百度 (BIDU) 2012 Q1 法說會逐字稿

...Tseng, Baidu's Investor Relations Director.

Hello everyone and welcome to Baidu's first quarter 2012 earnings conference call.

Baidu's earnings release was distributed earlier today and you can find a copy on our website as well as on newswire services.

Today you will hear from Robin Li, Baidu's Chief Executive Officer and Jennifer Li, Baidu's Chief Financial Officer.

After their prepared remarks, Robin and Jennifer will answer your questions.

Before we continue please note that the discussion today will [obtain] 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 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 discussion 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 webcast of this conference call will also be available on Baidu's IR website.

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

Hello everyone and welcome to today's call.

We are pleased to begin the year with a strong set of results.

As always, our excellent performance was driven by our team's relentless execution.

In particular we achieved a robust expansion of our SME customer base despite a seasonally slow quarter.

We see huge opportunities to develop both our SME and large customer bases and we have been working hard to capture these opportunities.

Across a variety of product platforms, our user experience indicators grew strongly this quarter as well.

Underpinning this progress in customer base expansion and user experience is our sustained investment in talent, infrastructure and marketing.

In the first quarter we continued to push forward with our box computing initiative.

Box computing embodies our mission for the future of the Internet.

As part of this we made good progress on our open data and open application platforms.

In March, for example, searches for trending topics and breaking news on Baidu began returning results from all of China's major [Weibo] platforms.

The market has responded well to our ongoing improvements.

As of now we have tens of thousands of registered developer accounts on the open applications platform.

These developers have created over 70,000 applications that are available to Baidu users.

Traffic patterns demonstrate clearly that users are enjoying the easy access to these apps from our platform.

Since our personalized home page feature was launched in September of last year, we've continued to make it more convenient for users to enjoy.

Feedback has been great and is translating into improved user stickiness on the personalized home page.

The daily clicks number has grown very nicely since the launch last September.

Mobile search traffic maintained a strong growth trajectory in Q1.

Mobile search is of course central to our overall strategy.

Mobile search traffic now accounts for close to one-fifth of the total web search traffic on Baidu.

In Q1 we continued to leverage our advanced technology as well as investments in R&D and engineering talent in mobile to make solid improvements here.

As the mobile usage has grown, we have started to explore monetization opportunities.

For example, we have started to work on a mobile Phoenix's Nest account management, mobile ad display presentations and mobile back-end monetization technologies.

As a result, we've seen encouraging progress in CPM for mobile [ADS].

Mobile monetization is still at a very early stage, but we are excited about this tremendous opportunity over the long term.

We are also very pleased with the reception of Baidu's iOS and joint apps.

This apps not only offers the standard Baidu search experience optimized for mobile devices, but also enabled many innovative, new features like voice activation for both search and apps.

Box computing is especially well suited to mobile users because it brings dynamic, up to date information straight to the results page.

Mobile users are able to search and access information, content and apps directly from search results.

We are also seeing a significant uptick in both mobile PostBar and mobile Knows usage.

These are just some of the mobile products that have experienced year-over-year usage growth in the triple digits.

Ultimately our focus remains consistent; to ensure that mobile users get the best possible Baidu experience across all devices and operating systems.

And these are some of the many great examples of how we are leveraging our leading position to capture opportunities in the mobile arena.

The success of our mobile offering is built upon our industry-leading cloud infrastructure.

Since mobile devices themselves have limited processing power, an optimal mobile experience depends on powerful cloud-based back-end technology.

Baidu's leadership in cloud technology gives us a real competitive advantage, allowing us to deliver data, content and apps from the cloud to mobile devices.

In March we hosted our first ever developers' conference to promote our open platform and increase awareness among developers of Baidu's large and effective traffic distribution platform, reliable cloud computing service and strong user behavior analysis and monetization capabilities.

I am pleased to say that turnout was much larger than we expected.

At the conference we showcased three of our most exciting cloud-based initiatives.

This includes the Baidu application engine, BAE, which enables a developer to create and develop new apps for our open platform at lower cost than was previously possible.

