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Operator
Hello and thank you for standing by for Baidu's fourth-quarter and full-year 2014 earnings conference call.
(Operator Instructions).
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, Sharon Ng, Baidu's Director of Investor Relations.
Thank you.
Sharon Ng - Director, IR
Hello, everyone, and welcome to Baidu's fourth-quarter and full-year 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 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 - Co-Founder, Chairman and CEO
Hello, everyone, and thanks for joining today's call.
About two years ago we set out to fundamentally transform Baidu from a PC-centric company to a mobile-first company, at the forefront of innovation in the mobile Internet.
It took firm commitment, focused investment, keen vision and bold and swift execution.
Today, after this ambitious two-year push, we emerge as an even more competitive and innovative company.
We have unassailable dominance in mobile search.
We are the clear market leader in mobile maps.
And we continue to lead the market in app distribution.
Baidu's dominance in these three key gateways, along with our technology focus, our broad portfolio of apps in video, travel and more, and our extensive salesforce are competitive strengths which position us well to fulfill our vision of connecting people with services.
2014 was a year of many accomplishments, with Baidu truly seizing the mobile opportunity as mobile continued its inexorable rise.
In 2014, our topline reaccelerated and our full-year revenue grew 54% over the prior year.
Mobile search traffic exceeded PC search traffic during the second half of the year and continues to increase as a portion of overall search traffic.
Mobile monetization continued its momentum, ramping from just over 20% of total revenue in Q4 2013 to 42% in Q4 2014.
In December, for the first time, search revenue from mobile surpassed that from PC.
In 2014 we also cut the ribbon on our new Silicon Valley R&D Center and made notable advances in voice and visual search technologies.
And we took further steps to make Baidu a safer, more trustworthy platform for users.
2015 begins a new phase for Baidu to execute on our plan to connect people with services.
We are primed to take on this new opportunity that will drive the next chapter of Baidu's growth.
Now for progress on the quarter.
We continue to be the clear PC and mobile search market leader in China.
Our PC and mobile traffic continues to grow year on year.
Notably, daily mobile searches per user increased by 22% year on year.
Mobile's portion of overall search traffic continued its upward trend and comprised an even greater proportion after exceeding 50% in the third quarter.
The organic part of our mobile search traffic followed a similar trajectory, accounting for a growing proportion after topping 50% in recent quarters.
In Q4, we continued to make search faster, more relevant, more visual, more personalized and more real-time.
In November, we launched personalized results, returning tailored, more relevant search results.
We made instant search faster and more relevant than before, further improving the Baidu user experience and helping to increase page views and click-through rates.
We are also giving our users a more real-world, real-time experience, through live-cam feeds from select travel sites in China, including Mount Emei, Mount Hua, and Dunhuang.
Our investments in technologies, like deep learning and natural language processing, enable us to give to our users a better, differentiated search experience that is exceedingly difficult to replicate.
Overall, key monetization metrics -- the number of paid clicks, click-through rates, cost per click and CPM continued to trend nicely year on year.
Over the past several quarters, we continued to raise requirements and standards for Baidu's customers.
We started by requiring new and existing customers to be verified through our Plus V program and gradually implemented stricter requirements.
Those efforts help us build a safer and more trustworthy platform for our users.
A few months ago, we expanded the scope to require new customers to have both PC and mobile landing pages.
This meant a portion of merchants could not become our customers unless they met our standards.
As of December, 91% of our customers had mobile optimized landing pages.
We continue to hear positive feedback from customers about mobile, as we work with them to further improve their mobile presence through higher-quality mobile landing pages, better ad formats and products such as Baidu Connect.
We are also making it easier than ever for our customers to use multiple products across the Baidu platform.
In the fourth quarter, we integrated 24 products into a single interface, creating a streamlined one-stop experience.
Display advertising, which includes our PC and mobile ad network, Brandzone, Aladdin, and other related products grew over 70% in 2014 over 2013.
We continued to solidify our lead in app distribution, holding 42% market share as of December, according to Analysys International.
Our platform distributed 174m apps on an average daily basis.
That's up from 160m apps the quarter prior.
We believe Baidu remains the best platform for mobile developers to distribute apps and the most attractive ecosystem to be a part of.
We also drove a broader effort to increase the adoption of Baidu's unified login.
In the fourth quarter, nearly 180m monthly active users logged into Baidu products, including search, Postbar, Nuomi, Baidu Wallet and Personal Cloud Storage, up from 95m in the fourth quarter of 2013.
With the transition of our core business behind us, Baidu's next new mobile opportunity is connecting people with services and enabling a closed-loop transaction.
The Internet disrupted the information and media industries, the next even larger opportunity is the disruption of service industries.
With China's young market economy, with verticals -- both online and offline -- embracing technology and the Internet, and with mobile opening up new doors, Baidu's market opportunity is larger than it has ever been.
In O2O in traditional verticals, Baidu can help drive value and greater efficiency by leveraging data and technology, industries like healthcare, financial services and education--industries where access is still unequal and where inefficiencies persist -- are ripe for radical transformation.
We've just begun this effort and have a lot of work to do.
Expect Baidu to apply the same commitment, focus and execution that helped us transition our core search business to this new opportunity.
Leveraging our tremendous assets, we are confident that our hard work and investments will pay off and reap significant long-term shareholder value.
Over the past year, we've been busy laying the groundwork to enable users to discover, connect, and transact, all through Baidu -- whether it's buying movie tickets or tickets to local attractions, hailing taxis and private cars, booking hotels, purchasing group-buying offers or ordering food delivery.
