百度 (BIDU) 2012 Q2 法說會逐字稿

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  • Operator

  • Hello and thank you for standing by for Baidu's second quarter 2012 earnings conference call.

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

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

  • Today's conference is being recorded.

  • If you have any objections you may disconnect 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.

  • Please go ahead.

  • Victor Tseng - IR Director

  • Hello everyone, and welcome to Baidu's second 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 Chairman and 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 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 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 obligations 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 measure.

  • 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 be available on Baidu's IR website.

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

  • Robin Li - Chairman and CEO

  • Hello everyone and thanks for joining today's call.

  • I'm pleased to report a strong set of results for the second quarter in spite of an uncertain macroeconomic environment and some tough comps with a blockbuster quarter a year ago.

  • This is a testament to our unrivalled ability to understand the needs of our customers and users and to design and execute winning programs to meet those needs.

  • One of the real highlights this quarter is our success in growing our customer base.

  • This has been an important priority for Baidu and we are making solid progress here.

  • In top tier markets we have taken a number of steps to optimize our sales process, including establishing call centers, improving our CRM systems and implementing better incentive systems for our sales staff.

  • These efforts are driving clear results.

  • We are also building strong momentum with small and medium sized enterprises in lower tier markets.

  • In the second quarter we rolled out our annual nationwide search engine marketing campaign.

  • This was by far the most ambitious annual campaign yet, with over 200 events in 190 cities around China.

  • We are also now partnering with local governments in 14 regions around China, educational programs that encourage SMEs to embrace online marketing.

  • We are now offering a number of new SME-friendly services.

  • For example, this quarter we launched a new tool that helps SMEs transform their desktop website into mobile-friendly formats.

  • This is a free, easy to use service that allows SMEs to create mobile and tablet ready website in as little as 10 minutes.

  • Already thousands of small businesses have made use of it.

  • On the large account front, the macroeconomic slowdown in China has put some pressure on our large customer spending and sentiment.

  • As a result, we have not seen any standout sectors this year that would be comparable to e-commerce in 2011.

  • Following last year's e-commerce bubble the sector is now consolidating, but we are optimistic about the future of e-commerce.

  • Due to the performance based nature of Baidu's marketing platform, large, successful e-commerce players' spending on Baidu remains very strong.

  • To counter the macro headwinds we are also proactively developing new traditional industry categories like food and beverage.

  • The traditional advertisers have large potential and have started to adopt Baidu's platform in marketing campaigns.

  • On the monetization front we made solid progress this quarter, and I am pleased to note that contextual ads performed particularly well.

  • New improvements to our contextual ad technology allow customers to target their ad towards more focused micro-markets based on user demographics and behaviors.

  • So customers now can target their particular interest groups, such as people who frequently travel overseas, or pet owners.

  • In the past quarter we also upgraded Advanced to (inaudible) Match, one of our Finnix [master] matching options.

  • This upgrade leverages our vast cache of user data to allow customers to reach broader, more targeted audience in more sophisticated ways.

  • The system is now better at integrating data such as customers' location, limitations and keywords with the user's search query and IP address.

  • Just recently we also introduced the biggest upgrade in five years to our Brand Link product.

  • Traditionally brand advertisers have used this area to display basic information like logos and links to their corporate website.

  • After this major revamp of Brand Link advertisers can turn this area into a specially customized mini-site for their brand.

  • They can embed pictures and videos, micro-blog accounts and even advanced functions like user registration areas and dynamic data.

  • For example, a company like Louis Vuitton can now use this area to display branded video ads and interactive information that searches our pages.

  • On the user front, mobile continued to grow very well and we are really charging ahead to build a truly frictionless experience for mobile users.

  • Our platform allows users to efficiently access the underlying information, content, apps and services they want through as many mobile operating environments as possible.

  • One of our most innovative new initiatives here is our powerful new voice search experience.

  • This is designed to enable smartphone users to search the web, activate apps and even get local information just by speaking into their phones.

  • The accuracy of our voice search technology is unmatched and we are already -- we've already rolled out some core functions based on it.

  • For example, if a user says, I'm at the Baidu campus, the system will instantly text them on Baidu campus and provide a map of the neighborhood.

  • If the user says, I want to call Mom, the program will instantly start the call.

  • Users can even use voice to search native apps and, of course, search the web.

  • I'm also very pleased to say that users who search the web on their mobiles, either through voice technology or through traditional way, are now being served results powered by our box computing technology.

  • We are optimizing our open data and open application platforms for the mobile platform and we can now serve up huge amounts of dynamic information and apps and other services to mobile phones.

  • Likewise, our personalized homepage is now completely iOS-friendly and has been optimized for users on the go.

