百度 (BIDU) 2011 Q3 法說會逐字稿

Hello and thank you for standing by for Baidu's Third Quarter 2011 Earnings Conference Call.

At this time all participants are in a listen-only mode.

After management's prepared remarks there will be a question and answer session.

Today's conference is being recorded.

If you have any objections you may disconnect the line at this time.

I would now like to turn the meeting over to your host for today's conference, Victor Tseng, Baidu's Investor Relations Director.

Hello everyone and welcome to Baidu's Third Quarter 2011 Earnings Conference Call.

We distributed Baidu's Third Quarter 2011 Earnings Release earlier today.

You can find a copy of the press release on the Company's IR website as well as on these wire 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 provisions of the US Private Securities Litigation Reform Act of 1995.

Forward-looking statements are subject to risk and uncertainty that may cause actual results to differ materially from our current expectation.

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 financial measures.

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

As a reminder, this conference is being recorded.

In addition, a web cast of this conference call will be available on Baidu's corporate website.

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

Hello everyone and welcome to today's call.

I will start today by reviewing our results for the third quarter and taking a look at the key trends and growth drivers.

Then I will talk about the exciting new initiatives we launched recently and finally I will update you on our strategic investment projects.

Looking first at our results, there has been another stellar quarter for Baidu with revenue accelerating 85% year-on-year.

In particular we see three main factors underpinning robust revenue growth in Q3.

First, traffic growth maintained its slow momentum in the quarter.

Second, we made solid progress on monetization.

Our full growth was at a record high of more than 65% year-on-year.

This was largely driven by enhancement to our Phoenix Nest platform.

Therefore we introduced a new key word matching option called Advanced [Brace] Match.

This is more focused than the traditional broad match but offers more flexibility and higher coverage than the exact match.

So it better captures user intent and improves click through quality.

We are seeing very encouraging adoption rates so far and there are still many other levers in Phoenix Nest that we can pull on to drive further monetization efficiency.

The third factor influencing our strong revenue growth was an increase in spending by our large accounts which has been a priority for Baidu.

One source of strong revenue growth was once again the e-commerce sector, in particular the revenues contributed by the online retail sector retained impressive momentum growing over 100% year-over-year.

Separately, classified information website spending also maintained a strong upward trend increasing by over 50% quarter-on-quarter.

So you can see that because of our central position in China's internet ecosystem we can always benefit enormously from emerging growth areas.

While it is difficult to predict the future of any single industry category the overall online marketing spending trajectory for our large accounts remains very positive.

Another area of strong revenue growth was in customers from more traditional industries.

We've benefited as these customers transitioned from off-line to online marketing.

The auto industry is a good example of this emerging trend.

These established off-line businesses increasingly recognized the value of Baidu's online marketing platform and are allocating larger percentages of their advertising budget to us.

Meanwhile our top verticals continue to grow healthily as well and remain an important part of Baidu's revenue makeup.

In Q3 we continue to optimize our sales process.

The goal is to ensure customer quality and improve sales efficiency for small and medium sized customers.

Complementing this push we have deepened our commitment to creating a better cleaner internet ecosystem.

Under the banner of Operation Sunshine Baidu has forged alliances with major stakeholders including government ministers and agencies, industry associations and the media.

Operation Sunshine is part of a long-term effort of which the Chinese Government has been very supportive.

Let's now move on to talk about some of our new initiatives.

Baidu's new personalized homepage feature went live in the beginning of September.

The personalized homepage represents the next step in the evolution of Baidu.

From simple web search to open data to open applications and now to personalized and direct feed that instantly meets users' needs.

This new feature gives users who are signed in Baidu a more personalized experience based on their historical search behavior.

For example, if a frequent movie-goer tends to search for local cinema times we include that link on his personal homepage or if a user in Beijing often searches for weather we will include that link on the Baidu homepage to a Beijing weather forecaster automatically.

So the personalized homepage brings not just the general information but personal information as well.

This is a good example of how Baidu is integrating search with users' social activities.

We will (inaudible) integrate Baidu's own search social products like Baidu Post Bar and space, SOS, external social platforms to satisfy users' social needs.

Another beautiful thing about our personalized homepage is that users don't have to do anything.

An intelligent recommendation engine customizes their homepage for them based on their behavior and social interactions.

This means that the success of the homepage does not depend on users being proactive.

This feature will ensure that Baidu is the logical starting point for more and more internet users and will keep users on our site longer.

Turning now to our mobile strategy where we have also made important progress.

First, we are extending our partnerships with mobile phone makers.

Baidu is now the default search engine of over 80% of the branded handsets using the Android operating system in China so far this year.