In the past year, the number of transactions completed on the Baidu platform has grown over four fold.
In each of these categories, Baidu creates value for users by delivering a better experience through a closed-loop transaction.
For merchants, Baidu brings them new leads and measurable ROI and conversion.
In 2014, we solidified the gateway dominance of Mobile Baidu and Mobile Maps, adding new product features, such as Discover and Nearby respectively to offer more O2O services to our users.
The past year, we also rolled out new key offerings, such as Baidu Connect, Baidu Wallet, and Baidu Food Delivery.
Baidu Connect, which we introduced in last September, has aggregated more than 600,000 merchant accounts.
Baidu Connect is a powerful customer service platform that can be accessed by Baidu's 540m monthly active mobile search users.
We offer merchants an optimal mobile presence, with easy-to-use templates tailored to their verticals.
We currently have 13 in total, including food and beverage, education, healthcare and travel.
And we introduced new templates for real estate, auto, financial services and wedding videography in the fourth quarter.
We now work with approximately 100 value-added service providers, who have helped us sign new Baidu Connect accounts, a majority of which are new to the Baidu platform.
Our goal here is to really understand merchant needs in the verticals that they operate in and provide the right integrated solutions to help drive value to their businesses.
We also fully integrated the Nuomi group-buying business over the past year.
Over this period, we continued to strengthen Nuomi's operations and infrastructure and ramp up its business.
Nuomi now leverages both its direct salesforce and Baidu's reseller network and has one of the largest merchant bases of all top group-buying platforms.
The service now offers to users more personalized recommendations and offers our customers an additional channel to attract new users.
Baidu Food Delivery is a high-frequency, local consumption service that we pilot tested earlier in 2014 and have rolled out to 73 cities.
We saw great adoption from users, with the number of transactions growing over seven fold quarter-on-quarter.
Baidu Food Delivery is complementary to our group-buying service and is an important component in building out our closed-loop offerings.
Baidu Wallet adoption is growing at a rapid clip, quadrupling the number of new user accounts quarter-on-quarter.
Baidu Wallet is a payment option across all Baidu products and continues to expand its online and offline merchant base.
The service offerings are early stage.
We will continue investing in this area to further build out our closed-loop transaction capabilities and overall ecosystem.
Turning now to iQiyi.
iQiyi continued to show great momentum, more than doubling its topline growth in the fourth quarter and the full year 2014.
Online video is an important and strategic vertical, with very attractive long-term growth prospects.
Fresh content is vital to the success of the platform.
And we remain highly committed to and supportive of iQiyi.
Over the years, we've faced fierce competition and a sea of change across the industry.
We've grown bigger, faster, stronger and ever more capable of cutting-edge innovation.
We've been able to do this because of our steadfast commitment to our mission -- to provide the best and most equitable way for people to find what they are looking for--and because of our unflagging faith in the transformative power of technology, our mission and our conviction sustain us now as we prepare for the next phase of growth.
We are still in the early innings as we build an ecosystem that will truly connect people with services.
The opportunity is exciting and visible.
We are well-positioned and our execution plan is clear and focused.
We are fired up and ready to go, to compete and to win.
With that, I will now turn the call over to Jennifer for a rundown of our financial performance in Q4 and the full year.
Jennifer Li - CFO
Thank you, Robin.
Hello, everyone.
We closed a landmark year with a very solid quarter.
In 2014 we saw the successful transition of our core search business to mobile.
2014 was also a year of significant investment as we deployed resources to secure leadership positions in key gateways and launched the cornerstone pieces of our closed-loop transaction offerings.
We are now particularly well-positioned as these investments lay the groundwork for Baidu to capture the new growth opportunity of connecting people with services.
Looking into full year 2015, Baidu will continue to execute on our plan and invest aggressively in a disciplined strategic manner.
We will spend to support our mobile products, including Mobile Baidu, Mobile Maps and app distribution, and drive adoption of our closed-loop LBS offerings, which includes Baidu Connect, Nuomi, Baidu Food Delivery and Baidu Wallet.
Key investment areas include sales and marketing, R&D, infrastructure and traffic acquisition cost.
We will continue to support iQiyi, which operates in a highly attractive and competitive industry.
High-quality content is key.
For 2015, the key investment focus for iQiyi will be on content acquisition.
Chinese New Year is right around the corner.
As you know, because of the holidays, Q1 is a seasonally slow quarter.
For this Q1, as compared to historical years, our guidance reflects the combined impact of, 1) the late timing of Chinese New Year; and 2) mobile's growing traffic contribution, which currently monetizes at a rate lower than that of PC.
Mobile monetization is on a path of steady and healthy growth.
This upward trend will continue as we progress through the year.
The fundamentals of our business are robust.
We are well positioned and we're ready to apply the same dedication and execution capability that drove the success of our mobile transition to our next opportunity.
We're excited about our growth prospects and confident we are creating long-term value for our shareholders.
For the fourth quarter, total revenues were RMB14.1b, representing a 48% increase year on year.
Mobile revenue represented 42% of total revenue for the fourth quarter of 2014, up from 36% in the third quarter of 2014.
Total revenues for the full year 2014 were RMB49.1b, an increase of approximately 54% from 2013.
Mobile revenue represented 37% of total revenue for fiscal year 2014.
During the fourth quarter, Baidu had approximately 523,000 active online marketing customers, a 16% increase from the corresponding period in 2013 and a 1% increase from the previous quarter.
Revenue per online marketing customer for the fourth quarter was RMB26,400, a 26% increase from the corresponding period in 2013 and an increase of 2% from the previous quarter.