We also introduced our mobile [cache bat MPB], a cloud-based environment for developers to capture the performance of their apps across dozens of operating systems and handsets.

Both of these will significantly lower the barriers to entry for more -- for small sized developers who don't have a lot of capital or manpower.

We rolled out an exciting new storage initiative we're calling Personal Cloud Service, PCS.

As I said, mobile internet usage needs to be backed up by good Cloud support.

Under the PCS umbrella, we will gradually roll out many useful Cloud based products and services.

As the first step, in March, we launched a Baidu Wangpan or Baidu NetDisk, currently in beta testing.

Wangpan will allow users to store, manage and share vast amounts of data for free across all terminal devices and virtually with no storage limitations.

We look forward to building out Wangpan's functionality and capability and we expect to become the industry leader on this front as well.

As I've mentioned before, although Cloud computing is still at an early stage in China it will become an integral part of the internet ecosystem and therefore represents a vital element in Baidu's growth strategy.

Now turning to our work on the customer front.

We have made it a priority this year to better leverage the enormous opportunity with the SME market in China.

Our sales and marketing team pushed hard into the second tier markets, implemented innovative sales methods and optimized an employee incentive scheme that ties [composition] more closely with sales.

These efforts have resulted in significant expansion of our SME customer base against a seasonally slow quarter.

This is a good start and we want to continue pushing hard to agitate smaller companies about the power of search engine marketing.

We also focused on enhancing existing customer satisfaction with innovative new products and tools.

One example from Q1 is the intelligent account optimization system.

This tool automatically provides suggestions to customers regarding account optimization.

This includes better keyword selection, better paid search relevance, matching choices, display time slots and much more.

So far the system has been well received by our beta testing customers and we plan to open it to all customers in the near future.

We are also continuing to be build awareness amongst large customers of the unique advantages of Baidu's platform.

More and more of these large customers are now leveraging our innovative [AD] products to meet their sophisticated performance oriented marketing requirements.

We are excited about the progress we've made here already and about the tremendous opportunity to win even more of our large customers' ad budget going forward.

Let's turn to our important investment initiatives.

I'm pleased to tell you that our investment in iTV continued to yield encouraging results.

In March iTV had more than 230 million unique visits from traditional PC users alone.

In terms of timespan on site iTV now ranks second in China among the online video service providers, according to both iResearch and comSCORE.

This is a real indication of the sheer strength of the iTV user experience.

We believe that we are well positioned to take advantage of the rapidly growing demand among users for online video content.

We know that today's internet users crave visual information and people are much more inclined to look at photos than to read text.

In light of this, in Q1, we revamped and re-launched PhotoWonder, an easy to use photo enhancement app for IOS and Android devices.

PhotoWonder allows users to modify smartphone pictures with a huge range of pre-set filters and frames to easily create collage and to upload these to popular social media sites.

In a short time we've seen a financial usage growth on both Android and IOS platforms.

PhotoWonder now has more than 14 million activated users and is well on the way to becoming another hit product for Baidu.

We're very excited about the opportunity here as social networking enters a more image intensive age and we are confident that PhotoWonder positions us well.

We started the year strong.

We made great progress across most crucial assets of our core business that position us well for future growth.

We see tremendous opportunities in fast emerging sectors such as the mobile web and Cloud computing, and our team is working hard to capitalize on all of these growth opportunities.

With that I shall now turn the call to Jennifer for financial highlights.

Thank you Robin.

We started 2012 with a productive quarter.

In order to maintain our leading position in the industry we sustained a rapid pace of investment in talent, network and other infrastructure while managing operational efficiency.

This investment strategy is building a solid foundation for future business progress.

Looking forward, we'll continue this aggressive investment strategy in the quarters ahead.

This month, for example, we have embarked on our annual nationwide search engine marketing tour.

In the coming quarters we also expect office construction and network infrastructure spending to ramp up.

Now let me go through some of the financial highlights for the first quarter of 2012.

All amounts mentioned are in RMB unless otherwise noted.

For the first quarter total revenues were RMB4.3 billion, representing a 75% increase year-over-year.

During the first quarter, Baidu had approximately 321,000 active online marketing customers, a 17.2% increase from the corresponding period in 2011, and a 2% increase from the previous quarter.