As a result we have made tremendous progress in ensuring that Baidu is the gateway to the internet for Chinese users whether they are going online on PCs or on mobile devices.

At the same time, last quarter we announced our new Yi mobile platform.

Yi is designed to provide Baidu services to users on the go.

We have an incredible suite of products and we want Baidu users to be able to use them anywhere anytime.

Once devices featured in our platform are available in the mass market Baidu Yi will give mobile users easy access to our search box, let them stream their music through Baidu Ting, find their destination on Baidu Maps and use a growing number of web-based apps.

This seamless access to Baidu's products across platforms will increase user stickiness and ensure that we remain at the center of online experience for Chinese users.

All of these features will be constantly integrated into Baidu's evolving cloud computing offering and we have plenty more exciting features in the pipeline.

Also through Baidu Yi, third party developers will gain access to Baidu's suite of mobile products and services.

Developers will have API to do research, maps, payments and more into the apps for the Yi platform.

Lastly, I'd like to update you on our strategic investment.

Our online meeting platform Qiyi continued to grow at a very encouraging rate.

During Q3 we saw monthly unique visitors jump to 191 million from 160 million in Q2.

Both comScore and iResearch showed that Qiyi is one of the leading video sites in user time spent on site.

One of the key factors setting Qiyi apart from the competition is differentiated, high quality content.

To keep its edge Qiyi has signed licensing agreement with the big six - the top tier movie content providers including Warner Bros, Paramount, Twentieth Century Fox, Sony, Disney and Universal.

We are really encouraged by how quickly Qiyi has captured a huge share of this very competitive market.

Baidu is fully committed to supporting Qiyi to grow further and we will be backing this up with further investment.

As you know, we recently invested in online travel (inaudible) Qunar.

With that deal now completed, high quality travel-related information from Qunar has been further integrated into Baidu search in areas like hotels, airlines and train information.

For example, when users search for hotel chains like Home Inns, on the results page they will see a Baidu map that automatically picks up the user's location and provides a comprehensive list of Home Inns hotel options in that geography along with pricing information.

Or a flight search will show you the recent price trend for your desired flight so you can see if the cost has been falling or increasing.

The net effect of this upgrade is broader vast computing coverage of travel-related key words for our users and better click through rate.

In conclusion, Baidu's strategic investment combined with our robust organic growth and new innovative products are solidifying our position at the heart of the Chinese internet ecosystem.

We have every reason for confidence in our progress for the future.

With that let me now turn the call over to Jennifer for the financial highlights.

Thank you Robin.

Hello everyone.

As Robin mentioned, Q3 was another stellar quarter that exceeded expectation.

This was driven by traffic growth, monetization improvements and strong spending by large accounts.

In order to ensure that Baidu continues to stay ahead of the curve we maintained investment in critical areas - R&D, infrastructure and strategic initiatives.

Going forward, the question of investment will remain central to our long-term growth strategy and driving top line growth.

I would like to highlight that starting in Q3 Qunar's financials have been consolidated into our financials.

The overall impact on Baidu's financials has so far been insignificant.

Also as Robin mentioned, we'll continue to support Qiyi's rapid growth.

Our cash investment of $23 million in Qiyi this quarter was recorded as a loss under the equity accounting method.

Our overall EPADS would have been $0.91 without this charge.

We anticipate a similar level of cash investment in Qiyi in this Q4.

After that we will assess from time to time what are the optimal options available for Baidu in supporting Qiyi.

Baidu and its partners will firmly support Qiyi.

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

All amounts mentioned are RMD unless otherwise noted.

Online marketing revenue for the third quarter of 2011 were RMB4.2 billion, an 85% increase year-on-year.

Baidu had around 304,000 active online marketing customers in the third quarter of 2011, a 12% increase from the corresponding period last year and a 2% increase from the previous quarter.

Revenue for online marketing customers in the third quarter reached approximately 13,700, a 65% increase from the corresponding period in 2010 and a 19% increase from the previous quarter.

Traffic acquisition cost as a component of cost of revenue of RMB334 million or 8% of total revenue as compared to 8.9% in the corresponding period in 2010 and 7.9% in the second quarter of 2011.

As we noted before, in the longer term we expect traffic acquisition cost as a percent of revenue to gradually increase based on the extent of contextual advertising growth.

Contextual ads are an important initiative for Baidu and require a higher payout ratio to Baidu union partners.

Bandwidth cost as a component of cost of revenue RMB166 million representing 4% of total revenue compared to 3.8% in the corresponding period in 2010.

This increase was mainly - reflects increase in server capacity to accommodate traffic growth, new product releases and higher computing requirements.