For the full year 2014, active online marketing customers increased by 8%, and revenue per online marketing customer increased by 41% over the full-year 2013 figures.
Traffic acquisition cost as a component of cost of revenue in Q4 was RMB1.9b or 13.4% of total revenues compared to 12.3% in the corresponding period in 2013 and 12.9% in the third quarter of 2014.
Full-year 2014 traffic acquisition cost as a percentage of revenue was 12.9%, up from 11.6% for 2013, which primarily reflects increased contribution of contextual ads, mobile and promotion of Hao123.
In 2015, expect the gradual increase in traffic acquisition cost as a percentage of revenue that we saw in 2014 to continue.
Bandwidth and depreciation cost as a percent of revenue in Q4 were 5.3% and 3.9%, respectively, compared to 5.9% and 4.3% in the corresponding period in 2013.
In 2014, bandwidth and depreciation costs as a percent of revenue decreased to 5.8% and 4% respectively, compared to 6.1% and 4.6% respectively in 2013.
Content costs as a component of cost of revenues in Q4 were RMB592m, representing 4.2% of total revenues compared to 3.8% in the corresponding period in 2013.
Total content costs for 2014 were RMB1.9b, 3.8% of total revenues compared to 2.6% in 2013.
This increase was mainly due to iQiyi's increased content costs.
In 2015, we expect content cost to step up at a similar rate compared to last year as we invest in high-quality and self-produced content to support iQiyi.
Selling, general and administrative expenses in Q4 were RMB3.5b, an increase of 89% year on year.
Total SG&A expenses for 2014 were RMB10.4b, a 101% increase from 2013, primarily due to an increase in promotional spending for mobile products.
In Q1, we have already begun our marketing efforts around the Chinese New Year period to promote our mobile products and LBS offerings, which include television ads on CCTV and celebrity endorsements for Mobile Baidu and Baidu Maps.
We have also seen good traction on the promotional marketing spend to drive adoption of Baidu Wallet, group buying and Baidu Food Delivery.
For full-year 2015, we'll continue to spend aggressively on sales and marketing to support our key gateways and build out our closed-loop offering.
We expect 2015 SG&A to step up at a similar dollar level as last year's step-up.
Within sales and marketing, spending will increase for online and offline marketing campaigns and promotional marketing.
We plan to engage in marketing and promotional campaigns strategically, at times taking advantage of seasonal holidays or events.
As such, sales and marketing spend will be an important expense item that will vary in magnitude quarter on quarter.
These efforts are necessary to support our long-term strategy and are generating good results.
We will continue to aggressively promote our products and services and monitor effectiveness closely.
R&D expenses in Q4 were RMB2.1b, an increase of 69% over the corresponding period in 2013.
Total R&D expenses for 2014 were RMB7b, a 70% increase from 2013, 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 RMB339m in the fourth quarter from RMB177m in the corresponding period in 2013.
SBC expenses for 2014 increased 87% over the 2013 level.
The increase reflects year-end true-up and incentives granted to one of our subsidiaries.
Operating profit for Q4 was RMB3b, an increase of 8% over Q4 2013.
Operating profit for the full year 2014 increased to 14% from 2013.
Total headcount, including our invested entities, as of December 31, 2014, was about 46,400, an increase of 7% compared to the end of Q3.
Most of the headcount increase was in R&D.
Income tax expense was RMB538m for the fourth quarter.
The effective tax rate for the quarter was 15.6% compared to 11.2% in Q4 2013.
For the full year our effective tax rate was 15.4% compared to 15% in 2013.
For 2015, we expect our effective tax rate to be in the high teens.
Net income attributable to Baidu for Q4 was RMB3.2b, a 16% increase from the corresponding period in 2013.
Basic and diluted earnings attributable to Baidu per ADS for the fourth quarter amounted to RMB9.05 and RMB9.01 respectively.
Net income attributable to Baidu for the full year increased by 25%.
Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure for Q4, was RMB3.6b, a 20% increase year on year.
Basic and diluted earnings attributable to Baidu per ADS, excluding share-based compensation expenses, both non-GAAP measures, were RMB10.02 and RMB9.97 respectively.
Net income attributable to Baidu, excluding share-based compensation expenses for the full year increased by 28%.
As of December 31, 2014, the Company had cash, cash equivalents and short-term investments of RMB57.7b.
Net operating cash inflow and capital expenditures for the fourth quarter were RMB5.3b and RMB1.5b, respectively.
Full-year net operating cash inflow and capital expenditure were RMB17.9b and RMB4.8b respectively.
Now let me provide you with our topline guidance for the first quarter of 2015.
We currently expect total revenues for the first quarter to be between RMB12.645b and RMB13.065b, representing a 33.2% to 37.6% year-over-year increase.
Please note, this forecast reflects Baidu's current and preliminary review and is subject to change.
I will now open the call to questions.
Operator, we're ready to take questions.
Operator
(Operator Instructions).
Eddie Leung, Merrill Lynch.
Eddie Leung - Analyst
Hi.
Good morning.
Thank you for taking my questions.
My question is about your guidance.
It's a relatively large step down in terms of growth.
So we understand the seasonality factors as well as mobile monetization.
But besides that, could you also give us some color on the macro-environment?
Is it any softening of the advertising markets that may have contributed to the guidance?
And if so, have we seen any big fluctuations in some of your advertiser industries in terms of the budget allocation process?
Thanks.
Jennifer Li - CFO
Hi, Eddie.
Thank you for your question.