  • We are working hard to make sure we provide users with the best tools for their mobile experience.

  • To that end, in Q2 we rolled out an updated edition of our mobile browser.

  • It's already been rated a top performer for speed and functionality versus competing browsers, particularly for handling HTML file based content.

  • We are confident that the Baidu browser is one of the best on the market and we continue to build important partnerships that ensure Baidu is the gateway of choice for mobile internet users just as it is for desktop users.

  • As you will have heard, users will be able to choose Baidu as the default search on Apple's iOS 6. Naturally users are increasingly relying on their smartphones to search for local information.

  • We estimate that last quarter 20% of our mobile searches from high end smartphones were related to local information which is far higher than the rate we've seen on desktops.

  • To meet our users' needs for local info we've been working hard to build out new location-based offerings centered on Baidu Maps.

  • For example, we rolled out a new GPS navigational service and we upgraded the real-time traffic function which is now much more accurate and has a more user friendly display format.

  • On the back end, we are working to build up our database of local information by partnering with more app providers and vertical sites, while also extracting local information from the web.

  • I'm confident that we have more local location based information than any other map provider in the market.

  • The Baidu Maps API is also open to other websites who have such a need, both on desktop and on mobile.

  • We are working with lots of valuable partner websites here in sectors like travel, (inaudible), real estate information and so on.

  • One reason that Baidu stands head and shoulders above every other company in the mobile space is our unparalleled cloud computing infrastructure.

  • Our personal cloud storage service, or PCS for short, which we launched last quarter is one of the pillars of this strategy.

  • Over the last few months we have been working hard to integrate it into more of our applications and services and to promote this to our users.

  • Our NetDisk service has been installed millions of times while still in beta testing.

  • Baidu users can now also leverage PCS to access, via PhotoWonder images, from anywhere and any device.

  • The ability to sync up with Baidu Album through PCS is a great selling point for PhotoWonder.

  • User numbers for the mobile app have more than doubled from nine million in Q1 to 20 million by the end of June.

  • We are working on building PCS integration into many third party developers' apps and our own products such as Baidu Music.

  • We are now partnering with more than 10,000 third party developers to integrate PCS functionality into their apps and we are working with major handset producers to offer fully integrated cloud storage to their phone users.

  • I'd also like to quickly highlight that iQiyi continues to slide and our strong support is clearly driving results.

  • As you know, online video is a very competitive space, but the high quality of iQiyi's content is a key differentiator over competitors.

  • User numbers showed encouraging growth in the quarter, with 250 million monthly unique users at the end of June.

  • The total time spent on the platform on a monthly basis is demonstrating a good growth trajectory.

  • According to both iResearch and comScore iQiyi ranks second in China in the important metrics.

  • Overall the second quarter demonstrated how our aggressive investment in deepening customer engagement is enabling us to attract more customers to Baidu and to increase more of our customers' budgets on Baidu.

  • Going forward we will maintain our focus on working closely with customers to understand their needs and leveraging our unrivalled user range to create the best possible results for them.

  • Finally, I'm excited to tell you about our seventh annual Baidu World Forum which will be held on September 3rd in Beijing.

  • This is an opportunity for Baidu to bring together some of the best in the [world] industry experts and our developer partners to share our strategic initiatives and discuss China internet trends.

  • I look forward to seeing many of you there.

  • Now let me turn the call to Jennifer.

  • Jennifer Li - CFO

  • Thank you Robin.

  • Hello everyone.

  • We were pleased to sustain our robust pace of top and bottom line growth from last quarter as we continued our aggressive investment strategy.

  • We devoted a lot of resources this quarter to strengthening our core infrastructure needs, building our customer base and investing in key areas like mobile.

  • This is a transformative time for the internet in China, and our robust investment strategy will be key to achieving long term sustainable growth and strengthening Baidu's position at the heart of China's internet ecosystem.

  • Now I'd like to go through our financial results for the quarter with you.

  • All amounts are in RMB unless otherwise noted.

  • For the second quarter total revenues were RMB5.5 billion representing a 59.8% increase year over year.

  • During the second quarter Baidu had approximately 352,000 active online marketing customers, an 18% increase from the corresponding period in 2011, and a 9.7% increase from the previous quarter.

  • Revenue per online marketing customer for the second quarter was approximately RMB15,500, a 34.8% increase from the corresponding period in 2011, and an increase of 16.5% from the previous quarter.

  • Traffic acquisition cost, as a component of cost of revenue in Q2, was RMB454 million, or 8.3% of total revenues, compared to 7.9% in the corresponding period in 2011 and 7.8% in the previous quarter.

