computing.

Management mentioned some time ago it was 50% before.

I would like to know what is the percentage right now.

Thank you.

Thanks, Cynthia.

On the client-side software, we do think browser is a very important distribution channel for our business.

In China the browser market is relatively fragmented.

People have developed a habit of installing their preferred browser on their desktop, so we are trying to meet that part of the user need.

Once a user installs a browser controlled by us, they are able to generate more search traffic.

This is true both on the PC side and also on the mobile side.

On the mobile side we also have a mobile browser serving our users.

In general we just view the client-side software as a way of distributing Baidu services.

Most people are still used to going to Baidu website and do their thing, but there are a certain percentage of users, maybe 10% or less, they have developed a habit of using client-side software to do all kinds of things.

We just view that as a distribution, and sometimes we do it by ourselves, developing our own client-side software.

Sometimes we are just partners with those client-side software developers and share revenue with them.

On the Box Computing coverage right now it's roughly 70% of the search result pages that contain Box Computing results.

Your next question comes from the line of Mayuresh Masurekar from Collins Stewart.

Please proceed.

Hello, everybody.

Congratulations on a great quarter and thanks for taking my questions.

Could you talk about revenue contribution this quarter from your initiatives other than (inaudible) like contextual, online video, e-commerce and so on.

And also, what you have assumed for them in the third quarter guidance and how big you expect it to be for 2012 and beyond.

Other revenue contributions pre - in terms of contractual and online display ads, they dwarf in comparison to our main core business, which is paid search.

They are albeit, you know, are, as I mentioned, an important area for us to grow our future revenue possibilities.

They're growing at a faster speed, although it's a smaller base, but they are growing at a faster speed and it's tracking, you know, it's keeping good traction in terms of growth projection, the speed of growth.

The overall contribution from these lines is very small of the total picture, but as I mentioned, they are growing faster and over time they'll become meaningful.

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

Please proceed.

Good morning, and my congratulations for impressive revenue growth.

I guess on that note in terms of the overall search can you continue to drive the ARPU higher?

If so, I guess what changes in the future do you see to the platform - I guess we don't call it Phoenix Nest anymore but to the platform - that you can make in the next few years to continue this high double digit growth?

Thanks.

Hi, Gene.

From what we have seen or heard from our customers, especially the larger ones, they still allocate the majority of their budget to offline advertising, while the ROI, or the performance for online advertising, especially search, is much better.

So we do expect this kind of trend will continue, so the ARPU should continue to grow.

Internally we do see a lot of room for improvement both in terms of the bidding mechanism as well as tools to help advertisers to better manage their advertising campaign.

We have lots and lots of things we can do, and again the marketing is early stage.

We do expect significant growth going forward.

Your next question comes from the line of Wendy Huang with RBS Scotland.

Please proceed.

Thanks for taking my question.

Number one it seems that every Q2 your ARPU enjoys very strong growth.

Is this partially driven by the seasonality and should we apply this to future years as well?

Secondly, apart from the online video channel and the recruitment (inaudible) that you have already made significant investment and progress, what will be the next vertical that are you eyeing or you plan to make investment in?

Thank you.

The strong Q2 ARPU performance, there is a strong element of seasonality.

Typically Q1 is a slower season because of Chinese New Year and you will see a big sequential increase in the second quarter from a total revenue stand point.

Total revenue contributions typically, of course, comes from both the ARPU growth as well as number of customers growth.

Both matrix will continue to have a lot of potential going forward.

So, you know, the seasonal pattern will tell us that we should continue to see strong ARPU as well as some step up in terms of customer growth in the future.

In terms of the strong verticals, yes, those verticals that you mentioned, we have established either a partnership or an investment in those areas.

We have, as we mentioned, also in the real estate area formed a partnership to help deliver a better overall user experience.

These are important vertical areas.

Things like auto, we'll continue to develop; financial services we'll continue to develop.

So there are, you know, our (inaudible) strategy helps to cover the strong and important verticals.

Our objective is to form strong partnerships working with others in different forms and deliver a high quality user service experience.

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

Please proceed.

Hi, good morning, thanks for taking my question.

The question is mainly on your mobile phone strategies.

There's a news report saying that Baidu is developing on operating systems on mobile sites as well as the mobile phone.

So can you elaborate more about the strategies in terms of like potential timeline of the launch?

Anything like potential like say number of handset shipments?

Thank you.

We do see a lot of opportunities for the smartphone industry as adoption continues to grow fast.

We are developing a number of mobile phone related services and systems.

As soon as they become ready we will announce that.

Before that we are not going to disclose our plans.

Your next question comes from the line of Muzhi Li with Mizuho Securities .

Please proceed.

Hi, thank you for taking my questions and congratulations for a great quarter.

Jennifer, would you please give me more clarity on the definition of large customers.

Like do you define them by the size of their spending or the size of their revenue et cetera?

Thank you very much.

Large customers in our definition they typically have more comprehensive requests when it comes to marketing and promotional efforts.

These players typically have a brand that they want to build and continue to enhance.

So typically if you name them there are maybe a thousand of these large customers in the country and these are branded advertisers.

As I mentioned their service requirements will be more comprehensive and their service needs is more sophisticated from both their own perspective and requirement on the advertising platform.

Your next question comes from the line of Don See with Standard Chartered Bank.

Please proceed.

Hi, good morning, this is actually Don here.

Robin, Jennifer, Victor, congratulations on your result.

