百度 (BIDU) 2014 Q3 法說會逐字稿

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  • Operator

  • Hello, and thank you for standing by for Baidu's third quarter 2014 earnings conference call.

  • (Operator Instructions).

  • Today's conference is being recorded.

  • If you have any objections, you may disconnect at any time.

  • I would now like to turn the meeting over to your host for today's conference, Sharon Ng, Baidu's Director of Investor Relations.

  • Thank you.

  • Please go ahead.

  • Sharon Ng - IR Director

  • Hello, everyone and welcome to Baidu's third quarter 2014 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 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 risks and uncertainties that may cause actual results to differ materially from our current expectations.

  • Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC, including our Annual Report on Form 20-F.

  • Baidu does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

  • Our earnings press release and this call include discussions of certain unaudited, non-GAAP financial measures.

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

  • As a reminder, this conference is being recorded.

  • In addition, a 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.

  • Robin Li - Chairman and CEO

  • Hello, everyone.

  • We delivered strong results this quarter, with topline continuing to be robust, driven by our core search service.

  • Mobile contributed 36% of our total revenues for the quarter.

  • Our traffic continued to grow healthily, driven largely by mobile and this quarter, mobile traffic surpassed PC traffic.

  • Please note that prior to this quarter, iPad traffic and revenue were classified as part of PC.

  • As iPads have grown to be a more meaningful portion of our traffic, from this quarter onward, we will classify all tablets as part of mobile, to reflect tablets' mobile characteristics.

  • If we had classified all tablets as mobile in the second quarter, our mobile revenue would have been 33%.

  • Excluding iPad revenue in the second quarter, our mobile revenue was 30%.

  • Baidu continues to enjoy clear dominance, and upward growth momentum in the key mobile gateways of search, map and app distribution.

  • And more than ever before, Baidu is pulling together the strength of these gateway products and the breadth of our portfolio, to offer to users the best way to connect with the information and services they seek.

  • Mobile enables us to play a broader role in a larger addressable market.

  • O2O is perhaps the most exciting of the many new opportunities that China's mobile Internet revolution has opened up.

  • We can help bridge online and offline and with Baidu's solid mobile foundation, we can extend our value proposition to our users and customers, in ways we were not able to before.

  • For users, we can help them connect to services, effectively enabling users to make all decisions online, up until the point of offline consumption: whether enjoying a meal, getting a haircut or seeing a local attraction, to give but a few examples.

  • For customers, we have the potential to show true conversion from online to offline, as well.

  • With PC, we were limited to generating leads, but with mobile we can participate not only in leads generation, but also fulfillment in a closed loop transaction.

  • Baidu can help our customers -- large, medium and the smaller local merchants alike, bring users through the door.

  • We can help fill empty seats.

  • We can really match the service with the need.

  • And we know what users need because the majority of Chinese Internet users tell us every day what they're looking for.

  • We've designed our products to deliver an end-to-end experience, from query, to payment, to service fulfillment.

  • At Baidu World, on September 3rd, we rolled out a new initiative, called Baidu Connect.

  • Baidu Connect builds upon Light Apps and is a powerful tool for merchants that can bring in a large scale of leads, from search and maps, built with functionality that enables high conversion and offers merchants a powerful CRM system.

  • We provide easy to set up templates, tailored to specific industries.

  • The Baidu Connect account helps merchants reach new customers and maintain engagement with existing ones.

  • Baidu Connect enables both pull through search -- as a general search or adding the @ symbol before the real name of a service, and landing directly on the Baidu Connect page -- and push as well through the "Discover" button in Mobile Baidu or the "Nearby" button in Baidu Maps.

  • Once a user has decided to follow a business or made a purchase, the merchant can reach out to the user individually or in groups.

  • With the industry-tailored, user-friendly, click-to-action interface, we think the Baidu Connect account is how merchants will want to be represented on mobile, with the @ sign as a domain name like service for the mobile Internet.

  • While Baidu Connect is still in early phases of rollout, merchants have expressed great enthusiasm and the early traction is particularly encouraging.

  • Over the past few months, we have worked with over 40 value-added service providers and have accumulated over 400,000 customer accounts, spanning verticals from hospitality to professional services, comprising existing and new customers, to Baidu platform.

  • For example, Cloud Home Services, an online platform that connects users with housekeeping and domestic service providers launch their Baidu Connect account at the beginning of October and saw their new mobile orders grow by 20% month-on-month, 4 times higher than the 5% month-on-month growth rate prior to launching their Baidu Connect account.

  • The portion of Cloud Home Services' repeat customers also increased from 30% to 40% of their customer base after launching of their Baidu Connect account.

  • We are excited to broaden Baidu Connect's rollout to create tangible, positive value for an even larger set of merchants.