As we noted for the Q1 guidance, we wanted to make clear that what is reflected in the projection for us is mainly because of the seasonal -- a very strong seasonal factor.
As you know, the Chinese New Year falls right in the middle of the quarter.
For the first half of the quarter, people are in the holiday mood.
And for the second half of the full quarter, it's not long enough for the whole business to fully recover.
So the Q1 is pronouncedly affected by the seasonal factor.
And obviously we also talked about the mobile is during this time, from a traffic perspective, would be particularly strong.
However, on the monetization front, it does have a distance versus the PC monetization capabilities.
Reflected in our guidance, I would say macro is not really a consideration.
We operate in an emerging market and with full of opportunities.
There are not only existing advertising customers that we're servicing, and we are also cultivating new service sectors and really reach out to build in local service and local businesses as well.
From an overall business side of the perspectives, the environment is full of opportunities and potential, so reflected in the guidance is primarily because of the seasonal factor as well as the mix of mobile versus PC.
Eddie Leung - Analyst
Understood.
Thank you, Jennifer.
Operator
Alicia Yap, Barclays.
Alicia Yap - Analyst
Hi.
Good morning, Robin, Jennifer and Sharon.
Thanks for taking my questions.
I also have a related question from the first-quarter guidance.
So, Jennifer, if we actually have a normal Chinese New Year this year, so let's say late January or early February, what will be the guidance look like?
If we only have the issues on the mobile being monetized lower, if we take out the seasonal factor on Chinese New Year?
And then in relation to that, will the second quarter this year have a much higher sequential rebound than the previous year?
And then also on the mobile for Chinese New Year, given higher percentage of traffic coming from mobile, and mobile devices is more portable, shouldn't we actually continue to see more traffic and even more queries than previous year when people are away from the PC?
So any color you could provide would be helpful.
Thank you.
Jennifer Li - CFO
Yes, Alicia.
Thank you for the question.
As we said, the main factor driving the Q1 guidance is the seasonal factor, as well as the mobile mix.
The seasonal factor reflected on the Chinese New Year is that this year the Chinese New Year is in late timing and that affects the full quarter.
The mobile monetization part, it can't really clearly separate these two components because the mobile mix part is a moving part.
Over the past two years, as we set out to really transition from the PC-centric business to mobile first business, we have seen steadily healthy growth of our mobile monetization capability.
We are on that path, and we're still on that path for steady and healthy growth of the monetization rate, so this element is a moment in time, and that happens to fall in this first one quarter.
So this one quarter is a combined impact of those two, and not really clearly can separate that out.
But having said that, for your second question, obviously we don't give out the Q2 guidance.
But because of the Q1, the strong seasonal timing, if you expect that Q2 has a strong rebound, and I wouldn't say that would be a wrong assumption, so I do expect that.
And for Q1, we have already seen mobile traffic surpassing PC.
And during holiday times, mobile traffic will be particularly strong, just as you know that even people are on the go, they will have access to the Internet through our mobile search box.
So mobile traffic is very strong, very solid.
The fundamentals are robust.
And we're just in that timing of having the mobile monetization rate trying to catch up with the PC's monetization capability.
Robin Li - Co-Founder, Chairman and CEO
I just want to reconfirm that the mobile traffic mix is also part of the seasonality, because right around the Chinese New Year, probably one month before the Chinese New Year and two to three weeks after, people are on the road, a lot of people are on the road.
They will use the mobile to do search instead of PC.
So if we don't consider the rapid growth of mobile traffic year-on-year, just looking at the seasonality, mobile would represent a larger percentage of total traffic during the Chinese New Year period.
Alicia Yap - Analyst
I see.
Can I follow up on this answer?
It's that is there any big difference from advertiser willingness to spend and the budgets they are spending as we move more to mobile during the holiday season?
Have you seen any change from the advertiser sentiment and willingness from PC to mobile shift?
Thanks.
Jennifer Li - CFO
I would say, in general, our larger advertiser base, they really understand the value of our platform and they have been very open to take advantage both on the PC side and the mobile side.
And I think you will note that mobile opens up new opportunities, for example, like the local services.
Local services traditionally wouldn't be a part of the PC-centric advertiser base, but with mobile, that is new opportunities and for these businesses to get on Baidu's platform and also for users to really look for information that relates to local service merchants, service providers.
We are obviously on that path to develop these new sectors.
And so I would say from the existing advertiser base, there's not a preferred unwillingness not to spend during the holiday season.
Their patterns are normal, but I would say huge mobile traffic that generated new business opportunities, new queries, and those are elements and sectors that we are on the path to develop.
And with time, that's why we are putting so much efforts in Baidu Connect, in group buy, in all driving high-frequency service providers and make them become our advertiser base on the Baidu platform.
So I would say not really, but we're in that transitional time to develop a new customer base.
And mobile's traffic base is very robust, we're just in that time to really cultivate new advertiser base and that could be monetized.
Alicia Yap - Analyst
I see.
Thank you.
Can I just lastly -- is the CPC on mobile still at 60% of PC in the fourth quarter?
Jennifer Li - CFO
That's one of the metrics we look at.
Obviously CPC itself doesn't represent the whole monetization capability for mobile.
We obviously have with click-through, CPM and all that.
Just for a CPC per se, largely it stayed constant.
Alicia Yap - Analyst
Okay.
Thank you.
Great.
Operator
Dick Wei, Credit Suisse.
Dick Wei - Analyst
Hi.
Good morning.
Thank you for taking my questions.
I guess I also wanted to follow on the mobile monetization side.
I wonder what kind of a monetization gap do we expect to close between mobile and PC, say towards the end of this year, any sense the management can share.