Depreciation cost as a component of cost of revenue were RMB177 million representing 4.2% of total revenue compared to 3.7% in the corresponding period in 2010.

The increase was mainly due to an increase in network infrastructure capacity but we'll continue to aggressively invest in network infrastructure and building more office space.

Operational cost RMB125 million representing 3% of total revenue compared to RMB85 million and 2.5% in Q2 of 2011.

The main part of the sequential increase was due to pick up of intangible asset amortization related to Qunar transactions.

The useful life of these intangible assets range from three to 10 years so we expect this will be an ongoing item in the foreseeable future.

SG&A expense was RMB460 million, an increase of 22% quarter-over-quarter.

This increase primarily reflects increased personnel cost, marketing expenses and, of course, Qunar financial consolidation.

Research and development expenses were RMB383 million, a 28% increase quarter-over-quarter.

This increase primarily reflects increased headcount and, of course, including Qunar financial consolidation.

Share-based compensation expenses which were allocated to related operating costs and expense line items increased in aggregate to RMB39 million in the third quarter of 2011 on RMB24 million in the corresponding period in 2010.

Operating profit was RMB2.2 billion, an 88% increase year-over-year.

Loss from equity method accounting was RMB156 million.

This increase mainly reflects the cash investment we made in Qiyi this past quarter.

Total headcount as of September 30, 2011 was about 14,700, roughly 1900 more than the previous quarter.

This includes about 800 employees from Qunar, now consolidated in our headcount.

Income tax expenses were RMB318 million for the third quarter.

The effective tax rate for the third quarter was 14.5% as compared to 13.6% for the corresponding period in 2010.

The year-on-year increase was due to expiration of some PRC subsidiaries' preferential tax rate.

Net income attributable to Baidu was about RMB1.9 billion, an 80% increase from the corresponding period in 2010.

Basic and diluted earnings attributable to Baidu per ADS for the third quarter of 2011 amounted to RMB5.39 and RMB5.38 respectively.

Net income attributable to Baidu excluding share-based compensation expenses, a non-GAAP measure was about RMB1.9 billion, a 79% increase from the corresponding period in 2010.

Basic and diluted earnings attributable to Baidu per ADS excluding share-based compensation expense, those non-GAAP measures were RMB5.50 and RMB5.49 respectively.

As of September 30, 2011 the Company had cash, cash equivalents and short-term investments of RMB11.4 billion.

Net operating cash inflow and capital expenditures for the third quarter of 2011 were RMB1.8 billion and RMB490 million respectively.

Now, let me provide you with our top line guidance for the fourth quarter 2011.

We currently expect total revenue for the fourth quarter of 2011 to be between RMB4.41 billion and RMB4.54 billion which would represent a 79.9% to 85% year-over-year growth.

This forecast reflects Baidu's current and preliminary view which is subject to change.

I will now open the call to questions.

Operator, please go ahead.

(Operator Instructions).

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

Your line is open.

Good morning and congrats on a very strong quarter.

My first question is on the revenue contribution of SME.

Robin mentioned that very strong growth in (inaudible) sites.

I wonder what is the revenue contributions of SME customers, what is the growth rate and what kind of ARPU for these (inaudible) customers?

If you can shed some insight that would be great.

Thanks.

Hi Dick.

I think this quarter across the Board all the different customer bases grew very strongly and they all contributed to the end of the day the revenue growth.

The large accounts outperformed the SMEs but SME has continued to grow very strongly both on year-on-year basis as well as on sequential basis.

We have year-on-year 85% increase.

Both SME and large accounts did well but large accounts is growing faster than SMEs for this quarter and it actually has been the trend for the past few quarters.

The next question comes from the line of Jiong Shao from Macquarie Securities.

Your line is open.

Thank you very much for taking my questions and congratulations on the very strong results.

For Q3 your strong growth of roughly 85% year-over-year, I was wondering could you please roughly break it down for us in terms of how much was due to the traffic growth, how much was monetization improvement and how much sort of price appreciation and any color on those metrics for 2012 would be appreciated.

Thank you.

I think it's a combination of all factors.

Traffic continued to grow strongly.

The pcp increase was pretty much due to revenue mix because the trend of larger accounts willing to pay higher prices.

Also saying a big contribution from existing verticals and as well as new emerging verticals.

The B2C e-commerce has been very strong.

Virtually almost all the larger B2C sites are large customers of ours and we see very strong momentum of the O2O trend, offline to online.

A lot of the vertical industries are moving their businesses from offline to online so we are a big beneficiary of that.

It's very hard to separate all these factors and figure out which one contributed more but what we can tell is that the advertisers are generally very happy about the performance so that helps us.

We do have a lot of room to grow.

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

Your line is open.