Revenue for online marketing customers for the first quarter was approximately RMB13,300, a 49.4% increase from the corresponding period in 2011 and a decrease of 7.6% from the previous quarter.

Traffic acquisition cost as a component of costs of revenue in Q1 was RMB331 million or 7.8% of total revenues, compared to 8.2% in the corresponding period in 2011 and a 7.9% in the fourth quarter of last year.

Bandwidth and depreciation cost as a percent of revenues in Q1 were 5.2% and 5.5% respectively, compared to 5% and 5% in the corresponding period of 2011.

As I mentioned just now, the increase was mainly due to an increase in network infrastructure capacity.

Selling, general and administrative expenses in Q1 were RMB479 million, an increase of 43.9% year-on-year, primarily due an increase in personnel related expenses.

R&D expenses in Q1 were RMB443 million, an increase of 85% over the corresponding period in 2011, primarily due to increased head count reflecting our continued strategic investment in R&D talent.

Share based compensation expenses, which were allocated to related operating cost and expense line items increased in aggregate to RMB35 million in the first quarter from RMB31 million in the corresponding period in 2011.

Operating profit from Q1 was RMB2.1 billion, an increase of 75.1% over Q1 2011.

Total head count as of 31 March 2012 was about 16,500, roughly 400 more than the previous quarter.

Income tax expense was RMB331 million for the first quarter.

The effective tax rate for the first quarter was 15.1% compared to 14.5% in Q1 2011.

Net income attributable to Baidu for Q1 was RMB1.9 billion, a 75.9% increase from the corresponding period in 2011.

Basic and diluted earnings attributable to Baidu per ADS for the first quarter of 2012 amounted to RMB5.39 and RMB5.38 respectively.

Net income attributable to Baidu, excluding share based compensation expenses, a non-GAAP measure for Q1, was RMB1.9 billion, a 74.1% increase year-on-year.

Basic and diluted earnings attributable to Baidu per ADS, excluding share based compensation expenses, both non-GAAP measures, were RMB5.49 and RMB5.48 respectively.

As of 31 March 2012 the Company had cash, cash equivalents and short term investments of RMB16.1 billion.

Net operating cash flow for the first quarter of 2012 was RMB2.4 billion.

Capital expenditure for the first quarter of 2012 were RMB298 million.

Now let me provide you with our topline guidance for the second quarter 2012.

We currently expect total revenues for the second quarter of 2012 to be between RMB5.335 billion and RMB5.460 billion, which would represent a 56.2% to 59.9% year-on-year increase.

I do wish to emphasize that this forecast reflects Baidu's current and preliminary view which is subject to change.

I will now open the call to questions.

Operator, please go ahead.

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

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

If you have more than one question please request to join the question queue again after your first question has been addressed.

Your first question comes from the line of Dick Wei of JP Morgan.

Please ask your question.

Hi.

Thank you for taking my question.

My question is on the guidance.

I wonder if you can share some assumptions on the second quarter guidance, maybe first, within the second quarter is the management assuming that May and June will be weaker versus May compared to prior years?

Maybe secondly, maybe you can share some thoughts on expanding SME versus the large advertisers on Q2, that would be great.

Thank you.

Dick, good morning.

We have always made our best to make projections.

In Q2 we think the sequential pattern is normal as we have -- what we have demonstrated in Q1 is, we added quite a number of customer accounts and these accounts are primarily SMEs and what that really demonstrates is the market potential is huge and our sales team -- the kind of work that we have done is bearing fruit.

We continue to work a lot with large advertising customers and bring in traditional customers and their ad allocation -- ad budget allocation onto the Baidu platform.

A lot of work is in the pipeline, I think, both on the SME front and the large customer side we continue to see tremendous opportunity.

Month over month between May, June and July we do not anticipate different patterns as we compare to prior years.

Last year in Q2, obviously, it was a very special quarter.

As you would recall in last Q2 there were particularly hard factors, such like group buying factors and a lot of hot monies getting into the factor.

So Q2 last year, if you recall, we provided sequential guidance in the range of 32% to 35%.