And also is it going to help to re-accelerate the full-year revenue growth?
I guess at Q1 the midpoint is around 35%.
So with mobile monetization and the PC pricing increases, is that more realistic to see more of that constitute a 40% or high 30s percentage growth for 2015?
Thank you.
Jennifer Li - CFO
Yes.
Hi, Dick.
As I mentioned earlier, the mobile monetization rate is on the trajectory of growing.
We have seen that steadily and healthily been growing over the past two years and we expect the same will occur throughout the year.
And so obviously, we do expect the mobile and PC monetization rate, the gap to narrow.
In fact, I think we're very optimistic about the mobile monetization capabilities given there's richer data points and enhanced capabilities that we're building to build the closed-loop transaction, drives better ROI for our customer and holistically provides really high ROI for our customers, and therefore mobile monetization rate should be if not exceeding the PC monetization capability.
For Q1, I would say somewhat, you can interpret that the Q1 year-on-year compression is somewhat depressed because of the seasonal factor and given that there is seasonality in that, and given that we do expect mobile monetization to trend up, I would say this is not truly representative of the whole year's picture.
Dick Wei - Analyst
Okay.
Great.
Just a quick follow-up on that.
So I guess the Q1 guidance, I just maybe wondered quickly whether we are being more conservative given the Chinese New Year, because maybe the visibility is a bit lower than usual, or is it just purely seasonality worse than the historic seasonal early Chinese New Year?
Thanks.
Jennifer Li - CFO
Yes.
I think you're correct.
During the Chinese New Year's time, it is a slow time and business typically resumes two weeks after the Chinese New Year.
So as we provide the guidance, there is obviously we're not that deep into the quarter or we're after the holidays, so obviously there is a lack of visibility.
But I would say, as we have always done consistently, we provide our best guidance given our knowledge of the business and in our best expectation as of now.
Dick Wei - Analyst
Great.
Thank you very much.
Operator
Alex Yao, JPMorgan.
Alex Yao - Analyst
Hi.
Good morning.
Thank you for taking my question.
I have a follow-up question on the mobile monetization.
Jennifer, as you say, you guys are very optimistic on the mobile monetization capability over time.
And then the traffic from mobile also increased rapidly.
Should we expect at some point in 2015 the mobile monetization rate increase could possibly reaccelerate the revenue growth?
That's the first question.
Secondly, given the revenue growth outlook and your investment strategy, can you talk about how should we think about the margin outlook for this year?
Thank you.
Jennifer Li - CFO
I think we provide one quarter's guidance and I gave you some color on how you should read this number and how it may not be that representative for the full year.
So we are optimistic about our monetization capability on the mobile front.
And I wouldn't get into further comments on the annual revenue outlook.
On the investment side, I think in the prepared remarks I tried to give you as much way to think about our investment angles as possible.
The key investment areas for us is to extend our service and build the closed-loop transaction and enable connecting people with services.
So the main activities we will carry out for products are like Baidu Connect, Nuomi, the food delivery service and Baidu Wallet.
Areas of investment, and I think areas of significant investment would be in the SG&A line.
And for SG&A expenses, as I mentioned, the absolute dollar step-up for 2015 over 2014 will be similar compared to the year-ago step-up.
And that would be the key item to look at.
And for other main expense line items, I think they have pretty established patterns and you could really model that pretty closely.
Another line item that I have put you to pay attention to is content cost.
And I gave you specific ways to think about content cost as well.
So I would say those two elements are the main investment areas, and other elements we will continue the traction of the prior patterns in terms of investments.
Alex Yao - Analyst
Understood, thank you.
Operator
Ming Zhao, 86Research.
Ming Zhao - Analyst
Thank you.
Thank you for taking my question.
I have a similar question on the mobile monetization.
The question I have is because in the first half of last year the mobile traffic growth is actually helping the monetization.
It is reaccelerating the top-line growth if you look at the first two quarters of last year's growth.
And then towards the year end, into first quarter this year, the higher traffic from mobile is actually causing a problem to your monetization.
So my question is really is this because some low-hanging fruits have been picked?
Some of the early adopters of mobile search have been already on a platform, but what's left are those industries very hard to adopt mobile search and then you must go to the local services for a brand new area for growth.
Is that the situation the Company is facing now?
Robin Li - Co-Founder, Chairman and CEO
Ming, I think that's not an apple-to-apple comparison, you are talking about the first half of 2014.
We are talking about the guidance for the first quarter of 2015.
And the timing of Chinese New Year for 2014 and 2015 is very different.
And, as I said, both the mobile traffic mix and the timing of the Chinese New Year are, in essence, seasonality.
So I don't think that's a fair comparison.
Regarding to the mobile monetization, I don't think we have reaped all the low-hanging fruit.
There is still a lot of room for growth in terms of improving monetization capability of mobile, and even more exciting opportunities on mobile.
We have the chance to really connect people with services, which is in addition to the traditional sponsorship or advertising dollars, so we do see a lot of opportunities going forward.
Jennifer Li - CFO
And to add on that, Ming, I understand your question.
If you're looking at the early part of 2014, and that comparison was versus the earlier part of 2013.
2013, if you recall, mobile monetization was barely existent.
So that comparison is, I would say, on a low base and you can say purely incremental and easier comparison.
And as we stand in 2015 compared to 2014, obviously mobile is already becoming a very meaningful component of the overall picture.
The mix issue is playing a significant part.
So I wouldn't draw the conclusion that mobile monetization becomes a problem.
It's not a problem.