Hi, good morning and also congratulations on the strong result.

I am wondering, in terms of Phoenix Nest enhancements that you discussed, are you seeing this as contributing already a material proportion of your paid clicks in the third quarter or going forward in the fourth quarter?

Thank you.

Yes, as I mentioned, during the prepared remarks Advanced Batch Match did contribute quite significantly to the overall revenue growth in particular the number of paid clicks.

In the past (inaudible) customers only had two options, either to see exact match or the broad match.

Some thought the broad match was too broad, some thought the match (inaudible) easier with their interest with the customer interest.

With this new option more advertisers or customers can become more aggressive in showing their ads or paid links results.

This started in Q3 and will benefit from now on so Q4 would also benefit from this.

There are quite a few things like this we are working on.

We will report that as we achieve those goals.

The next question comes from the line of Jin Yoon from Nomura.

Your line is open.

Hi, good morning everyone.

Just a follow-up on the previous question.

How much impact in your guidance is really attributable to the new tweak in the Phoenix Nest compared to any material contributions from the new homepage or are you expecting any greater than expected contributions from Qunar?

Thanks.

Let me answer the first part of the question.

The new homepage does not have a positive impact on revenue yet.

It even has a slight negative impact because users would search a little less with the new homepage but the new homepage is obviously easier and we hope going forward people will stay longer on Baidu's site and use our site as a starting point more frequently.

So the improvements we've made in the Phoenix Nest contributed the most from and our product point of view.

Any improvement we've done on monetization front those will carry forward and will continue to refine and improve the monetization capability as Robin mentioned.

To your question on Qunar contributions, as I mentioned, Qunar's overall impact to the Baidu overall picture is really small and it doesn't really make sense for us to isolate Qunar's revenue per se just for the Q4.

As Qunar becomes a more meaningful part of Baidu we would certainly separately disclose that but I think in the near term it's very minimal.

The next question comes from the line of Eddie Leung from Merrill Lynch.

Your line is open.

Good morning guys.

Two questions.

The first one is about your other revenues.

Could you give us more color on the increase of other revenues in the quarter?

Secondly, could you also give us the top five advertiser categories and where online/e-commerce stand within the ranking of your advertiser category?

Thanks.

You will notice there is a slight other revenue number in our reported financial.

Our main revenue is online marketing services and we have set out some business ventures as you are aware like Baidu HR to provide other services.

So this more other revenue is basically a reflection of those non-online marketing services that we generate.

As to your second question related to the top five sectors and these remain largely the familiar ones.

The medical and health care sectors, education, machinery, equipment, travel and business service.

Those were the top five sectors for us in Q3.

As we mentioned in our script, online e-commerce continues to be a main driver and continues to grow very strongly.

As we have mentioned in the past, Eddie, we do not separately identify these because that will distort the way that we actually traditionally track our different sectors but we are able to tell you the online e-commerce sector continues to outpace the general 85% increase and has been growing by over 100% for the Q3 still.

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

Your line is open.

Thank you for taking my question.

I have a question related to your personalized homepage.

I was wondering if you could give us an idea of how many people have signed up for this service already.

Related to that, is this service on your way to do more of SMS like feature, like Google has done with Google Plus?

Thank you.

Hi Paul.

For Baidu's new personalized home page, users do need to separately sign-up as long as they have a (inaudible) account whenever they log in (inaudible) personalized homepage as their default homepage.

The adoption rate has been healthy.

I think users are accessible to this new homepage setting.

The benefit of it is obviously users in a lot of cases do not even need to search to reach the sites that they are interested in and also they can reach that feed they find on other social sites.

So, users will be able to view a lot more information than before on the Baidu homepage.

That being true, the social information both where Baidu social products like Post Bar or Baidu Space as well as social feed from other sites.

We believe that personalization is a very fundamental need from our users and is also underserved.

Our efforts are devoted to this direction instead of developing a single social network site.

That's been our strategy.

The next question comes from the line of Richard Ji of Morgan Stanley.

Your line is open.

Hi.

Hi Robin and Jennifer.

Thanks for taking my call.

I have a question regarding Qiyi.

So far, can you just give us a little more color on the advertising spending trend on Qiyi, especially given its a robust unique visitor growth as well as subscriber growth?

Then going forward shall we be able to see more cross selling and for advertising service between Baidu and Qiyi?

Qiyi is a young venture.

We have been pretty much focused on expanding the user base and the improved user experience.

Because of the nature of online video, I think that this model is quite clear, which is advertising.

We are basically competing for media time on this front, so we are not so worried about the revenue opportunities of this venture.

We have talked to the Qiyi team on cross-selling but we have not really done much in the past.

Going forward, that's certainly a real possibility.