  • Our experience is that in China, brick -- and -- mortar businesses embrace and are eager to work with Internet companies, possibly even more so than their counterparts in more developed countries, with entrenched industries and players.

  • Already, over 450,000 local merchants, with nearly 2m storefronts across more than 300 cities have worked with Nuomi to attract new consumers.

  • With the new opportunities mobile presents, we can now connect, not only with the roughly half million large customers and SMEs that we service today through search, but also the tens of millions of local service-focused businesses who have begun to embrace the Internet.

  • We are hard at work, building out our O2O offering and are enthusiastic about the immense market opportunity.

  • On the search front, in Q3, we launched instant search on PC, a feature that has resulted in a better user experience and marked improvement in clicked page views.

  • An instantaneous predictive feature like this is particularly challenging for Chinese search, with one of the reasons being diverse text input methods through Pinyin, five stroke input method, and English.

  • Our success with it owes to our longstanding leadership in natural language processing, machine learning and large-scale network infrastructure.

  • We continue to be the clear dominant leader in mobile search, and as mentioned at the beginning of the call, mobile traffic comprised over half of search traffic this quarter.

  • We continued to build the organic portion of our mobile search traffic, which comprises over half of our mobile search traffic, driven by user adoption of our Mobile Baidu and Baidu Mobile Browser apps.

  • Aside from channel distribution, search is ultimately driven by technology and big data.

  • Mobile search technology is an order of magnitude more difficult than PC based search, requiring more diverse intuitive interfaces -- such as voice search and visual search, and more relevant, targeted results.

  • Voice search queries already make up around 10% of mobile search queries on Baidu today, and we believe that in the next five years, over 50% of searches will be speech or image driven.

  • Baidu has invested heavily in these cutting-edge technologies, and we are far ahead of the competition.

  • Our global lead is especially clear in visual recognition technology.

  • Baidu's visual search is of the most sophisticated in the world, and has the broadest functionality.

  • In the updated 6.0 version of our flagship Mobile Baidu app, the old visual search function, which required the user to select an image category, such as facial recognition or OCR translation has been replaced with a smart visual search function.

  • We now intuit intent by the object framed in the image and return the right result.

  • For example, a visual search for a shirt, a blouse, a handbag or other categories of items will return mobile commerce results for matching items.

  • Aim the camera at a QR code, and it will resolve to the corresponding link.

  • Snap a selfie and it will show you which celebrity you most resemble.

  • This is all possible because of our commitment to Deep Learning, which has already revolutionized computer vision.

  • Baidu is a pioneer in making this breakthrough technology available to the mainstream user and in applying deep learning to visual search.

  • Mobile Baidu 6.0 also launched a breakthrough feature in the "Discover" button.

  • Both the Mobile Baidu "Discover" function and our "Nearby" feature on Baidu Mobile Map, help push to users personalized recommendations and promotional offers, based on the user's interests, time of the day, and location.

  • Version 6.0 is also optimized for Baidu Connect.

  • Baidu Mobile Map is the clear dominant player in the market, with over 240m monthly active users, up from over 200m in Q2 and growing nearly 70%, year on year.

  • We've added great new features in our monthly map app updates, including better navigation and rich real-time public transit information.

  • We've also added new local O2O services, such as food delivery and private car hiring, which complements the existing taxi hailing functionality.

  • Hotel bookings through Baidu Map have shown explosive growth, nearly tripling year on year.

  • Closed loop hotel booking has been available through Baidu Map and Mobile Baidu since September, with over half of hotel bookings on Mobile Map completed in a closed-loop session.

  • In Q3, we ran a hugely successful promotional campaign, with McDonald's China that tapped a number of our mobile products and highlighted the breadth of our product portfolio.

  • McDonald's China worked closely with Map and Nuomi, and leveraged Baidu products, such as Mobile Baidu, Hao123, 91 Wireless among others.

  • The soft-serve ice cream cone product promotion through Baidu Map brought over 20m visits to the promotion's homepage, and 70m views in social media, driving user awareness, not only to McDonald's China products, but also to Baidu Connect, which users accessed both by jumping directly to the promotion page from the product icon on Maps, and through the personalized "push" offering on the "Nearby" function.

  • Also, for the first time, McDonald's China ran a nationwide offer with a group-buying platform and worked with Nuomi as their exclusive partner.

  • In app distribution, we continue to solidify our leading position.

  • During the third quarter, we distributed an average of 160m apps on a daily basis, up from 130m apps the quarter prior and more than doubling, since we combined Baidu and 91 Wireless app distribution platforms about a year ago

  • Over 1m individual developers work with Baidu, to help them to get their apps discovered and monetized.

  • Key monetization metrics -- paid clicks, click-through ratesand CPM -- continued to grow nicely.