The actual performance exceeded our expectation and came in at 40%.

So if you look at the normal pattern of 32% and 35% that was kind of the ballpark range that we were looking at last year and building on the second quarter, third quarter outstanding performance and in line performance in Q4 as well as this past Q1, I think (inaudible) very solid high base -- these second quarter guidance is a very solid guidance.

So this is a pattern that we do not -- we are not seeing anything different and this is a pattern that we are currently projecting.

Great, thank you.

Your next question comes from the line of Jiong Shao of Macquarie Securities, please ask your question.

Good morning, thank you very much for taking my question.

Just to follow up on the revenue guidance question; if I look at the year-over-year growth of cited below 60%, I think this is -- you haven't seen anything less than 60% since end of 2009, I was wondering, other than a higher base, could you talk about the visibility, currently, you have in the advertising and in particular in the search-based advertising demand in China?

Thank you.

I think we continue to see tremendous opportunity.

As you just correctly noted, year-on-year comparison, we do have a large base last Q2, but as we're seeing into the market segment, whether it's for SME or large customers that we have [billed], obviously we see continued momentum in these people recognizing the search engine marketing platform as a very effective promotional platform for them.

So our sales team is very focused on executing, educating and developing the market as well as servicing the customers.

So I think the market potential is there, the market execution that we have demonstrated a pretty good track record all along and we continue to think that we have very, very significant potential in developing the market.

In terms of -- I think, visibility and all that, we do not feel there is anything that much different.

Obviously, we have a very diversified portfolio and many, many more business and business sectors and customers to add on the platform, so I think that the outlook for us is -- continues tremendous potential and we're focused on execution.

Thank you very much.

Your next question comes from the line of Alex Yao of Deutsche Bank, please ask your question.

Hi, good morning everyone and thank you very much for taking my question.

My question is about your cloud computing strategy; can you share with us your thoughts on the commercial perspective of the cloud computing strategy?

And also, how should we think about the returns on those investments in terms of the cost structure which will be generated from this initiative?

Thank you.

Yes.

Cloud computing is a very important infrastructure play with our technology competitiveness, we can build very large scale infrastructure that allows developers to build apps upon that.

Once -- so we are in, basically, an eco-system play instead of trying to bet on (inaudible) of the specific apps.

In the future, I think the best model for this would very much like a commission based structure, we will take a cut from all the apps running on our platform.

Although this is a relatively longer term picture, we would be able to -- we would want to invest in this and bringing all the users so that their behavior, their data can be used by all kinds of different applications.

In the future, we think this will pay off, based on our infrastructure and our monetization capabilities we have built over the past 10 years.

Thank you, and how would this impact the cost structure?

It's all building our [business] plan and it's not going to be a sudden rise or sudden change for the cost structure.

Alex, I think the way to think about it is, if you think about the past two years of investment pattern, and I have stressed that we will continue this investment strategy.

So the approach will be consistent and this is part of our core business.

As well, we mentioned it's very important for us to set these solid foundations as we develop forward and to really solidify our position in the marketplace.

This is part of our overall core business and the investment or related cost if you're thinking about it, you can look at the patterns from the past two years and that pattern will sustain.

Thank you very much.

Your next question comes from the line of Jin Yoon of Nomura Securities, please ask your question.

Thank you for that, just a couple of questions.

Your traffic acquisition costs, as percentage of revenues, it looks like it declined a little bit this quarter, is that -- have there been any material changes in how you allocate cost to or how you share revenue with the traffic [partners]again?

Or is it just a function of the fact that contextual ads are probably not as growing as that?

But how should we look at that?

And second of all, just looking at customer deposits have been a relatively strong indicator of revenue, it's pretty strong this quarter, does that mean that this should -- should be going strong going forward after these new SME customer strategies ramp up after this quarter?

Yeah, I'll stop right there, thanks guys.

On for first question, related to TAC, what you are seeing in Q1 is a normal fluctuation as we have indicated in the past.

The TAC expense that we are deploying today has more to do with the new product promotion that we're pushing through the network of union partners.

The composition of the TAC is shifting more towards the new product promotions rather than the traditional traffic acquisition cost.