We're still on the trajectory of healthy and steady growth.
And there is a lot of room for us to continue to improve, a lot of customer base to develop, and a lot of room and potential opportunities, so it's only because of the base that you are comparing is different.
Ming Zhao - Analyst
Thank you very much.
Operator
Ella Ji, Oppenheimer.
Ella Ji - Analyst
Good morning, management.
Thank you for taking my question.
I also have a question relating to the mobile monetization.
How much within mobile revenue?
How much is coming from non-search-related services?
Since you have been saying that mobile monetization has been increasing and growing healthily, but mobile CPC discount to PC remains stable.
So I just wonder if it's non-search-related services that's driving the mobile revenue growth.
Jennifer Li - CFO
The mobile revenue predominantly is still search.
Actually from an advertising product perspective, it's not as rich as PC today.
We've been doing that business for quite some time and there are different forms of products that we can use to monetize the PC traffic.
For mobile side, I would say majority of the mobile revenue is still search-related.
There are other revenues, like display revenues that's generated out of mobile because of iQiyi, for example.
So it's not because of the different products that's driving the growth of the mobile.
The mobile revenue is growing while CPC is relatively stable.
That is just saying that we will continue to improve the monetization capabilities.
CPC, as I mentioned earlier, is really not the full picture for mobile monetization capability.
So for the mobile monetization capabilities, you look at really the display, the relevancy, the click-through and all that, so CPC is just one element.
And because the advertising, the keywords choices are much more, the advertisers are spending more.
When it comes to average CPC, it could stay constant.
And so that's why I think just looking that the CPC won't solve your questions.
Ella Ji - Analyst
Got it.
So is it fair to say that your mobile is still mostly driven by search-related services?
Jennifer Li - CFO
Yes.
Ella Ji - Analyst
Got it.
Thank you.
And if I can have one more question that's related to your SG&A spending in this 4Q.
The total dollar amount is up for more than 30% Q on Q. I wonder, Jennifer, if you can help break down this additional spending by different categories, such as pre-installation or branding or promotion.
If you can provide any detailed colors, that would be very helpful.
Jennifer Li - CFO
Yes.
The incremental SG&A expense is almost all because of promotional efforts.
That drives products like Baidu Wallet, group buy and the food delivery service.
We launched the food delivery service in Q4.
Ella Ji - Analyst
Thank you very much.
Operator
(Operator Instructions).
Alan Hellawell, Deutsche Bank.
Alan Hellawell - Analyst
Thank you very much.
Yes, Jennifer, very much appreciate the broad framework you offered around how to think about SG&A in 2015.
I think you also suggested that with regard to the other cost items, extrapolate in line with past trends.
And, if I'm not mistaken, we did see a pretty significant jump in R&D as a percentage of revenues.
Are you saying that we should probably assume maybe a similar percentage-point increase as a percentage of revenues on the R&D front?
Or can you give us a little more color as to how we should think about that operating expense?
Thank you.
Jennifer Li - CFO
Well I think if you look at the R&D expense as a percent of revenue, over the years we have steadily concentrated on investment in R&D.
So expect that plan to carry on, maybe more moderate pace, not as sizable as last year.
Alan Hellawell - Analyst
Thank you.
Operator
Wendy Huang, Macquarie.
Wendy Huang - Analyst
Thank you.
I just want to clarify your answer to Alicia's question at the very beginning, which mentioned the gap between the PC and mobile CPC staying constant at 50% only.
If I recall correctly, I think Robin mentioned in Q3 2013 that mobile CPC already accounted for like 55% of the PC, and in Q4 that ratio also went up further to 60%.
But how come now it came back to 50% in recent quarters?
And also related to that, it's interesting that you mentioned about different seasonality of the PC and the mobile traffic.
So taking a longer-term view, given that mobile traffic is stronger in Q1, should we expect by the time that the gap between the PC and mobile CPC to narrow down, actually the seasonality for your overall business actually should be stronger in Q1 rather than weaker in Q1?
Thank you.
Jennifer Li - CFO
I think there were some numbers going around for CPC as a percent, mobile versus PC.
That number, I think I mentioned earlier on the call, was 60%.
But I want to direct your attention probably away from CPC.
CPC is only one aspect of the monetization capability.
Looking at CPM, the overall monetization capabilities will be more relevant.
And for the second question, is about Q1 mobile traffic.
Robin Li - Co-Founder, Chairman and CEO
Yes.
Would Q1 be stronger going forward when mobile monetization catch up.
Wendy Huang - Analyst
Yes.
Robin Li - Co-Founder, Chairman and CEO
Eventually I think it's going to be a gradual process.
So right now the monetization capability for mobile traffic is still lower than PC.
But it's gradually catching up.
Eventually we are confident that mobile monetization capability will be on par or even bigger than PC monetization.
And when that happens, then during Q1, when seasonally mobile represents a larger traffic mix, the revenue growth will show a stronger pattern at that time.
Wendy Huang - Analyst
So mobile revenue seasonality will dominate the Q1 seasonality?
Robin Li - Co-Founder, Chairman and CEO
Going forward, yes.
Wendy Huang - Analyst
Okay.
Great.
Thank you.
Operator
Thomas Chong, Citigroup.
Thomas Chong - Analyst
Hi.
Good morning, Robin, Jennifer and Sharon.
Thanks for taking my questions.
My first question is about the integration with Uber.
Can management talk about how the integration goes on with Baidu Maps and what's the potential P&L impact?
And my second question relates to the PC search.
Should we expect in terms of the PC search revenue growth momentum for this year is similar to last year?