  • The increase mainly reflects improvement in contextual ad performance.

  • The Baidu union network is important for us.

  • We have more than 600,000 union partners now, making this the largest publishing network in China.

  • We manage these relationships dynamically and will continue to drive contextual ad business growth.

  • We are benefiting from these partnerships.

  • Our union partners are benefiting too and we see tremendous room to grow this relationship further.

  • To drive incremental revenue like contextual ad business, we expect TAC as a percent of revenue, to gradually increase over the long term, as stated before.

  • Bandwidth and depreciation cost as a percent of revenue in Q2 were 4.4% and 4.6% respectively, compared to 4.3% and 4.2% in the corresponding period of 2011.

  • The increase was mainly due to an increase in network infrastructure capacity.

  • Selling, general and administrative expenses in Q2 were RMB558 million [sic see results -- RMB587.6 million], an increase of 55.6% year-on-year, primarily due to an increase in personnel and marketing related expenses.

  • For the coming quarters, as Robin has mentioned, we have a lot of exciting new products and features that we will look to invest resources, to promote.

  • R&D expenses in Q2 were RMB546 million, an increase of 82.7% over the corresponding period in 2011, primarily due to increased headcount, reflecting our continuous 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 RMB54 million in the second quarter of RMB35 million.

  • Operating profit for Q2 was RMB2.8 billion, an increase of 51.5% over Q2 2011.

  • Total headcount as of 30 June 2012 was about 17,400, roughly 900 more than the previous quarter.

  • Income tax expense was RMB235 million for the second quarter.

  • The effective tax rate for the second quarter was 7.9%, compared to 14.9% in Q2 2011.

  • As you will recall income tax for one of our subsidiaries at a non-preferential tax rate in 2011.

  • This subsidiary has obtained a high and a new technology enterprise tax license this quarter.

  • Accordingly, we reversed the provision (inaudible -- technical difficulty) in 2011.

  • Net income attributable to Baidu for Q2 was RMB2.8 billion, a 69.8% [sic see results --69.6%] increase from the corresponding period 2011.

  • Basic and diluted earnings attributable to Baidu per ADS for the second quarter of 2012 amounted to RMB7.87 and RMB7.86 respectively.

  • Net income attributable to Baidu excluding share based compensation expenses, a Non-GAAP measure for Q2 was RMB2.8 billion, a 69.3% increase year-on-year.

  • Basic and diluted earnings attributable to Baidu per ADS, excluding share based compensation expenses, both non-GAAP measures were RMB8.02 and RMB80.1 respectively.

  • As of 30 June 2012 the company had cash, cash equivalents and short-term investments of RMB18.3 billion.

  • Net operating cash flow for the second quarter of 2012 was RMB3 billion.

  • Capital expenditure this quarter was RMB722.0 million.

  • Now let me provide you with our top line guidance for the fourth quarter of 2012.

  • We currently expect total revenue for the third quarter of 2012 to be between RMB6.245 billion and RMB6.41 billion, which would present a 49.6% to 53.5% year-on-year increase.

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

  • I will now open the call to questions.

  • Operator please go ahead.

  • Operator

  • (Operator Instructions).

  • Our first question in queue comes from the line of Dick Wei calling from JP Morgan.

  • Please ask your question.

  • Dick Wei - Analyst

  • Good morning.

  • Thank you for taking my questions.

  • My first question is on mobile.

  • I wonder what is the management's view in terms of its mobile traffic additional?

  • Or is it capitalizing some of the PC traffic and in addition, maybe if management can comment on some of the monetization schedule and advertising formats, such as Click-to-Call and also how is the advertisers in general looking at mobile ROI verses PC.

  • That would be helpful?

  • Thank you.

  • Robin Li - Chairman and CEO

  • Hi Dick.

  • We believe that mobile traffic is largely incremental to desktop search traffic.

  • If you think about the search activities, the information needs for users are usually very short [lived].

  • If they have a mobile phone on hand, they will do the search -- if they don't have a mobile phone, they will have probably forgot the information needs before they reach to a desktop computer.

  • So we think the mobile traffic is largely incremental to the current desktop traffic.

  • But having said that, I would have to say that mobile internet is in its very early stage.

  • There are a lot of similarities between the mobile internet now and the desktop internet many, many years ago when we didn't have enough amount of information or applications available for users to search.

  • So we would expect the mobile traffic will have many, many years of hyper growth going forward.

  • Speaking of monetization, again, we think this is the early stage of mobile internet.

  • We are in no hurry to aggressively monetize our mobile traffic.

  • We are indeed exploring a lot of different mechanisms on the mobile advertising front, including click to call and we will report to you back when we -- when this kind of activity is more material to our marketing platform.