And we are -- as you know, we have been working on a contextual app product and the product itself is making good progress and obviously this is not an overnight product that you should see significant differences and, therefore, I would point to the TAC as a normal fluctuation compared to the prior quarters' patterns.

In the second question, with regards to customer deposits, yes, as we have recruited more customers and these people would be putting their deposits with us, it does show that the customers are having confidence in our platform, are willing to spend with us.

Obviously, as we execute on helping them spend all their promotional dollars, we help them along the way to generate a kind of -- the ROIs that they desire, so it is a good indicator, it does not directly correlate with revenue projects.

But this is definitely a solid cash base and customers' confidence in us that we're having.

So this is a solid number that's good to have.

Your next question comes from the line of Alicia Yap of Barclays, please ask your question.

Good morning, Robin, Jennifer and Victor, thanks for taking my questions.

Just quickly, can you remind us the top five customers and which [sectors] are showing stronger growth and which ones are facing more challenges and cutting back their spending, particularly in the first and the second quarter this year?

Thank you.

I our top five sectors for Q1 are namely medical healthcare, machinery equipment, [education], travel and software and games.

And they are because Q1 is a seasonally special quarter so there is slight changes in the top five sectors.

The other normal players that would typically show up here are business service and franchising and there are some seasonal patterns as were (inaudible) as Q1 comes in the picture.

So the mix of the top sectors are not really changing, I think particularly around the B2C side, we continue to see very strong growth and because the fact that we're seeing these sectors continue to be the top, you can expect that they are all enjoying very strong growth.

And obviously, as I said, B2C is stronger than B2B.

Okay, great, thank you.

Your next question comes from the line of Eddie Leung of Merrill Lynch, please ask your question.

Thank you for taking my questions.

I have two questions; the first one is about your user traffic, so in terms of search query growth, have you guys seen the impact from a slowdown in Chinese internet user growth?

And then my second question is related to the contributions from [TuneUp], could you discuss a little bit about the changing contributions to your top lines throughout the past couple of months from TuneUp?

Thanks.

Eddie, on the user traffic growth, we have seen very strong traffic growth over the past few quarters, it's been very consistent.

So although the internet user base in China is quite large and the growth could slow down, but our traffic not only depends on the number of new users coming in every day, it also depends on the time spent by each user.

Because information for search is so fundamental, so essential to everyone's ordinary life, I think people are increasingly dependent on us to find information.

That's why we've seen very healthy growth in terms of user traffic or in terms of queries over the past few quarters.

And, Eddie, on your question related to TuneUp, if you look at our recently released 20-F, that gave you an indication of what TuneUp's level of revenue looks like.

If -- because we have acquired TuneUp and we're consolidating the results, the revenue number is included in our total number, but the absolute number itself is so immaterial, it really is a very small part of the overall revenue that we're generating.

Got that, thank you.

Your next question comes from the line of Catherine Leung of Goldman Sachs, please ask your question.

Hi, good morning.

I was wondering if you could elaborate on the particular innovative marketing efforts you mentioned in the opening remarks which have accelerated your SME customer base growth, given I think you have regularly organized these marketing events to the [tier 2] cities over the past few years?

Thank you.

Yeah, we do have this nationwide marketing tour every year.

What's different this year is that we implemented certain incentives for the [sales] to [signing] more customers.

We implemented a structural change in our sales force last year, which means we separated the inside sales from outside salespeople.

There are certain dedicated teams who would go to the customer side and do on-site visits and the other team would do a (inaudible).

So this kind of structure allows us to sign up new customers more efficiently.

Last year because the large customers grew so rapidly, we were not able to spare a lot of resources to take care of the smaller customers and starting from this year we are saying that we were able to sign up new accounts from the second period and third period.

Okay, great.

Thank you.

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

Please ask your question.

Good morning Robin, Jennifer and Victor.

Can you elaborate a little more on your mobile search initiative?

Clearly there has been very fast (inaudible) and likely is going to a key (inaudible) going forward.

When shall we be (inaudible) some meaningful revenue contributions, and can you also comment on the potential margin profile [for] the mobile search relative to PC-based search?