  • We upgraded our bidding system and introduced more ad formats, like dynamic ads and richer ads extension to provide customers with more choices and greater ability to tailor their campaigns to their specific needs.

  • We continue to see more traction with city-level bidding, which enables customers to refine their bid for over 360 cities.

  • We have continued to push quality standards higher for mobile landing pages and have provided numerous free tools to our customers, to continue to aid their mobile transition.

  • Baidu's extensive salesforce remains one of our key competitive advantages, and gives us the breadth and depth to reach new and existing customers and swiftly execute on key initiatives.

  • Our nearly 20,000 person strong direct salesforce and broad reseller network cover well over 300 cities in China.

  • Turning now to iQiyi -- iQiyi continued to show great traction in Q3 and continues to lead in key metrics.

  • We believe the long-term prospects for online video and iQiyi are very attractiveand we remain supportive of the platform.

  • Before I hand over to Jennifer, I want to add that we are delighted to have Ya-Qin Zhang on board.

  • A long-time veteran of Microsoft, both in China and in the US, Ya-Qin joined us in September as President in charge of new businesses at Baidu.

  • He has hit the ground running and we know that we will be doing great things together.

  • Technology is changing the Internet, creating tremendous new opportunities, for those with bold vision and driving changes that will meaningfully improve people's lives.

  • Our dominance in critical gateways, along with our infrastructure, our Big Data capabilities, our group buying resources, and our extensive salesforce give Baidu unrivaled strength across the mobile Internet ecosystem, and the combination of these unique assets places us in a powerful position to capture the vast mobile opportunity in China.

  • With that, I will now hand over to Jennifer, who can update you on financials.

  • Jennifer Li - CFO

  • Thank you, Robin.

  • Hello, everyone.

  • We delivered a solid quarter with strong results, with mobile continuing to perform well.

  • We continue to invest aggressively in talent, technology, and sales and marketing, to further build out our mobile platform and ecosystem, to capture the vast market opportunities.

  • Our focus remains on solidifying our leadership positions in key gateways, such as search, maps, and app distribution, and driving adoptions of our newer initiatives, such as mobile and cloud and LBS, which Baidu Connect is a key part of.

  • We are committed to fulfilling our vision and are confident about our ability to execute, leveraging upon our competitive strengths.

  • We are very excited about the opportunity and this will be an ongoing effort.

  • Now moving to the financials.

  • All monetary amounts are in RMB, unless otherwise noted.

  • For the third quarter, total revenues were RMB13.5b, representing a 52% increase year-over-year.

  • During the third quarter, Baidu had approximately 516,000 active online marketing customers, an 11% increase from the corresponding period in 2013, and a 6% increase from the previous quarter.

  • Revenue per online marketing customer, for the third quarter was RMB25,900, a 36% increase from the corresponding period in 2013 and an increase of 7% from the previous quarter.

  • Traffic acquisition cost, as a component of cost of revenue in Q3 was RMB1.7b, or 12.9% of total revenues, compared to 11.7% in the corresponding period in 2013, and 12.7% in the second quarter of 2014.

  • The increase reflects increased contribution of contextual ads, mobile, and promotion of Hao123.

  • Bandwidth and depreciation costs as a percentage of revenues in Q3 were 5.6% and 3.8% respectively, compared to 5.8% and 4.2% in the corresponding period in 2013.

  • Content costs, as a component of cost of revenues were RMB498m, representing 3.7% of total revenues, compared to 2.5% in the corresponding period, in 2013.

  • Content costs are mainly related to iQiyi.

  • Selling, general and administrative expenses in Q3 were RMB2.7b, an increase of 95% year-on-year.

  • The increase was mainly due to an increase in promotional spending for mobile products.

  • R&D expenses in Q3 were RMB1.8b, an increase of 68% over the corresponding period in 2013.

  • The increase was primarily due to an increase in the number of R&D personnel.

  • Share-based compensation expenses, which were allocated to related operating costs and expense-line items, increased in aggregate, to RMB234m in the third quarter, from RMB143m in Q3 2013.

  • SBC increase due to more shares being granted to Baidu employees.

  • Operating profit for Q3 was RMB3.9b, an increase of 17% over Q3 2013.

  • Total headcount, on a consolidated basis, including invested entities, was about 43,500 at the end of Q3.

  • This represents an increase of 7%, as compared to the end of last quarter.

  • The headcount increase was largely due to increase in R&D headcount.

  • Income tax expense was RMB657m for the third quarter.

  • The effective tax rate for the third quarter was 15.5%, compared to 16.3% in Q3 2013.

  • Net income attributable to Baidu for Q3 was RMB3.9b, a 27% increase from the corresponding period in 2013.