  • Operator

  • The next question in queue comes from the line of Jiong Shao, calling from Macquarie.

  • Please ask your question.

  • Jiong Shao - Analyst

  • Thank you very much.

  • Good morning, firstly, congrats on pretty solid results in a fairly challenging macro environment.

  • My questions is on VIE.

  • As you know, this topic has resurfaced recently.

  • I was wondering if you could provide a little bit of color on some of the VIE structures you have and some of the plans you may have going forward, to continue to strengthen your VIE structure, in terms of providing the protections or securities for the shareholders.

  • Thank you very much.

  • Jennifer Li - CFO

  • Hi Jiong.

  • The VIE structure has been around for over a decade and, as you know, most overseas listed Chinese companies operate under similar structures, to enable them to list abroad.

  • I do mainly utilize VIE structure to its license to operate in China.

  • We assure that as much of our economic value resides with the [WFOE] entity as possible.

  • We have contractual agreements set up and oversight provided to these VIE entities and all the controlling power actually resides with the WFOE and the economic interest is mostly allocated to almost all the interests of the VIE is allocated to WFOE.

  • Operating cash flows are all at the holding company level and large majority of our assets, cash position and all that are all at the holding company level.

  • So we have mechanisms and daily operations to ensure that there is minimum exposure to VIE.

  • If you read our 20-F, we provide sufficient disclosure and much coverage on the VIE and hopefully that gives you the kind of comfort.

  • We do have consistently operated with a very transparent and good corporate governance practice and we have a number of independent board members to ensure that minority investor interests are protected.

  • We ensure that the relationship we have with our holding company between the holding company and the VIE is structured in a way that safeguards the investors' interest and the long term future of the company and fundamentally we don't see there is any particular government policy change per se in the near term.

  • But this has been a structure that has been in place and is working and Baidu is doing everything to protect the shareholder interest and I hope our covenant structure, our track record, our disclosure that we have provided gives the investor the kind of comfort.

  • Operator

  • The next question comes from the line of Alex Yao, calling from Deutsche Bank.

  • Please ask your question.

  • Alex Yao - Analyst

  • Good morning everyone and congrats on a very solid quarter.

  • I have two questions.

  • Number one is, can you comment on the growth rate between the number of paid clicks verses the CPC and how would you envision the glowing mobile search will change the pattern of the two operating metrics.

  • Number two is, can you give us some comment on the revenue growth momentum between larger accounts and SME in the quarter?

  • Thank you very much.

  • Jennifer Li - CFO

  • I'll take the first and third one.

  • Alex, thank you for your question.

  • For Q2 we had a pretty solid revenue growth and as Robin highlighted in his statement, there are numerous things that we are doing to counter these macro environment headwinds.

  • Some of the things we implemented related to monetization improvements and for monetization, it delivers clicks as well as some pricing in the system.

  • For Q2 what we have experienced is both metrics, the clicks as well as ACP has helped on the revenue growth.

  • These are -- both metrics are moving in a very healthy state and there is much more work that we will continue to do to make sure that we deliver the kind of ROI to our customers.

  • At the same time, there is a healthy level of pricing in the system.

  • In terms of large and the small business growth, as we highlighted this quarter, for Q2 in particular, we have seen strong momentum on the SME side.

  • There is a lot of good work that we have put into the system, starting last year, including improving sales process, developing tools to help the customers have better experience, using our platform, all that -- you know, good things.

  • We carried out the national marketing campaign this quarter and that was bearing very good fruit.

  • So our SME business is growing robustly and I think one of the benefits we have is we have a very diversified customer base and so the whole Baidu platform is much more resilient in this environment and of course our sales force execution effort did a great contribution to the performance.

  • Large advertisers, as we were saying, for this particular quarter the sentiment -- because of the macro environment, we do feel the sentiment of consumerisms one the large customers and their spending is somewhat contained, compared to the robust star performance that we saw last year.

  • Having said that, we are doing numerous things to counter this situation.

  • We want to service our customers with more richer product offerings and services and at the same time, our new industries, new customers that we try to develop and, as Robin mentioned, some new sectors, such as food and beverage, we are seeing good progress and traction.

  • So obviously, large customers' growth this year is no comparison to last year.

  • But it still remains very solid and we're doing many things to continue to grow the sector.

  • Robin Li - Chairman and CEO

  • What's the second -- unanswered part?

  • I --

  • Jennifer Li - CFO

  • The mobile -- something had to do with mobile, Alex?

  • Alex Yao - Analyst

  • Regarding the two core operating matrix that, the paid click growth and the CPC growth, how would you envision the growing mobile search will change the growth pattern on the two metrics?