Richard, what we are saying is that mobile search traffic has been growing much, much faster, especially for those smartphone based mobile searches.

We are aggressively investing in improving the user experience for our mobile search and we have seen very good results.

What's different from the mobile is that at this stage we need to probably share some revenue with the handset manufacturers or other distribution channels when we ask them to pre-load our search.

In most cases it's a default search on those phones.

The [monetization] capability on mobile is relatively low.

It's still much lower than PC-based search queries, but we've started to work on the monetization capabilities for our mobile traffic.

We have seen very encouraging results.

So going forward you can expect that the revenue contribution from mobile will continue to go up, but it's - probably for the rest of year it's still going to be a very small percentage.

It's kind of early to talk about the margin difference because the overall traffic, or overall revenue, rather, is too small.

Once we have established the dominant position in mobile search we may not need to pay out a lot of channel distribution costs in the longer term.

So I don't think it so important to focus on margin right now.

Thank you, Robin.

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

Please ask your question.

Hi, good morning, thanks for (inaudible) questions.

Also questions relating to mobile internet.

Is there some third party company to track, [so that Baidu market shares] in mobile internet, is this lower than the PC base?

Can you explain a little bit the reasons behind why there's some discrepancy [between PC and] mobile side?

Is it related to say Baidu's strategy in the mobile browser itself?

Thank you.

Well, I think there are a number of reasons.

First is that I don't think there is an incredible market intelligence on the mobile search market share.

A lot of those numbers are really based on the number of bytes transmitted to certain mobile search sites.

Some of the sites actually host some very large files such as movie files on their sites, so the traffic share or number of bytes is really misleading when you think about the mobile search market share.

Our current estimation is that we should have over 50% of the mobile search market at this point, and of course as I mentioned before mobile search is growing very, very fast and we just have started to invest aggressively to improve the user experience.

That brings up the second reason, which is that we were not so focused on mobile before because we started this kind of early, before there were no healthy competition among the carriers and the mainstream phones were future phones which was very hard for users to use to surf the internet and search.

This has changed, so we will start to focus on that too.

Thirdly, I would like to point out that users would search more given that they have a phone that can have access to internet too, so we do expect that the vast majority of our existing users on PC - China has more than 500 million users, and we have a very large reach for coverage for this kind of user.

When we have certain type of information needs, it's very natural for them to pull out their phone if a PC is not in front of them to find the information.

So [then that], we will -- we expect to see faster growth because of the mobile search phenomena.

Just one quick one, (inaudible) your market share in the smartphone [needed to be higher than in a future phone]?

I really don't know.

We don't have any credible third party data and it's very hard to get the number from other players.

What we are saying is that mobile search has been growing much faster than PC and smartphone traffic is growing much, much faster than the mobile search, the overall mobile search traffic.

Thank you very much for that.

Your next question comes from the line of Ravi Sarathy of Citi.

Please ask your question.

Good morning.

Thank you very much for taking my question.

I've got a question about your vision for the personal cloud servers that you spoke about in your opening remarks.

I was wondering what your view is of how broad that cloud service will ultimately be in terms of the user experience, whether you see it encompassing as well as photos, music, video, and other types of data storage and sharing.

Secondly, I'm wondering if that would encapsulate a streaming service, and when you talked about sharing with friends for the personal cloud service, I was wondering if that is around sharing with people who are already registered or officially integrating with other social networks and social sites in China today.

Thank you.

Yeah, like I mentioned before, the personal cloud service is really an infrastructure [plan].

We have a very large infrastructure that can enable users to store their data content or apps on the cloud site at a cost, I mean cost to us, because in most cases it is free to the users, very cost effectively.

This kind of infrastructure can support a lot of apps.

For example we recently lodged an (inaudible) that give people virtually unlimited storage for them to store whatever they want, but there are a lot of other apps that can take advantage of this infrastructure, for example, PhotoWonder.

When people take pictures using their phone they can actually store the data on the cloud side.

There are a lot of other Baidu services, from Baidu Knows to PostBar.