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

Your line is open.

I want to offer my congratulations.

Impressive growth and impressive guidance - maybe you could talk a little bit about what are some examples of further improvements to your platform you could still make and perhaps compare that to Google's platform?

What stage are you in terms of your platform relative to Google?

It's very hard for us to compare with our competitors.

We don't know exactly what they have done and what they are doing.

What we have seen is that we have lots of room for improvement in the Phoenix Master System.

Basically, there are two main areas that we can improve upon.

One is the (inaudible) side, as I mentioned (inaudible).

It's basically a (inaudible) mechanism.

The other side is the account management so to speak - the CRM system of how we provide tools for our customers to better manage their marketing campaign.

We just got started on that front.

We believe a better management system or more tools will help the customers especially the small and medium customers to spend more comfortably our platform.

So what I can tell you is that we have a lot of levers here and we will continue to monitor the ROI for our customers.

We believe that as we move on we will be able to release the buying power from both the large customers and the SME.

The next question comes from the line of Ming Zhao from SIG.

Your line is open.

Thank you and good morning.

I have a question about customer acquisition.

It seems like you added about 6000 customers in the quarter.

The year over year growth has some deceleration there, but you also in the meantime booked strong ARPU growth.

So my question is it because you have a lot of large customers whose stronger spending power has threatened some of the SME customers so the customer acquisition has slowed?

Any color on that would be appreciated.

Thank you.

I think it's a number of reasons.

First, as you correctly realized, our focus was more on the larger accounts over the past couple of quarters.

The desire to spend and the budget to spend on our platform is really high.

Secondly, we also realized that there's some macroeconomic reasons for the (inaudible) gradually moving away from the export our end in economy, so they're rebalancing on the macro economy.

Some of our export our end is that customers are not doing so well.

Thirdly the SMEs do not really have the necessary tools to really spend on our platform and we are working on that too.

The next question come from the line of Alex Yao from Deutsche Bank.

Your line is open.

Good morning everyone and thank you very much for taking my question.

Hi Robin.

Can you talk about the number of paid click growth in this quarter?

How would you envision this to continue to grow in the next several quarters?

Thank you very much.

Alex, paid clicks grew very healthily this quarter, as we mentioned, and we continue to improve our monetization capability.

That in itself helps improve the click rate and generates the number of clicks that will ultimately deliver the customers the ROI.

We continue to have ways to refine our monetization platform and we anticipate paid clicks.

As usual the trend has seen increasing and growing healthily for our customers, and that said there's no reason for us to think why that shouldn't be the case going forward.

The next question comes from the line of Alicia Yap from Barclays Capital.

Your line is open.

Good morning Jennifer and Robin.

Question is on, have you seen any increase in attractions on the contextual ads and how will the PSE be trending in the next few quarters?

What should we expect on the incomes of the margin trend in fourth quarter 2012?

Thank you.

Contextual ad is a very important initiative for us and we have been focused on the need to improve the technology, the product and also develop customer understanding to adopt the tool.

The business initiative is tracking well.

We are pleased to see the progress.

As indicated in my script, over the longer term as we gradually improve and taking traction on this business, you should expect the pathways to increase accordingly because, for this business, it's an important initiative and we do pay out a higher pay-out to our union partners.

So, over time and gradually as we gain traction on this business you should expect [add] to increase.

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

Your line is open.

Hi.

Good morning.

Thanks for taking my questions.

Just a reasonably different soft policy (inaudible) on the TV advertising end (inaudible).

Would that policy actually be positive or negative to Baidu as pharmaceutical is pretty much one of the biggest industry segments of Baidu?

Thank you.

In that regard Wallace, we are aware of that development, but we don't have any indication to see if there's any specific regulations that will actually affect our online marketing service to the medical and healthcare service providers.

What we have control over is our own process.

We have put in a lot of effort as part of a normal business plan process to make sure that we service our end users with quality contact information and we're vigilant in terms of developing our advertisers.

There is - it's very hard for us to say one way or another how this will affect us, but we are doing things that we have control over.

The next question comes from the line of Jenny Wu from Citi.

Your line is open.

Thank you for taking my question.

Hi Robin.

Would you please share with us your observation of advertiser spending behavior such as is that a general trend that more and more large advertisers will adopt this [paid] search as a key advertising platform?

Currently what industries are you investing large accounts from?

Yeah, sure, I think it's definitely true that the large accounts are very much aware of the trend.

From the companies or customers that I have been talking to, they all have a mandate from the higher level that they should allocate more of their budget, more of the advertising budget, to align to search.

Of all the advertising forms search obviously provides the best of performance.