  • Is CPC going to be affected by the mobile search?

  • Robin Li - Chairman and CEO

  • Yeah, okay.

  • As you know, that the monetization capabilities for mobile is not as good as the desktop search at this time, so the CPC, understandably, is lower on the mobile platform.

  • But, like I mentioned before, we think the mobile internet is in its early stage.

  • There are just not enough amount of applications or overall data or content that's available for users to search.

  • So users are not as dependent upon search on mobile, as they do on the desktop, yet.

  • So going forward, when the users start increasingly relying on their mobile phone to get information, we think that the monetization will follow.

  • Operator

  • The next question comes from the line of Alicia Yap, coming from Barclays.

  • Please ask your question.

  • Alicia Yap - Analyst

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

  • I have some questions that is that we finally got to see the contextual ad is picking up more meaningfully in this quarter.

  • So can management share your view how China contextual ad market to grow in the next few years and what are some of the industries that are more receptive to the contextual ads currently?

  • Thank you.

  • Jennifer Li - CFO

  • Hi Alicia.

  • I think that I've mentioned this for some time now.

  • Contextual ad business is a focus for us and the team has been doing good work over the past year or if not more.

  • It started from a very small base and has been consistently taking traction and in the past I think because the base is small, you wouldn't feel -- you wouldn't see that.

  • So the TAC percent of revenue.

  • As the business is gaining momentum, the team continues to roll out improved product technology and services to our customer.

  • It is growing very nicely and we're very encouraged by the sector growth.

  • In terms of customer adoption, there is a wide range of customers that can adopt this.

  • The large customers obviously like this, because it serves their brand needs and our SMEs, small and medium size businesses, also like the contextual ads because of the improved product feature to better target and give them better ROIs.

  • So we are seeing good adoptions of our customers, both on the large customer side, as well as the SME.

  • Because this, as you just noted -- we are only starting.

  • I think there is still a lot of room for us to continue to develop the contextual business.

  • It is only really beginning and even from our end, we see much continued improvement that we can implement to improve the product and it's a virtuous circle.

  • Our product gets better.

  • The customers' acceptance is better and there is more feed, better information that is made available to us and we can continue to improve on that.

  • So I think there is a lot of room for us to continue to develop this sector of business.

  • Operator

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

  • Please ask your question.

  • Jin Yoon - Analyst

  • Hi, good morning, thank you.

  • A couple more questions regarding on the mobile.

  • I note the market share measurement on your mobile is quite different than how people measure PC markets for search.

  • If you look at a pure cost-per-click or a per revenue basis, do you know what your market share is in search?

  • Because I know right now it's being done on a bits per second, which is not exactly comparing apples to apples here.

  • Second of all, when you look at the demand environment for mobile, has -- are your customers coming to you and saying they want to just advertise just purely on mobile and looking for a different pricing structure or a different TAC structure, just with the mobile?

  • Or are we too early in the process to even think that way?

  • Thanks.

  • Robin Li - Chairman and CEO

  • The answer to your first question is we don't know.

  • We don't know the exact market share for us and for the competition.

  • It's like the desktop search 10 years ago.

  • You don't really have any reliable data, the market share distribution amount or the search players.

  • But what we know is that our mobile traffic continue to grow at very high speed, at least a triple digit growth and we believe that it's more important to look internally on this measuring the early stage of mobile internet.

  • Regardless of our relative market share we think it's more important for us to help form a user behavior that's so much dependent on search on the mobile platform.

  • If they try to do search for everything they need, then we will become a winner.

  • If they don't do that, even if we have 90% of the market share, that doesn't mean much to us.

  • On the mobile advertising front, I mentioned before that there are not enough content and apps yet on the mobile platform that can make the user so dependent on (inaudible) yet.

  • That also includes the advertisers' mobile friendly websites too.

  • If they don't have a mobile friendly website or content or apps, the ROI for them on the mobile platform will not be as good.

  • In the different type of customers require or expect a different kind of performance on the mobile platform.

  • In most case they need to do their work to make their sites more mobile friendly and get a better sense of how they measure the performance.

  • On our side, there are a lot of things we can do and we are also trying very hard to help our customers to establish this kind of mobile friendly environment so that they can advertise on the mobile more.

  • So, it's really the early stage and people not talking a lot of different things and we're just trying to a form an environment that's mobile friendly.

  • Then the performance should be okay.

  • Operator

  • The next question comes from the line of Yu Jin calling from CICC.

  • Please ask your question.

  • Yu Jin - Analyst

  • Yeah.

  • Good morning, Robin and Jennifer and Victor.

  • Thank you for taking my questions.