  • Basic and diluted earnings attributable to Baidu per ADS for the third quarter, amounted to RMB11.05 and RMB11.00, respectively.

  • Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure, for Q3 was RMB4.1b, a 29% increase year-on-year.

  • Basic and diluted earnings attributable to Baidu per ADS excluding share-based compensation expenses, both non-GAAP measures, were RMB11.72 and RMB11.67, respectively.

  • As of Q3 2014 the Company had cash, cash equivalents, and short-term investments of RMB51.3b.

  • Net operating cash inflow and capital expenditures for the third quarter were RMB4.9b and RMB1.4b, respectively.

  • Now let me provide you with our top-line guidance for the fourth quarter of 2014.

  • We currently expect total revenues for the fourth quarter to be between RMB13.850b and RMB14.250b, representing a 45.5% to 49.6% year-over-year increase.

  • Please note, this forecast reflects Baidu's current and preliminary view, and is subject to change.

  • I will now open the call to questions.

  • Operator, please go ahead.

  • Operator

  • (Operator Instructions).

  • Alan Hellawell, Deutsche Bank.

  • Alan Hellawell - Analyst

  • Thank you very much.

  • A big picture question.

  • The Company has shown itself willing to invest heavily to win certain strategic markets.

  • This year we can argue that margins have declined to support your success in mobile.

  • As we look into 2015, is there an emerging opportunity for margins to recover?

  • Or would, for instance, the centrality of succeeding in O2O that Robin was reflecting on lead to another year of investment?

  • Or for that matter, are there any other initiatives that would create another year of investment in 2015?

  • Thank you.

  • Jennifer Li - CFO

  • Hi, Alan.

  • I can understand the question.

  • I think we have outlined to everybody our strategic important areas.

  • And these areas are at the early stage of their investments.

  • We have established our vision, to really connect people with services and we are just at the very critical time to execute on that.

  • As we have communicated consistently, we are very optimistic about our future.

  • And we're very optimistic about the opportunities in front of us.

  • We're right in the middle of the execution and it's really not a quarter's question or a near like 2015's question.

  • It's really the tremendous opportunities in front of us and what really calls for resources, as well as commitment to execute on that plan and really win for the future.

  • So I have to say for 2015, it's a little bit early to comment on that.

  • But I think in my prepared remarks, what I wanted to really emphasize is we are excited about the opportunity.

  • And the investment efforts are an ongoing effort as we go forward.

  • So really not getting into the specifics of margin questions, you are already seeing that the investments we made on the mobile front are starting to paying off, and there are new initiatives that we have identified and are working on.

  • And you are very aware of these focal strategic focus areas that we have communicated.

  • Operator

  • Dick Wei, Credit Suisse.

  • Dick Wei - Analyst

  • Hi.

  • Good morning.

  • Thank you for taking my questions.

  • I have a question on the mobile search front.

  • Number one is that it looks like we have a pretty good increase in mobile search traffic during the quarter.

  • Maybe the monetization rate seems to be growing a little bit slower, compared to the mobile traffic.

  • I just wonder what are the dynamics of that change?

  • And related to that, how is the mobile search traffic growth coming along?

  • Have you seen some deceleration of growth already?

  • Are we still seeing like triple-digit growth now?

  • Just maybe some sense of the overall mobile traffic growth picture will be helpful.

  • Thank you.

  • Robin Li - Chairman and CEO

  • Yes, Dick, I think you are right.

  • The traffic growth for mobile outpaced monetization capability growth in the past quarter, which I think is kind of expected.

  • We don't want to over-monetize the mobile traffic at this time because we think it's still early.

  • We still see a lot of growth opportunity in terms of stickiness for mobile search.

  • We are not going to publicize the growth rate, exact growth rate for our search traffic.

  • But I can say that we still expect mobile search traffic to continue to grow at a very fast rate.

  • And like I mentioned before, monetization will continue to grow.

  • And we will decide how aggressive we become on the monetization front on mobile.

  • Operator

  • Alicia Yap, Barclays.

  • Alicia Yap - Analyst

  • Hi.

  • Good morning and good evening, Robin, Jennifer and Sharon.

  • Thank you for taking my questions.

  • My question is related to the Baidu Connect and the O2O initiative.

  • I think you highlighted that it has pretty good initial tractions and also from the customer account sign-ups.

  • So just wonder if you could share with us, is there any difficulty or hurdle that the team or the sales team might have faced during the initial process of signing up customers or educate them.

  • And what is currently our expectations, in terms of this Baidu Connect, to start to potentially maybe gaining some good real momentum into the next year, maybe potentially some revenue contribution?

  • Thank you.

  • Robin Li - Chairman and CEO

  • Yes, Baidu Connect is new.

  • Like I mentioned, there are more than 400,000 accounts or customers already joined this new initiative.