I just have a quick question.

Can you give us a little bit more color on your overseas plan?

Are you planning to set up offices or businesses maybe in the north Chinese dominated countries for example?

Thanks.

Like I mentioned before, we are going to expand into many other markets for the years to come.

We are internally developing a better infrastructure that will support multiple languages and when it's ready we will be able to launch much more languages simultaneously.

Around that time we'll be able to set up overseas offices.

But right now we are not ready to say which market we're going into and how aggressive we will become.

Your next question comes from the line of [Jane Ho] with [TH Capital].

Please proceed.

Hi, Jennifer, I have one question regarding the size, Hao123, I want to know how much the traffic contribution from Hao123, and how much revenue contribution from 123 if it's possible?

Hao123 has been around for a number of years, it's a very well-known directory site and brand name.

It does contribute some level of monetization.

It's an integral part of our overall service.

We have not separately disclosed the traffic or the amount of revenue contributed from the site.

But as I mentioned you know it's an overall offering that we provide to the market place as well as to our advertisers.

Your next question comes from the line of Andy Yeung with Oppenheimer.

Please proceed.

Hi, good morning, thank you for taking my question.

My question is about your view on vertical search markets.

Some of your investment in policies such as (inaudible) all have some vertical favorites in them.

So can you give us some insight into your view on the vertical search market and how does that play into your future investment and product strategy?

Thanks.

Yes we do see value in the vertical search areas that's why we made partnerships and investments in a number of companies in this sector.

The value of (inaudible) is typically they can customize a lot of data.

For example for (inaudible) they have lots of (inaudible) data and second hand homes or those kind of information.

That's more structured in a database for in the case of Qunar we have a very large database of hotels that we work with that can provide up to date information such as room, per room night, price per room night, those kind of information.

We would like to tightly integrate this kind of information in our search results so that our users are better served.

On the other hand because of the enhancement or the value those vertical search players can add to this kind of data, they deserve to make money from this.

It's very important in verticals that we'd like to have a certain kind of position in those leading companies to ensure that we do not lose the good user experience if they decide not to work with us in the future.

So and these kind of investments or partnerships are win-win and each party brings in their value and at the end of the day it's better for our users.

Your next question comes from the line of Gary Ngan with UBS.

Please proceed.

Good morning everyone, thanks for taking my question.

I have two questions, the first one is just now, Jennifer, you mentioned that there are about 1000 large customers in the country or so.

So could you comment on what kind of roughly the coverage ratio that Baidu has already established a relationship with?

My second question is related to what Robin just now mentioned about Baidu's interest in the social related businesses.

So in your view do you think that the social networks, i.e.

Weibo and Facebook-like type of SMS today in China are you know the long term mode of social networks?

Or Baidu is thinking about some other really innovative and completely landscape-shaping SMS mode in the future?

Hi, Gary, I'll take your first part of the question.

The about 1000 large customers, these as I mentioned are the branded advertisers and they typically, you know, these are the large customers that basically all the advertising media platform will approach and they will take advantage of those marketing platforms.

So we are probably not much different from a customer per se as compared to other media platforms.

It's more a matter of budget allocation.

So historically these players will spend a lot more on the traditional media sites and with the internet and particularly search engines we offer target, performance targeted, performance based marketing platform and we offer a full bundled set of services for these.

They are increasingly allocating more budgets to our platform.

On the social front, our (inaudible) is basically embrace and expand.

We have added a lot of social features in our existing products such as the apps feature, the share feature.

We also have feed in some of our products like a Post Bar.

We think in the future there are a lot of things we can do starting from our core offering web search or search related.

We'd like to perfectly combine the people relationship with content relationship.

In some cases users are looking for content; in some other cases users are looking for relationships.

We'd like to perfectly combine these two and give users a home that they depend on.

So we are indeed working on some new products that will better satisfy users' needs.

In China there is no dominant SMS in this market.

That gives us a very good opportunity to innovate and lead in markets like this.

You have a follow up from the line of Eric Wen with Mirae Asset Securities.

Please proceed.

Hello, thanks very much for taking my follow up question.

Robin, my question is how far is Baidu towards monetizing its map products?

Given the strength of showing from the Group buying companies, how much of those advertising are being integrated with Baidu's map products?

Thank you very much.

Right now the revenue from map products is very insignificant and we do not expect that to change in the near future.

But map is strategically important to Baidu especially in the age of wireless internet or mobile internet.

I am not sure if we generate revenue from the Group buying companies on the map service.

But it's not important.

We are working on a better map service continuously so that people can find better local information and people can get connected to nearby people who share similar interests or who know each other.

So map is not a revenue generator.

It's not going to be in the near future but it's very critical in our overall service landscape.

Your next question comes from the line of Hui Dong with HSBC.

Please proceed.

Good morning, thanks for taking my question.

I have a quick question for Robin.

I think Chinese ecommerce online advertising spending story has been with us for some time.

When do you think the second growth will peak and start to slow down?

Thanks.

I think the Chinese ecommerce market is still in its early stage.

It took off much later than search.

That's not the case in the US, as you know.

These days there are lots of companies get [founded] - traditional companies, brick and mortar companies, started to increase the ecommerce trend.

More importantly, consumers are developing the habit of buying online.

So we see tremendous momentum going forward and more and more companies will realize that the best way to do ecommerce is through Baidu.

So we'll continue to benefit from this trend for the years to come.

We are now approaching the end of the conference call.

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

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

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.