  • So I have (inaudible) questions for management.

  • The question is about mobile internet too.

  • What are management feeling about internet users -- how they use mobile internet?

  • So far, so according to the third party use survey, mobile users spend 80% of time on applications and only 20% of time is spent on browser-based services.

  • So, will that change and [if that change] -- so (inaudible) what kind of driver (inaudible) it will drive users to spending more time on browsers so to up demand and (inaudible)?

  • Secondly, it's about mobile search.

  • The (inaudible) says that most of the time when people do search, they're announcing that I will search about, but mobile search, besides the (inaudible), it appears that most users also they will heighten (inaudible) some applications integrating the web location (inaudible) Baidu services.

  • That looks like (inaudible) search queries.

  • So, my question is -- it's how do management view (inaudible) to attract?

  • Why are people using mobile (inaudible), second how people use mobile search?

  • Highly appreciated if management can also share some of the Company's strategies to cope with the potential changes.

  • So, I will stop you there.

  • Robin Li - Chairman and CEO

  • Regarding to your first question, at this time users spend a lot of time on applications and probably less time on browser.

  • Again, I think that's due to the early stage nature of mobile internet.

  • That's also like in the early stage of desktop internet.

  • There are only a few of the websites that the users frequently go, but as the internet became larger and larger more content and websites became more diversified and users spend a lot of time on the (inaudible).

  • I think that will be true for mobile internet too.

  • Over time when there are more mobile friendly data or content available, users will become more -- will spend on the browser or even the applications.

  • To me, there's no fundamental difference between an application and browse-based content.

  • We are actually seeing much trends that more and more services become web-based apps.

  • The backhand is the [space actually] and the content on the cloud side.

  • Even for all kinds of native applications, I think we can come up with better ways for users to search for apps.

  • Right now, the mainstream model for apps is App Store.

  • We are not really friendly or fair to those less used apps and therefore not good for this default system.

  • We are developing all kinds of technologies that allow our users to find information or apps or services from one search box.

  • So, whatever they're looking for, either the content behind the browser or applications will be able to find that for our users.

  • By doing that, our users will spend more time with us or be more dependent on the gateway we build.

  • On your second question, I think mobile search will be different from desktop in the sense that we have more information about the user, about the location and a lot of contextual information that's available.

  • So, not only can we build a better query-based or box-based search experience for our users, we can do more in the sense that in a lot of cases before the user even types in a query, we already know what the user wants and we can deliver that too them.

  • If you remember last year when we rolled out the new personalized homepage, that was the main drive behind it.

  • So, for the mobile it's the same thing.

  • In a lot of cases, we know what the user wants even before he or she types in a query.

  • Again, we are developing all kinds of technology to make that experience better and better for our users.

  • Operator

  • (Operator instructions).

  • We'll now move to the next question from the line of Catherine Leung calling from Goldman Sachs.

  • Please ask your question.

  • Catherine Leung - Analyst

  • Hi, I was wondering whether we should interpret the deceleration in the average revenue per customer growth on a year-on-year basis as reflecting more of the large customers spending less or more of the SMEs just naturally lowering the average band.

  • Thank you.

  • Jennifer Li - CFO

  • Catherine, I think our pool continues to grow at a healthy rate.

  • This year, in particular, the SME has been a very strong driver in terms of revenue growth.

  • That is different in 2011.

  • So, it is true that when it comes to SMEs doing promotional work with us, their ad budget is no comparison to the large advertisers.

  • So you can't say -- none of these advertisers are spending less.

  • They're all increasing their spending.

  • It's just that the SMEs are doing more of the work compared to the large customers, if we use 2011 as the base.

  • So both are growing, but SME is the main driver and SME has the smaller budget.

  • Operator

  • The next question comes from the line of Ravi Sarathy calling from Citi Investment.

  • Please ask your question.

  • Ravi Sarathy - Analyst

  • Congratulations on a solid quarter in a tough environment and thank you for taking my call -- my question.

  • Another question on mobile, if I may.

  • I recall in the last quarter you mentioned that mobile as a share of total search queries was about a fifth, I was wondering if you had an update on that figure or some color around that.

  • You also mentioned that you were pre-installed on 80% of branded Android handsets.

  • I was wondering again if you had an update on that as of the end of Q2.

  • The final question related to those was that the amount of the revenues that pay away to the hardware ecosystem for that pre-install, I was wondering if you could give any color as to what that might number might be.

  • Is it 20% or 25% of mobile search revenues and how you account for it?

  • Is that in tracked acquisition costs or do you state revenues net of that number?

  • Thank you very much.

  • Robin Li - Chairman and CEO

  • I'll answer the first two and Jennifer will answer the third TAC question.