  • But they represent a wide variety of industries.

  • Every industry has their own unique requirements or unique needs.

  • And we sometimes need to tailor build things for each industry.

  • And we work with many of the value-added service providers, who help us on that.

  • But this will take some time.

  • It also will take us some time to understand different industry specific requirements in order to serve those Baidu Connect merchants better.

  • But overall we are very encouraged that this is the right direction.

  • It really takes advantage of the nature of mobile and the nature of search and map products we have a strong hold of.

  • Mobile people tend to communicate more and they can get instant feedback.

  • It's sensitive to the location, to time of the day and it's easier to manage the customer relationship.

  • So we are building all kinds of features and fine-tuning these kind of features for the merchants, and we hope over time the customer experience will become better and better.

  • But for those early adopters, they've already seen the results.

  • They are already benefiting from this new infrastructure we've set up.

  • Operator

  • Jiong Shao, Macquarie.

  • Jiong Shao - Analyst

  • Thank you for taking my question.

  • Just following up on Baidu Connect, I was wondering, what are some of the initiatives you have in your plan to roll out to educate the consumers that their Baidu Connect accounts actually exist.

  • Through your 400,000 accounts, many consumers may not know there's a Baidu Connect account existing in the Baidu ecosystem.

  • Particularly I think if I search certain restaurants in Baidu itself without the app, I think the Baidu Connect account is not popping up yet, at least the ones I tried.

  • Thank you.

  • Robin Li - Chairman and CEO

  • Yes, Jiong, you're very right that we will need to step up the consumer education process, like when you are typing certain name of the merchant, for example a restaurant name.

  • We will in the future have suggestions of those Baidu Connect names, which means a name starts with an @ sign in the search box, so we will give consumer suggestions on those search queries when people type in names of those merchants.

  • That's just one way.

  • There are many other ways.

  • For example, the "Discover" button of the Mobile Baidu app.

  • If a merchant has a Baidu Connect account, we will label that in those recommended merchant list.

  • And similarly, on Baidu Map, we will also have a "Nearby" function and merchants listed there will have an opportunity to be marked as a Baidu Connect merchant.

  • So we have lots of apps that's very sticky very high-frequency with a very high number of daily active users.

  • And we will use those apps to remind and to educate consumers to start to use Baidu Connect.

  • Operator

  • Eddie Leung, Merrill Lynch.

  • Eddie Leung - Analyst

  • Hi, good morning.

  • Thank you for taking my questions.

  • Just a question about mobile search marketing.

  • I think a couple of your competitors recently talked about they're getting more aggressive in mobile search expertise into into next year.

  • Especially I think they are deepening their relationships with handset manufacturers.

  • Some of them talking about having more efforts in mobile OS; some of them are even thinking about strategic investment.

  • So, just wondering how you think about the competitive landscape in mobile search heading into next year, especially whether you would change your pre-installation strategy in next year.

  • Thanks.

  • Robin Li - Chairman and CEO

  • I think for the mobile search, there are two very important fronts that we need to compete.

  • One is channel distribution, the other is the search quality.

  • I think search quality is a longer-term sustainable thing and by far we have a clear lead on this.

  • And in the long run, I think mobile users will actively choose to download the Baidu apps instead of the competitions' apps.

  • So most of our investment in the future will be in the search quality front and we think consumers will be able to tell, they are already able to tell the difference, but it's going to be easier for mobile users to tell the difference of Baidu search and other searches.

  • Having said that, we will continue to invest in channel in the pre-installation on handsets and other channels that can bring search traffic to us.

  • This front is quite competitive.

  • There are always companies who think they have a chance in mobile search, so we will continue to invest.

  • But going forward, hopefully, we will see more organic traffic, we'll see more downloads from users who do not rely on or are dependent on those pre-installation.

  • Operator

  • Philip Wan, Morgan Stanley.

  • Philip Wan - Analyst

  • Hi.

  • Good morning, Robin, Jennifer and Sharon.

  • Thanks for taking my question.

  • My question is about mobile search.

  • Could you share with us the top trending categories on mobile search?

  • And among these categories, how does click-through rate or CPC compare to the respective ones on PC?

  • Lastly, based on the current run rate, when would you expect on average the mobile CPC or click-through to reach or exceed the PC level?

  • Thank you.

  • Jennifer Li - CFO

  • To a large extent, our customer group are the same group and they really take advantage of this integrated bidding platform that advertise their services and products on both mobile and PC.

  • So for the categories on PC and mobile, the sectors are not that much different.

  • And for the particular sectors that contribute to the revenue, you're very aware of that our top five sectors kind of surround around medical services, education, travel, machinery, and some, you know, local services is emerging, and home refurbishment sectors like that is improving fast.

  • And so to your first question, it's really not much different between PC and mobile in general.