A lot of user generated content -- anyone can choose to store certain part of the content as their personal content so that they have a sense of owning some data.

There are a lot of other developers, third party developers, who can develop apps and taking advantage of this storage infrastructure and including sharing this kind of data among the social networks they prefer.

It could be a Baidu social product, it could be any other popular product that's available on the internet.

So (inaudible) is really an infrastructure play.

Understood.

And a quick follow up, somewhat related to that, around mobile and the pre-installation of the Baidu range of apps including search.

I was wondering if you could update us on the percent of Android handsets as well as the development we have around IOS for the pre-install of Baidu Search and other apps.

Right now Android is growing much faster.

I think the user base is much larger and will become even larger because we -- based on current market analysis, we expect a lot of order probably of 100 million new Android based phones becoming available this year.

Right now about 80% of these Android phones, brand new Android phones, come with pre -- with Baidu Search pre-loaded.

So we are very happy about that growth.

Thank you very much.

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

Please ask your question.

The line of Gene Munster is open.

Thank you and good morning.

Robin, can you talk a little bit about customer ads, your better than expected output is a little bit weaker, maybe a little bit about that trend going forward as (inaudible) more advertisers.

[Are these] small businesses that might have a lower revenue opportunity or in general how should we think about [RAPU] relative to customer ads over the next year or two?

Thanks.

Yeah, I would say that over the past couple of years large customers generally grow faster than FMEs as we talked about during the past few conference calls.

That's because all of a sudden there were a lot of the traditional advertisers plus some of those cost factors (inaudible) they all came in and spent a lot of money.

Starting from this year we think that that customer mix will become more normal in the sense that a lot of the FMEs continue to sign up and we were able to spare a lot of resources to take care of them.

RAPU had a slight drop, it's pretty much because of [personality], Q1 is always the slowest quarter for us.

So over the next couple of years, I think we should see very healthy growth in a number of customers and as well as our pool.

It's just the customer mix may shift a little bit.

Those larger customers -- existing larger customers may not be able to double their ad spending on us every year.

But we do expect both the customer numbers and our pool to grow very nicely.

Okay.

Great.

Thank you.

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

Please ask your question.

Good morning.

I have a -- I have two questions.

Number one is related to [ITE].

Is the RMB46 million loss from equity investment mostly from ITE and can management give the outlook for the next few quarters.

We also would like to hear from Robin your view of ongoing online video consolidation and what do you think this has implied to [GE] related loss?

Will that -- will GE loss narrow?

The second question is related to Baidu's strategy on the operating system.

We read from recent news that Baidu is cooperating with Dell and also Foxconn to manufacture handsets based on the (inaudible).

Can management give some more color on this?

Thank you.

On your question related to the loss or gain from the equity cost accounting method, what's included in this quarter's number mainly are two items.

ITE is part of it and there is also an element related to the Baidu Youa spinoff.

If you read our 20-F we obtained funding for Baidu Youa and we recognized a gain related to the transaction.

So on a going forward basis if the entity is loss generating we will pick up the related loss items.

This quarter the total amount is in the range of RMB45 million and I expect this to be the range going forward on a consistent basis for the remaining quarters.

Maybe slight variations quarter-over-quarter, but that's largely the range that I'm looking at.

Yeah, on the outlook for online video, I have mentioned this before.

We see a tremendous amount of user demand for video content.

A lot of users come to Baidu and search for video content.

Our main goal is to satisfy this type of user needs.

We invested in ITE so that they can bring us very high quality, professionally produced licensed content to our users and we will continue to support that.

We are also open to other types of -- other sources of online video content.

In my mind the online video business is not really a winner-take-all business.

A lot of players have chances to benefit from this.

On the one hand demand is huge.

On the other hand a lot of people have the capability to bring high quality content online.

So we are very optimistic about the future of online video.

On the operating system thing, we continue to work on Baidu Yi which is a platform for mobile handset manufacturers to preload.

It comes with a lot of Baidu flavored products and look and feel, and we worked with Dell before and we are working with other manufacturers for future release of mobile phones.

Thank you.

I have a follow up question for Jennifer.

Jennifer you said the RMB45 million loss per quarter is the estimate for loss related to Youa.