  • For the mobile search percentage, as I mentioned before, mobile search traffic continued to grow at sky-rocket rates, so as a percentage of the total search traffic mobile continued to increase, but we are not going to disclose this number quarter-by-quarter.

  • The overall trend does not change.

  • If there is a change, we will of course let you know.

  • On the pre-installation of our search app or search box, we think we have signed up all the major selling brands on the market in China to pre-install our search services as well as some other applications we have developed.

  • Jennifer Li - CFO

  • In terms of revenue share, it is the arrangements with these players is a revenue sharing arrangement.

  • So, if we generate mobile revenue, we will share a little bit of that with our partners.

  • For each partner, the contractual arrangements can be somewhat different.

  • I won't get into the details but the nature of the work is we do advertising work.

  • We will record the total revenue and we will treat the sharing part as TAC.

  • Operator

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

  • Please ask your question.

  • Eddie Leung - Analyst

  • Hi, good morning, guys.

  • Thank you for taking my questions.

  • Just quickly on two things.

  • Is there any operating matrix you can share with us about the popularity of Baidu Map?

  • Then, I would also like to get any guidance for the tax rate for the full year given the lower tax rate in the same quarter.

  • Thank you.

  • Robin Li - Chairman and CEO

  • About Baidu Map, we have a dominant market share on the desktop and we continue to enhance in the future.

  • We think that LBS will become a very important part of the mobile internet life, so we have been aggressively pushing the Baidu Map service on the mobile.

  • We have seen a tremendous amount of growth on the mobile platform.

  • Going forward, we will try to integrate more services to the Baidu Map service, so it will really become an LBS service instead of just a map service.

  • There are a lot of things to be done on that front.

  • Jennifer Li - CFO

  • And Eddie, on your tax question, yes, basically, what happened in tax was we were accruing at a higher base last year, so if we were using the favorable tax rate, last year's income would be higher.

  • This Q2, just for a conservative principle, once we get the license, we'll (inaudible) the tax benefit and there is kind of a catch-up of last year's higher accrual and we reversed that this quarter.

  • The overall tax rate for the year, I have provided a guidance earlier in the year.

  • In the whole year, we're looking at close to mid-teens.

  • That's the tax rate that we expect.

  • Operator

  • The next question comes from the line of Ming Zhao calling from 86Research.

  • Please ask your question.

  • Ming Zhao - Analyst

  • (inaudible -- technical difficulty) investment.

  • So, last year you acquired the Qunar.

  • This year, we heard market speculation that you're going to buy UCWEB.

  • So my question is how likely that is and any thoughts on (inaudible)?

  • Jennifer, if you could provide the full year CapEx, that would be great.

  • Thank you.

  • Robin Li - Chairman and CEO

  • Well, Ming, we don't comment on this kind of rumors, so I'll just let Jennifer answer the second part of your question.

  • Jennifer Li - CFO

  • Hi, Ming.

  • For CapEx, I also provided a guidance earlier part in the year.

  • We -- this is a year of investment for us.

  • We're focused on investing in infrastructure as well as office space to host more and more of the talents, particularly R&D.

  • We do expect the 2012 CapEx to step up and if you refer to the 2009, 2010, 2011 change in terms of the year-on-year that is the trajectory or the trend that you should be expecting for 2012.

  • Operator

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

  • Please ask your question.

  • Cynthia Meng - Analyst

  • Thank you, management, for taking the time.

  • I have one question.

  • The 2Q '12 had a very good control of margins -- a very good control in costs and GP margin was up.

  • OP margin was also up 4 percentage points sequentially.

  • This is mainly due to lower bandwidth and server costs.

  • Also S&M expenses as a percent of sales was also lower.

  • Are these sustainable going into the second half and is there clearer visibility to the second half economy compared to the first half?

  • Any signs of picking up from your observation in the business?

  • Thank you.

  • Jennifer Li - CFO

  • Hi, Cynthia.

  • As you noted, I think we continued to deliver very strong and healthy margins.

  • Sequentially, for seasonality reasons, Q2 is typically higher in terms of OPs margin compared to Q1, so I think the way to look at our margins if you're doing comparison is to look at the year-over-year trend.

  • In terms of year-over-year trend, I think that was very managed -- that bit fared out very well as well.

  • Last year, we had extraordinary performance in terms of margins.

  • We benefited from the extraordinary growth in the e-commerce sector, the good buying sector -- all the good things like that -- and that helped on the margins.

  • We have made it clear that we are in a very robust investment cycle and particularly in this time -- the transformative time of the internet space in China -- it's very important for us to make strategic investment for the long-term sustainability of this business and we will do so in a very disciplined approach.