So it's much easier for them to show to their boss that's how effective advertising campaign is on Baidu.

For all the other advertising platforms online or offline, it's much harder to demonstrate that, so search has definitely become a key advertising platform for them.

In terms of the large accounts some of the sector players, our customers, as we mentioned, you're familiar with some of the auto players like the manufacturers, the OEMs, the game sector, that's pretty good, retail, online services.

These are all brand players and they are large accounts for us.

The next question comes from the line of Cynthia Meng from Jefferies.

Your line is open.

Thank you for taking my question and congratulations for a great quarter.

I have two questions.

From your current business development activities, especially with the SMEs, does management see stronger take up of search marketing from third tier and interior of China?

Do you anticipate or have you observed any weakness from the current credit crunch in some other places for SME companies?

The second question is, can management give any guidance on expected run rate investment in Qiyi and Qunar for 2012?

Thank you.

I'll answer the first one.

I do sense that it's largely consumer or domestic consumption oriented.

The large cities still contribute a super majority of our revenue and the growth rate is also high.

You can probably imagine if these large accounts are growing faster, then the revenue contribution from the major cities are getting larger instead of smaller.

So, from this point of view, the third tier cities, they are growing fast but not as fast as the large cities.

Because of our limited exposure to those very small cities and very, very small enterprises, we have not got any sense of the impact of the credit crunch you mentioned.

With regards to support from Baidu towards Qiyi and Qunar, Qiyi as I mentioned, we supported Qiyi with cash investment in Q3 and will do a similar cash investment in Qiyi in Q4 and after that we'll assess from time to time what is the optimal options that we have to support this venture.

So as the time comes, we'll let you know if there's any new developments.

With regards to Qunar, we acquired the majority of the Company and Qunar has sufficient cash.

On an ongoing basis, Qunar's own business is growing very healthily, has very little demand for additional cash from our perspective.

So in the near term, I do not expect that Qunar will call for cash contribution from Baidu.

The next question comes from the line of Andy Yeung from Oppenheimer.

Your line is open.

Hi, good morning.

Congratulations on a very strong quarter.

I just want to ask a little bit about the mobile space.

Can you give us some insight into the mobile search area, how much of your current search volume is coming from mobile devices?

Also, if there is a difference or any difference between your online and mobile paid clicks behavior and how you actually monetize those clicks.

Mobile search is a little bit different from the PC search.

It's kind of hard to compare on an apple to apple basis.

Each mobile page is generally much shorter than a PC page, so number of page views on the mobile side is different from number of page views on the PC side.

The industry is in early stage, we're still trying to optimize the mobile search experience.

We have not been very aggressive in monetizing the mobile traffic yet.

We do plan to optimize the advertising part of mobile (inaudible).

For example, we would allow our customers to show the phone number and consumers can just click on those numbers and make phone calls.

This is not possible on the PC side.

So mobile is growing faster than PC, but it's still a relatively small part from the page viewpoint (inaudible) point of view and it's an even smaller part from the revenue point of view.

The next question comes from the line of Gary Ngan from UBS.

Your line is now open.

Thank you very much for taking my questions.

I have a question on competition, especially on vertical searches like (inaudible).

I think in rest of the world we haven't really seen a successful vertical search elsewhere, but neither have we seen a country which 80% of the gross merchandise value has been controlled by one company.

So I just wanted to get a sense of how do you see the competition, competitive landscape going forward in this particular vertical search?

What do you think is the advantage or disadvantage of Baidu versus your competitor?

Thank you.

Our fundamental belief is that users, most of the users are lazy, they don't want to distinguish their information needs from shopping to cars to lifestyle, so any type of information needs they actually come to by doing a search for it.

We have the largest user base and we have the most sophisticated search technology, so we are quite confident users will increasingly rely upon Baidu for all types of information needs.

This is also true for e-commerce related information needs.

Like I mentioned before, virtually all of the large B2C e-commerce types advertise on us.

That's because we think our traffic we can drive for very good quality traffic to the site and users.

It's true that, as you probably also agree, that more of the shopping activities will happen now in those credible larger e-commerce sites and we are simply a big beneficiary of that trend.

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

Your line is now open.

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

I would like to ask more insight about your feelings of the slowdown in the e-commerce, like group buying and also some general merchandise e-commerce websites, that they closed down their services, and how this industry contraction will affect your fourth quarter's result and going forward into 2012.

Thank you very much.

In general, I think we saw a big increase in terms of group buying sites getting promotional activities on our platform and there has been in our sector some level of consolidation.

On our platform, we continue to see the Group buying sites are spending with us.

The e-commerce sites, as I mentioned, continue to grow very strongly.

So these sectors over the past few quarters has been growing very nicely.