  • There are some categories that could be ranked higher than others just because of different features.

  • To your second question, the CPC on mobile continues to have a gap compared to PC.

  • Largely it is one area that drives the overall monetization, it's only just one element.

  • The mobile overall business, traffic continues to grow.

  • The customers continue to embrace the mobile platform and really take advantage of it, and we haven't seen meaningful improvements or changes of that, but I think overall the CPC is tracking.

  • And on the third, the long-time perspective -- do you want to comment on that?

  • Robin Li - Chairman and CEO

  • Yes.

  • I think eventually the CPC or click-through rate on mobile will be able to be on par with desktop or sometimes surpass that of desktop.

  • Already in certain categories or to certain customers, the CPC on mobile is already higher than desktops.

  • But overall it's still lower as Jennifer mentioned.

  • And the categories, although right now there's not much difference, but we see the trend that on mobile, those more consumer-oriented services will become a larger percentage of our total revenue, probably because the nature of mobile is people are using their fragmented time to do things, and on desktops they will be more serious doing research type of work.

  • So I guess what I'm trying to say is that it's not really comparable that CPC or click-through rate between desktop and mobile, because over time the industry mix could change.

  • Operator

  • Chi Tsang, HSBC.

  • Chi Tsang - Analyst

  • Hi, good morning.

  • Thank you very much for taking my questions.

  • I have a question regarding spending again.

  • So this year we've seen a large step-up in spending, mostly related to channel costs and pre-installations.

  • So I'm wondering if we can get an update on whether the pace of spending on pre-installations will level out or decline.

  • And relatedly, I'm wondering, for the investment that is related to O2O, has there been sort of a step-up again of overall SG&A spending or is that a moderation from the current trend of SG&A?

  • Thank you very much.

  • Jennifer Li - CFO

  • Overall for this year, we invested in sales and marketing, and that falls into bucket of, one is channel, one is promotional efforts.

  • And I would say the third is branding efforts, and really focused on our key products, like Mobile Baidu, Baidu Maps, the Mobile Assistant and also our securities products and browsers.

  • With regards to going forward the O2O investments, I would say, we are just really starting to kick off the O2O investments.

  • There are broader categories of services that we want to offer.

  • There is education that we need to do for customers and users to really come up to our group buy platform.

  • We're very pleased with the key strategic position we have on maps, and we'll continue to invest in the overall O2O platform that would have both the service side as well as the fundamental map functionality.

  • Going forward, I would say we're only at the very early stage.

  • We'll for sure to step up the O2O investments.

  • Operator

  • Ella Ji, Oppenheimer.

  • Ella Ji - Analyst

  • Thank you.

  • Good morning, management.

  • Could we also talk about your guidance for the fourth quarter?

  • In terms of both year-over-year and Q-on-Q growth, it has come down a little bit from the prior two quarters.

  • Just any color you can share, that would be helpful.

  • And then as we look out into the next 12 to 18 months, I think, Robin, you have talked a lot about Baidu Connect and O2O.

  • But it seems that monetization, we may not see that to contribute meaningfully to the revenue.

  • So, is it fair to say that for the next 12 to 18 months search, or especially mobile will continue to be the primary growth driver?

  • Jennifer Li - CFO

  • With regards to the guidance, I think we offered a very solid guidance and I think it's a very good guidance.

  • If you look at the driver of the business, mobile has performed very well.

  • And as we reported, it contributes to 36% of the revenue, and it continues to trend very well.

  • If you look at the sequential growth, for the sequential growth, and I think compared to last year, last year if you recall, in Q4, we did have completed some consolidation of M&A company efforts.

  • Namely, we had the 91 Wireless acquisition and we also had the Nuomi acquisition.

  • So last year's sequential, as a reference, would be a very high base, if you compare both on a sequential basis as well as on a year-over-year basis.

  • So if you stripped out those kind of one-time and normalized this earnings, and I think our guidance is a very healthy and good guidance.

  • Robin Li - Chairman and CEO

  • On the 12 to 18 months timeframe, you're right, we don't expect Baidu Connect or O20 effort to contribute significantly to the revenue part directly.

  • But indirectly, I think it's going to be very good for our mobile ecosystem.

  • We do expect this kind of initiatives will enhance our user experience.

  • People will -- because of Baidu Connect, users will use Baidu search more, use Mobile Baidu more, because of our O2O, because of our group buy offerings, people will get this kind of services more easily from the existing Baidu apps, be it Mobile Baidu or Baidu Maps.

  • We have this vision that, in the PC era, search is trying to connect people with information, but in the mobile age, the goal of search is to connect people with services.

  • And in order to achieve that goal, to realize that vision, we need to build our capabilities in O2O and we need to build Baidu Connect so that those merchants, especially those small local ones, will have a very strong, good mobile presence in the Baidu mobile ecosystem.