  • So, as we continue to carry our business, we see much opportunities to continue to drive revenue growth.

  • At the same time, important initiatives like mobile and cloud are very important areas for us to invest.

  • We invest of the search business the revenue and the cash flow that we generate in this future business is very important for us.

  • So, we have been doing this over the past some time and will continue to do so.

  • The landscape continues to evolve.

  • The market opportunity is tremendous.

  • We want to make sure that we carry out our duties throughout this time and maximize our opportunities for the future.

  • In terms of second half business outlook, I think we provide quarterly guidance and the Q3 guidance is a very solid guidance.

  • I think everybody is aware the macro environment is challenging, however, I think because of the beautiful search product, the performance-based nature of our service and our execution capability, we want to make sure regardless of the macro environment, we're charging ahead to deliver a solid result.

  • Operator

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

  • Please ask your question.

  • Richard Ji - Analyst

  • Thanks for taking my call.

  • Robin and Jennifer, can you comment on your top paid listing categories and in which areas have you been seeing stress and which areas we have seen some slowdown?

  • Thank you.

  • Jennifer Li - CFO

  • The typical top five sectors that we report, this time, is very consistent.

  • In the top five sectors we have medical healthcare, education, machinery equipment, travel and franchising.

  • Of the top sectors, we see very strong growth continuously.

  • If we were -- if we have to make comparisons the B2B sector, such as machinery, is weaker than the B2C sectors like the others.

  • Operator

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

  • Please ask your question.

  • Andy Yeung - Analyst

  • Hi, good morning.

  • Thank you for taking my question.

  • Obviously you have worked hard to develop new applications like mobile browser and mobile LBS applications for your customers.

  • At the same time, you also have made some strategic investments in Qiyi and Qunar before.

  • So from a philosophical standpoint, how do you decide when to buy a product or services and when do you decide to do it in-house?

  • Robin Li - Chairman and CEO

  • Okay.

  • We don't try to differentiate this based on what kind of these things to buy and what kind of things to build.

  • In most cases, I would say that I prefer buy to build because that will save us time and give us competitive advantages.

  • It's just in a lot of cases, there are just not good enough applications or services or products for us to buy, so we have to build.

  • For the two investments you mentioned, Qunar and Qiyi, they fall into the category of vertical.

  • So, in the previous calls, we mentioned this so-called landing page strategy.

  • So when people do search Baidu, they will probably land on another site.

  • If that site belongs to a important vertical and we believe we can come out with the equally good or even better quality of content or service, we will consider owning that either by acquisition or building (inaudible -- technical difficulty) ourselves.

  • Operator

  • The next question comes from the line of Elinor Leung calling from the CLSA.

  • Please ask your question.

  • Elinor Leung - Analyst

  • Hi, morning.

  • Thanks for the call.

  • My question is related to e-commerce search.

  • Last time you mentioned that you wanted to develop more vertical search engine capability and in terms of e-commerce search can you tell us regarding the progress?

  • It seems that the e-Tao has made a big improvement on their search engine.

  • What about Baidu?

  • Would that be a major competition against Baidu?

  • Also, if Baidu has any plans to go back to the e-commerce market, would this also affect your LBS strategy -- how you're going to work closer with [the merchants] in order to develop your LBS services?

  • Thank you.

  • Robin Li - Chairman and CEO

  • Yeah, we think we have very good e-commerce search capabilities.

  • That is demonstrated by the loyal customers or advertisers from the commerce category.

  • They all spend a lot of money to advertise on Baidu and they just cannot buy enough amount of inventory from us.

  • We continue to try to enhance the user experience for e-commerce related queries.

  • We have a mechanism called open data platform -- an open application form.

  • Related parties with data can submit their data to our platform and we can show that to our users when necessary.

  • Having said that, I think there are a few -- a lot of room of improvement for the commerce related search.

  • We have devoted resources -- engineering resources to improve that experience.

  • We do not necessarily need a separate product for e-commerce search.

  • We still believe that users can find the necessary information from one search box.

  • LBS -- it's a potentially huge sector.

  • There are lots of things we can do and like I mentioned our product and strategy is centered on Baidu Map.

  • We are actually adding a lot of information -- merchant information, shopping information, travel information, all kinds of information -- on this platform and we believe it will become more useful to the user and deliver better value to merchants going forward.

  • Operator

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

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

  • Robin Li - Chairman and CEO

  • Well, once again, thanks for joining the call.

  • Please do not hesitate to get in touch with us if you have any further questions.

  • We look forward to speaking again soon.

  • Operator

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

  • This concludes the presentation.

  • You may now disconnect.

  • Good day.