As Robin mentioned, we are really at the centre space in terms of the overall internet activities development and the growing transition of users to take advantage of internet sales to do e-commerce activities, ultimately Baidu will be the beneficiary.

They do not make up to be the top sectors in terms of revenue contribution, so any slight variations in that sector does not really have a major impact to our bottom line, but, of course, we're very excited to see the e-commerce sector growing nicely and Baidu is right in the centre of all the activity.

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

Your line is now open.

Thanks for taking my question and congratulations on a great quarter.

Large advertisers are clearly paying the big (inaudible) here, so what percentage of the large advertisers' total marketing budgets and online advertising budgets is currently being spent on search?

In your operation, how high can that number go?

Then I have a follow up question.

It really varies from customer to customer and from industry to industry.

Some of the more internet savvy accounts spend virtually all of their budget on the Baidu search platform, while for the other more offline oriented businesses they still only allocate a very small percentage of their total advertising budget to us.

So it varies from 80%, 90% of the budget for those really online-centric sites to less than 10% online marketing budget for those more traditional vendors.

But the point is that they are allocating more budget to online and even larger percentage is allocated on search.

Of course, you can tell that a much larger portion of the economy comes from those offline businesses and, in general, they spend around 10% of the advertising budget online and other than online they spend like 30% to 40% on search.

So we definitely have a lot of room for growth there.

Thanks, and my follow up question is travel is one of the major advertiser verticals for you.

So as you integrate Qunar into Baidu, what is the reaction that you're getting from your travel (inaudible) advisors that to change your role as a partner and what is the benefit to monetization that you might be getting from the travel clicks please?

Well, Qunar is essentially a vertical search engine.

It satisfies the needs of our users travel activities.

So it's very hard to separate the Baidu searches from Qunar searches.

We continue to serve our customers from all kinds of travel related businesses.

We have a choice to run their marketing campaign down the Baidu platform or the Qunar platform.

Qunar is more detail oriented, more specific on a lot of things but for Baidu we are more generic.

So in this sense, maybe more of the Baidu users, they not have that clear intention of where to go or what to do.

That sort of thing they will come to Baidu and we try to convert that into the real travel customers, but for Qunar the users in general have a better idea of what they would like to do and where they would like to go, so they go there and find the right information.

The objective for us to acquire Qunar is really to ultimately provide our users a better search, a better overall search experience as they're looking for travel related information.

So as they get into Baidu and they're looking for travel information, they really land on a premium high quality vertical travel search information.

In general, we're providing travel search information and as you are looking for travel businesses there are a whole slew of different players and different stage of activities that the user will carry out such as transaction, such as commenting.

Just in terms of our relationship with the other travel sector players, we don't see any slowdown in terms of their advertising activities on our platform and, in fact, in Q3 sequentially travel was a very strong sector that saw a strong sequential growth and the notable travel players that will have a familiar name, they all increased in their spending in Q3 with us.

The next question comes from the line of Wendy Huang from RBS.

Your line is now open.

Hi, I have two housekeeping questions.

The first is regarding your margin.

Growth margin and operating margin growth held up quite well in Q3 in spite of increasing bandwidth costs and also (inaudible) costs of intangibles.

So can you give some color to operating margin and growth margin for Q4, especially sales marketing costs, how will that trend up in Q4?

My second housekeeping question is regarding Qunar.

Just double check, is this Qunar revenue included in the overall marketing revenue in your revenue breakdown?

If this is the case, has your number of advertiser figure and ARPU figure included Qunar's contribution as well?

Thank you.

On your first question, in terms of margin, margin is really a reflection of the speed of revenue growth and also the speed of our investment.

Our top priority is really focused to drive the top line growth and, as mentioned in quite a few quarters and as you have seen, we have aggressively invested in R&D, in the infrastructure and in strategic initiatives.

These expenses will add up and flow through our expense line.

So the operating margin is really a natural follower of what the revenue is and what the expenses are.

You have seen in the past quarter the trend in terms of all the line items are expenses and that should give you a pretty good idea in terms of the speed of investment that we're actually carrying out.

In terms of marketing costs for Q4, we do anticipate continued increase in SG&A expenses and particularly marketing per se.

We do note a Q3 step up and we would anticipate Q4 continue to step up in terms of marketing spend.

What actually happens in Q4 is this year marks the tenth anniversary of Baidu's commercial product, so we'll do a number of celebrations and events to carry out to continue to develop the market and promote search engine marketing.

We may even carry out some TV commercials in certain cities.

So continue to expect that we will do the marketing efforts to develop the market and promote the brand.

Consequentially to your question, you should expect marketing expenses to go up.