Thanks.
Robin Li - Co-Founder, Chairman and CEO
On the Uber integration, we are still working on it.
We are providing APIs for Uber to work with.
And it's still working in progress.
From what we have heard that is the GMV or number of transactions of Uber China has been growing at a very fast pace.
So we are optimistic about the future perspective of this collaboration.
Jennifer Li - CFO
And, Thomas, also as you know, we look at our search business holistically.
But if you have to single out the PC side, and I think the PC is pretty stable and there is still room for us to continue to improve on the monetization capabilities, be very innovative with experimenting different advertising products and continue to enhance user experience and also drive more relevant search ads.
That's good for the user as well as good for the customers.
And we don't really separate our overall business separately.
But I think we're not unhappy with the progress on the PC front.
Thomas Chong - Analyst
Thanks, Jennifer.
Operator
Cynthia Meng, Jefferies.
Cynthia Meng - Analyst
Thank you, Robin, Jennifer and Sharon, for giving us the opportunity.
My question is regarding the recently announced reorganization.
Can management give some color on the rationale and what kind of milestone management has in mind in terms of developing new businesses that will drive the future growth of Baidu.
And in addition, as a follow-up for the questions before, given the small market share of Baidu Wallet, will management consider subsidized taxi hailing activities for Uber and other companies that you have affiliation with?
Thank you.
Robin Li - Co-Founder, Chairman and CEO
Yes.
On the reorg, the competitive landscape is changing quickly and the market dynamics are very vibrant.
So before we had six business units and we combined LBS into the mobile unit and combined our international business and consumer business into the New Business Group.
That gives you three big business groups.
The first one focuses on the search, which is our current core asset.
And the second one focuses on mobile, which is growing the fastest.
And the third one focuses on all kinds of emerging opportunities, including healthcare, education, finance, etc.
So that's the rationale behind the reorg.
We think that by combining some of the business units, the efficiency will be increased and some of the redundancy can be eliminated so the overall Company will be more agile.
On Baidu Wallet, we have been subsidizing all kinds of transactions in our ecosystem, primarily for services we operate ourselves, for example, the group buying, the food delivery or movie tickets.
We occasionally would subsidize other partnership deals.
That would be on a case-by-case basis.
Cynthia Meng - Analyst
Thank you.
And Robin, can you talk about some of the milestones you might be able to share with regards to the new business unit?
Robin Li - Co-Founder, Chairman and CEO
Well the new Business unit actually comprise of a number of initiatives we are working on.
Right now, they are at very early stages.
For example, for healthcare, we are trying to connect patients with doctors.
There are about 2 million doctors in China and there are lots and lots of patients.
Right now the resources are not allocated optimally.
Lots of the patients go to those very famous top-notch doctors and those doctors only can spend a few minutes with each patient.
We think that's not a good use of medical resources.
We're trying to do the matchmaking to send the relevant patients to relevant doctors.
We look at that as a closed-loop transaction, we're connecting people with services.
We measure those number of transactions or deals as milestones.
For education, we're trying to find opportunities to fund those potential candidates or potential students with financing options, consumer credits, so that they can have more incentive to take some of the classes offered by our partners.
And based on our platform, we can grow traffic to a lot of potential students and that encourages them to take more classes.
And that will enable lots of people who didn't have the money to take on courses, to be engaged in this kind of new system.
There are initiatives like this in our emerging business group, and the main measurement is the number of transactions we complete on those platforms.
Cynthia Meng - Analyst
Thank you.
Operator
(Operator Instructions).
George Meng, Morgan Stanley.
George Meng - Analyst
Hi.
Good morning, Robin, Jennifer and Sharon.
Thank you very much for taking my question.
I wonder if you can provide more granularity of your revenue growth, especially on mobile.
So in terms of, for example, the advertiser categories and also type, basically if you view your business from between KA and SME, do you think that SME is actually meaningfully different in terms of growth rate from KA?
And also in terms of the advertising categories, do you see any impact from, say, healthcare from some of your competitors?
Thanks.
Jennifer Li - CFO
I think overall, the customers, because of their size and their business, they do have different needs.
And that's the beauty of our platform that can really cater to whatever size and whatever kind of advertisers and whatever budget they may have.
For SMEs, I would say the population is huge.
And for our SME sales people, there are opportunities to actually penetrate into the deeper third- or fourth-tier cities and to really develop new customer base.
And also with our technology and the city-level bidding that gets into more refined, the geographical accuracy, that really opens up opportunity for our local businesses that really want to do very targeted promotion.
And for large customers, their adoption of mobile is also progressing very well.
And so their needs do vary and the drivers of those businesses could be different.
For large advertisers, they look for novel products, ways to help them carry out campaigns and generate overall ROI and also for branding purposes.
And for SMEs, their needs will be different, it will be very performance-based, could be.
And so I think on both fronts, the business is growing healthily, albeit because of different drivers.
George Meng - Analyst
Okay.
Got it.
And anything on the categories, like healthcare?
Do you see any impact from your competitor launching healthcare search also?
Jennifer Li - CFO
Healthcare continues to grow very strongly.
It's still one of our top-five sectors.
And what we're seeing is service sectors are growing very nicely on our platform.
I mentioned earlier, education services, like travel, even financial services, these sectors are really growing nicely and are among the top-five sectors.
George Meng - Analyst
Great.
And finally you mentioned branding.
So you also mentioned 70% year-on-year growth of your display ads.
I understand it's still very small, but can you quantify what the mobile contribution within the display ads, if you exclude, say iQiyi, is there any impact expected from Weixin launching their ads on Weixin?