I assume this does not include [TE] related equity loss, and if it doesn't, can you give some guidance as to what we should expect on TE related equity loss going forward?

Thank you.

Yeah.

What I said included in the line items are mainly two things.

One is Youa and one is ITE.

As I indicated last quarter, with the cash contribution we put into ITE, on a going forward basis we will pick up our share of the financial results related to TE.

So included in this number also have ITE's numbers.

But I just wanted to highlight that there is a new item related to Youa that's also included in this number.

Going forward largely they -- if business patterns is holding constant this is the general range.

You might see some variation quarter-over-quarter.

Great.

Thank you.

Your next question comes from the line of Wendy Huang of Royal Bank of Scotland.

Please ask your question.

Thanks for taking my questions.

First, while you are pushing into Tier 2 cities and modify your sales incentive systems, what kind of measure will you put in place to avoid risk and prevent (inaudible) from happening again?

Secondly, the capital expenditures seems to have come down dramatically in Q1 on both a year-over-year basis and a sequential basis.

How should we view this change going forward?

Lastly, when you booked mobile advertising revenue, I wonder if you are booking the net revenue after distribution cost or you record the gross revenue.

Thank you.

I'll take on the first answer and Jen very well might answer the rest part of the question.

For the customizing the [tier 2 cities] as the vast majority of SMEs in China reside in the tier 2 or tier 3 cities, they start to realize the power of internet marketing or search engine marketing and we are just trying to satisfy their needs and help those SMEs in those regions to really take advantage of our platform.

So it's very natural that we start to [shift some of our] resources to the tier 2 cities.

Another point worth noting is that the growth rate for the tier 2 areas actually faster than the tier 1 cities, so it's only natural that more and more customers come from those areas.

And on the question related to CapEx, CapEx is typically becoming pretty choppy quarter over quarter so do not -- as I indicated, we are having consistent patterns when it comes to infrastructure investment and I also highlighted that other than data centers, we are also investing in office space, so you should expect the CapEx to pick up in the upcoming quarters.

Typically, what's included in CapEx, as you well know, is a service related and I think additional spending will occur this year, related to constructions for infrastructure as well as office space.

Related to your question on the mobile revenue, it is a very small part of the overall revenue picture today, and today we're recording the mobile revenue on a gross basis and any revenue sharing is going through the TAC line item.

Okay, thank you.

Your next question comes from the line of Fawne Jiang at Brean Murray.

Please ask your question.

Good morning, my question's actually on the general advertising outlook for 2012, since advertising (inaudible) China has a pretty slow start with some soft macro and [political] uncertainty, I think [our chat with] enterprises seem to suggest 2012 could be second half loaded.

I just wondered whether you see similar trends with your business.

Also, it would be extremely helpful if you could comment on the budget allocation trends for your big enterprises first half versus second half.

If seems as though you had a pretty good start on small and medium enterprises, so yes, once again, more color on the big enterprises side?

Yes, I will say that, things are different from the SME side to the large advertiser side.

For SMEs, they are not that affected by this kind of budget allocation.

Typically their main way of doing promotion -- online promoting is through Baidu and it's very much performance driven (inaudible) if we can -- we can deliver the right results, they all depend on us.

For the larger advertisers, the story's a little bit different in the sense that they generally have an annual budget for advertising and then they allocate a certain portion of that budget to search or to Baidu and we (inaudible) sign three more contracts with them at the beginning of the year.

We've seen very good acceptance from the large customers, or large advertisers, but what we have heard is that many of the traditional advertisers are not increasing their overall advertising budget, but they would like to increase the percentage of their budget allocation to online platforms, especially Baidu.

Right, so I guess the question is; it's fair to say we might see some recovery or improvement overall when we have to -- second half of the year?

Our current [belief is] that it's very possible.

As you know, Q1 is seasonally slow and we find a lot of -- three more contracts with the large advertisers, they are committed to spend a lot of money -- a very healthy growth year-on-year.

So the second half should look better.

Got it, thank you very much, Robin.

Yes.

We're 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.

Yes, once again thank you for joining us today and please to 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.