On your second question with regard to Qunar's revenue, Qunar's financials are completely consolidated into Baidu's financials.

So both the revenue as well as each expense lines are added and Qunar's revenue is included in the online marketing in revenue dollar amount.

Qunar's customers and their customers ARPU also contributed to Baidu's overall picture, but, as I mentioned, Qunar's overall impact is very insignificant.

The next question comes from the line of Jiong Shao of Macquarie Securities.

Your line is now open.

Thanks for taking my follow up question.

Just a follow-up on the operating margin comments, last quarter you correctly predicted that in the near term, to cover the massive investment you are making, the operating margin should trend down and it did.

I was just wondering, going forward, doesn't have to be this quarter, just generally for the next few quarters, the direction of the operating margin.

How should we sort of handicap that?

Thank you.

I really wouldn't want to venture specifically into the margin predictions as we don't typically do that.

As we mentioned, we will continue to drive the top line growth and you have already, I think, a graph, a good pattern of the way we invest and the expense line item, how that should form out.

I think the Q2 and Q3 expense development gives you an idea in terms of the magnitude and the pace, how that's going.

If we're looking longer term, really search is a beautiful business model and has tremendous scalability and our focus really is to drive the top line growth at this stage because we're really at the very early stage of leading the market space, knowing the beauty of search engine marketing and really continuing to spend a lot more with us and we deliver the kind of ROI to our customers.

We don't really focus on the margins, so I can't really give you quarter on quarter predictions, but this is a beautiful business and we are managing this business with a very disciplined approach and we invest prudently to develop future opportunities to drive long term growth.

Okay, thanks for the comments.

The next question comes from the line of Dick Wei of JPMorgan.

Your line is now open.

Hi, thanks for taking my follow up.

My first question is a longer term question.

If I look at Q3, sequential revenue growth around 22%, but if I look at accounts receivable it's up by 60% so I assume that seasonality impacted - the large customers are spending much more in Q3 as I guess in the prepared remarks that this (inaudible) side is also seeing 50% sequential growth.

So it seems like the SME growth is very much lower than the 22% of revenue growth.

So I wonder for the next three, five years, how would that kind of basically change.

If you could shed some light, that will be great.

And I have a follow up as well.

Thanks.

Like I mentioned, the larger accounts grow much faster, actually faster than we have expected it to, but the point is really that because of our central positioning, China's Internet ecosystem, we are able to reap the benefits of any emerging sector.

So last quarter classified ad website suddenly emerged as the (inaudible) advertising and certain verticals will just go up and down, but it's always a natural trend that once they are in a position to expand their (inaudible) they would advertise on our platform.

I also mentioned because of the relatively difficult environment for the export oriented businesses, some of the SMEs are not doing so well, but the overall customer portfolio is very healthy and we just need to come up with the right product or the right tool for them to really benefit from our online marketing platform.

Great.

Robin, I think a follow up on that is, what are you seeing in terms of the sentiment for some of the large advertisers or maybe SMEs as well in terms of macro uncertainty?

Any particular sectors that you're seeing stronger sentiment or weaker sentiment, or any delayed spending as well?

Any general macro comment would be great.

Honestly, we have not seen much sentiment on the macro economy with the exception of export oriented businesses being in tougher positions.

Our top verticals are all doing very well and, as you know, we are more domestic consumption focused and this sector's growing very, very nicely and we haven't seen any slowdown on this front.

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

Your line is now open.

Hi, thank you, financial related questions.

It seems customer deposits in third quarter actually jumped a lot but the deferred revenue is actually coming down.

Can you explain?

Also, one more is, it seems the minority interest loss is actually going up.

Is this more related to Qunar?

Thank you.

Hi, Wallace.

The customer deposits, basically these are the deposits customers make with us, primarily the SMEs.

They will do a cash deposit and then they will incur their spending, so when you see a customer deposit increase, of course that's a good indicator of the strong customer desire in terms of spending with us.

Deferred revenue, it's more or less related to the large accounts.

Large accounts have payment terms and more complicated contracts.

So to meet revenue recognition, a lot of the criteria need to be met and all the duties need to be fulfilled.

So you will see some movement of deferred revenue, but that is not a real indication of revenue going forward.

In terms of minority interest in the P&L line, I think for the equity accounting that I explained it out and those are related to the entities that we invest and those accounting treatments are under equity accounting methods and as you are looking at the income or loss attributable to non-controlling interest.

Those are other ventures that we hold that really have very small impact to the overall picture.

I think if you're trying to get to what is your best minority interest related to Qunar, Qunar's financial is doing pretty healthily.

It can stand on its own.

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.

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 call.

This concludes the presentation.

You may now disconnect.

Good day.