  • I think this kind offering will become a meaningful driver in terms of user stickiness to further differentiate us from the competition in terms of mobile search.

  • So, although directly there's not going to be a big portion of revenue contribution, we think this is strategically very important and it will contribute to our overall revenue growth over the next year or two.

  • Operator

  • Wendy Huang, Standard Chartered Bank.

  • Wendy Huang - Analyst

  • Thank you.

  • My first question is, how secure is Baidu in the medical search?

  • And what would be the potential impact from Qihoo, if Qihoo is to commercialize its medical search keywords in the near term?

  • And also, housekeeping question on the operational cost.

  • It seems that operational cost in both dollar term as well as the percentage term actually declined in Q3.

  • How should we think about this item going forward?

  • Thank you.

  • Robin Li - Chairman and CEO

  • Okay.

  • On the medical search question, I think in general we've been in the search business for more than 10 years.

  • The nature of the business is that advertisers or customers can never buy enough amount of traffic.

  • Our bottleneck for growth is always traffic, not customer demand.

  • I think because of that, our revenue is not going to be impacted by the change in competitive landscapes.

  • Jennifer Li - CFO

  • And with regards to operational cost, I would say, take a combined look at operational cost and content cost together, that would be helpful.

  • Some of the elements that we do business for that generates revenue are categorized under operational cost.

  • And if you look at it closely, some are probably content in nature and there is a small portion of that, because the business is going to be more meaningful, and these are content in nature, it gets re-classed into content cost.

  • So if you look at content cost and operations cost together, that would give you a better sense of what the cost is moving and how that's shaping.

  • Operator

  • Ming Zhao, 86Research.

  • Ming Zhao - Analyst

  • Yes.

  • Thank you for taking the question.

  • I have a question on the app distribution.

  • So you talked about 160m daily downloads.

  • But if we look at the handset market, right now, Samsung is losing market share, but Xiaomi, Huawei, Lenovo are gaining market share, and these local brands they all have their own app stores on their cellphones and people may just download apps from their app stores.

  • So is that a concern to your app distribution business in your view?

  • And is there any way that you could encourage users to download your apps to maintain that strength in the market?

  • Thank you.

  • Robin Li - Chairman and CEO

  • Ming, in my mind, there's a strong synergy between app distribution and mobile search.

  • At the end of the day, they are, fundamentally, all distribution, be it app distribution or webpage distribution.

  • So there are a lot of ways for us to improve upon the user experience of app distribution.

  • We already have the best user experience and largest traffic or app downloads as of today.

  • But going forward, I think we will be able to differentiate the user experience from our investment in technology, in distribution -- I mean app distribution or webpage distribution.

  • People come to us to look for things.

  • It can reside in a webpage, it can reside in a local merchant in the form of Baidu Connect.

  • It can reside in the native apps.

  • So all of this should be served within one platform.

  • So that's our vision, and I don't think any of the handset manufacturers have this kind of capability.

  • Longer term, when users find that they're experiencing other app markets that are too far away from the quality of ours, I think users will make their own choice.

  • Operator

  • Jin Yoon, Mizuho.

  • Jin Yoon - Analyst

  • Hi.

  • Good morning guys.

  • Just on the traffic acquisition cost going forward.

  • As the traffic shift continues to happen from PC to mobile, did the TAC cost trajectory change because of that?

  • And second of all, regarding just kind of revenue generated from the mobile side, does the agency fees or kickbacks to agencies change because of the fact that more revenues are coming from mobile?

  • Thanks.

  • Jennifer Li - CFO

  • With regards to traffic acquisition cost, I think you should expect that that continues to trend up.

  • The biggest driver of the increase in TAC is contractual ads, and contractual ads is growing nicely.

  • It's both on the PC side as well as on the mobile side.

  • And there is vast opportunity that we can explore to grow contextual ad business on the mobile front.

  • So regardless, it's not really just PC-specific, and as I mentioned, you should expect TAC continue to go up.

  • And for your second, I don't think -- you know, we don't have a separate arrangement on mobile.

  • Operator

  • Cynthia Meng, Jefferies.

  • Cynthia Meng - Analyst

  • Thank you, management.

  • I have two questions.

  • Within the 36% mobile revenue contribution, could management give some more color on the breakdown between mobile search, mobile game?

  • And what drives the strong sequential growth, 35%?

  • And what is your outlook for mobile revenue contribution by yearend next year?

  • And as a follow-on, can management also talk about your content strategy?

  • How should we think about content costs going forward given that iQiYi is increasing its in-house content production?

  • Thank you.

  • Jennifer Li - CFO

  • Yes.