Thanks.
Robin Li - Co-Founder, Chairman and CEO
Right now I think most of the branding budget are spent on our PC platform, including Brandzone or our Union business.
On mobile, we do not allow graphical display of any content.
So even though there are also Brandzone on mobile, the overall brand advertising contribution to mobile revenue is still much smaller than that of PC.
Having said that, I think that the brand advertising budget for online is still a very small percentage of the total brand advertising budget.
And I think both us and Weixin are very, very small in terms of brand advertising budget.
I do not see competition as an important factor right now.
We do see strong potential for brand advertisers to shift their offline budget to online and to mobile.
George Meng - Analyst
Thank you very much.
Operator
(Operator Instructions).
Chao Wang, Nomura.
Chao Wang - Analyst
Hi.
Morning.
Thanks for taking my question.
I have a question on your PC revenue growth.
It seems that 4Q results and 1Q guidance implies that PC revenue is down year over year.
Could you comment on PC revenue growth as well as PC traffic growth?
And secondly, regarding the late Chinese New Year impact, does that have a bigger impact on the brand ads as well?
Thank you.
Jennifer Li - CFO
On your first question related to the PC, I think there was the same question earlier.
I said overall the PC business is pretty steady, the traffic is solid and we continue to have ways to improve on the monetization capabilities for PC.
And so overall, I think PC continues to grow and we're not unhappy with that progress.
For brand advertising Q1 is seasonally slower quarter.
That has been historically the pattern.
And brand advertiser, as you know, Robin mentioned, we don't do much of that on the mobile front because mobile's traffic is the dominant component of the overall, of course the spending will be less.
And PC, because of its seasonal nature, the brand advertising spending for Q1 is -- that's why the reason the advertising overall is slower in Q1.
Chao Wang - Analyst
Got it.
Thank you.
Operator
Chi Tsang, HSBC.
Chi Tsang - Analyst
Hi.
This is Chi Tsang from HSBC.
Thanks for taking my question.
I had a question on Baidu Connect.
So we're seeing very strong adoption from the merchants.
That 600,000 figure is very, very large.
I'm curious to what you're seeing in terms of click-through from users, transactions or engagement levels.
Thank you very much.
Robin Li - Co-Founder, Chairman and CEO
Yes.
As I mentioned during the prepared remark, we rolled out a lot of verticals for Baidu Connect.
We enabled those merchants to come up with their own customized Baidu Connect sites.
Right now the conversion is very good.
But we would like to see more transactions or GMVs happen on those platforms.
There are a number of early adopters who have seen very encouraging results.
But it will take some time for the majority of the merchants to learn how to take advantage of the Baidu Connect system and enable transactions on it.
Next question, please.
Operator
Erica Poon, UBS.
Erica Poon - Analyst
Yes.
Hello.
Thank you.
About the content cost or the self-produced content that you mentioned earlier, can you just give us a bit more color what type of content you plan to produce and also the kind of cost associated with those?
Thank you.
Jennifer Li - CFO
Content cost is primarily attributable to iQiyi.
And during the last quarter, in Q4, you've already noticed that there is a step up in content cost.
New high-quality content has been acquired.
It is important because over the past year, iQiyi has established itself as the market leader and also created this great market perception that they have the high-quality content and really having the entertainment, high-quality programs that the users can look to.
Unique content is the way that you differentiate yourself, and we have already started producing self-produced content last quarter, so some cost component is reflected in the picture.
And going into 2015, there will be more increased emphasis on the self-produced content.
And it's not particularly the categories that we define as of this moment.
The main strategic underpinning is really to drive high-quality content that differentiates iQiyi's platform versus others and therefore attracts users and nurtures user's reliance, and possibly also grow user subscription.
So that's why it's strategically important.
And I gave you some guidance in terms of how to think about the cost related to that.
And we think this is strategically important because iQiyi is already the market leader, and with this kind of investment, it further strengthens its market leader position and build a solid business, and, as we go forward, given the attractiveness of this vertical, we expect longer-term shareholder returns.
Erica Poon - Analyst
Thanks, Jennifer.
Operator
Natalie Wu, CICC.
Natalie Wu - Analyst
Good morning, Robin, Jennifer and Sharon.
Thanks for taking my question.
Firstly, just to clarify, you mentioned that SG&A's data pattern this year will resemble last year.
So wondering whether you are referring to absolute value or in terms of percentage of revenue.
And secondly, I noticed that you have already started a lot of O2O initiatives lately, like Baidu food eelivery, group buying, movie tickets, healthcare, etc.
Wondering, can the management share with us your revenue target on this initiative?
Is there any target on revenue contribution from commission-based business, say 40% to 50%?
Jennifer Li - CFO
Natalie, for your first question, it's the dollar amount.
Robin Li - Co-Founder, Chairman and CEO
And on those O2O initiatives, yes, over time, this kind of initiative, be it food delivery or group buying, will bring in revenue.
It is going to be a more of a take-rate basis.
But right now we are in the investment stage.
There are a lot of subsidies in each of those categories, so near term we do not expect any meaningful contribution to revenue from these businesses.
Natalie Wu - Analyst
Thank you, Robin.
Is there any long-term target?
Robin Li - Co-Founder, Chairman and CEO
Yes, of course.
I think, longer term, the take-rate based businesses will represent a very significant part of our overall revenue.
Natalie Wu - Analyst
Thank you.
Operator
Thank you.
We are now approaching the end of the conference call.
Thank you for your participation in today's conference.
This concludes the presentation.
You may now disconnect.
Good day.