  • On the mobile -- overall mobile contributed to 36% of revenue.

  • And the biggest fundamental driver is mobile search.

  • Mobile game is a small part of the overall business, albeit it's growing very nicely year on year.

  • If you look at sequentially the growth, we did mention that for this quarter we're categorizing all the tablet traffic as well as revenue to be mobile.

  • It used to be belong to PC.

  • So if you were to take another look at Q2, using this new classification, the Q2's mobile revenue would be totaling to 33%.

  • So, sequentially, net-net, we had a step-up of 3 points in terms of mobile revenue contribution.

  • And I think it paced well and it's a nice increase.

  • It's not totally because of mobile games.

  • Our mobile search is a fundamental driver of the mobile business.

  • With regards to your content cost question, yes, I think you should expect content cost to increase.

  • There is, on one angle, acquisition for professional contents.

  • And there's also the plan to do self-productions, to generate exclusive high-quality contents that will help us both build our business, generating revenue on the advertising side as well as growing the subscription business for iQiyi.

  • So we should expect content cost to ramp up over time with the self-production piece coming in.

  • Operator

  • Thomas Chong, Citigroup.

  • Thomas Chong - Analyst

  • Hi, good morning.

  • I have two questions.

  • My first question is about management strategy with regards to international expansion and about the use of cash.

  • And secondly, does the management has any plan about the commission-based business model going forward?

  • When should we expect this kind of business model to kick in, in the next couple of quarters?

  • Thanks.

  • Jennifer Li - CFO

  • Okay.

  • With regards to international plan, and you would have been aware that we have launched our search service in several markets and we are also doing mobile products in some of the emerging markets.

  • What we see is there are countries with vast user base that continue to see fast growth for users to get into the Internet.

  • And particularly with mobile, and I think there are a lot of opportunities for users to grow and newcomers and new services to get in.

  • So for those emerging markets with vast user base and with mobile as an opportunity, those would be markets that we would like to experiment to see that we have products that can cater to the local markets' needs.

  • So those would be the areas of us to get into markets internationally.

  • I would say international markets and international efforts are medium, longer-term efforts.

  • We are getting into these markets at a very early stage and we will take our time to understand the markets and to establish ourselves.

  • With regards -- I don't know if your question on use of cash is related to international.

  • Obviously we deploy our cash.

  • We're pretty cash-rich in terms of operating capabilities, and we can tap to the capital markets as we have done so in the past.

  • We have much opportunities in front of us, and today we use our own cash mainly to support these strategic initiatives.

  • And our use of cash is really for us as a strategic tool to help us establish ourselves, deploy resources where we think it's strategically important, and help us build for the future.

  • With regards to your commission business, I think this is a business model that could potentially kick in when we connect our users with services.

  • We are at a very early stage to build that overall business, to shape it, to build the overall ecosystem with commission-based business model, over time it could become a meaningful business model.

  • Operator

  • Mike Chen, UBS.

  • Mike Chen - Analyst

  • Hi.

  • Hello, hi.

  • A question regarding your mobile search.

  • Can management give more color on the search revenue growth?

  • How much coming from the ARPU trend and how much coming from the number of unique customers from mobile?

  • Robin Li - Chairman and CEO

  • I think right now the customer base between PC and mobile has a very high degree of overlaps and the growth is driven by both the ARPU and number of customers, but we don't separate out the ARPU and the number of customers between PC and mobile.

  • We think it's one unified platform for customers to reach out to their targeted consumers.

  • Operator

  • Piyush Mubayi, Goldman Sachs.

  • Piyush Mubayi - Analyst

  • Thank you.

  • I have two questions if I may.

  • Corresponding to the 36% revenue from mobiles, could you give us a sense of what the traffic was from both mobiles, in terms of the new definition that includes tablets, for the quarter?

  • And second, just big picture, we're seeing a big difference between traffic users with China Mobile between 4G and WiFi Plus or WiFi and 3G.

  • Are you seeing anything that's corresponding to a difference in paid click or patterns for search between these two distinctly different customer bases?

  • Thank you.

  • Robin Li - Chairman and CEO

  • On the mobile traffic, we already said that it surpassed the traffic of PC.

  • So it represents over half of the total traffic while the revenue represents about 36%.

  • On the different Internet involvement, we don't have any insight on the different customer or user behaviors right now.

  • But WiFi is the preferred involvement for most of our applications.

  • It's usually free, stable and fast.

  • But under 4G or 3G or even slower Internet connections, users are much more sensitive to the bandwidth costs, so they will use less of our services.

  • Operator

  • Great, thank you.

  • Ladies and gentlemen, that's all the time we do have for today's conference.

  • We'd like to thank you for your participation today.

  • This now concludes the presentation.

  • You may all now disconnect from the call.

  • Thank you.