百度 (BIDU) 2015 Q1 法說會逐字稿

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  • Operator

  • Hello, and thank you for standing by for Baidu's first quarter 2015 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.

  • Sharon Ng - Director of IR

  • Hello, everyone, and welcome to Baidu's first quarter 2015 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, and thanks for joining today's call.

  • This quarter, we continued to drive mobile monetization to new heights, as we built out our mobile ecosystem more fully.

  • For the first time, mobile represented half of Baidu's total revenues, further reinforcing Baidu's industry leadership in mobile.

  • We were able to reach this important watershed by innovating and doing things differently.

  • Our track record proves that we chose the right strategy and tactics, and that we are -- we've executed deftly and decisively, as we've navigated the mobile shift in our home market.

  • Search is still about direct, immediate expression of user intent.

  • We successfully leveraged this and the open nature of our platform, as well as our extensive on-the-ground sales force, to achieve this dramatic growth in mobile.

  • And there is much more to come.

  • With many users still just starting to awaken to the power of smartphones and how it empowers them as consumers, the opportunities that mobile opens up are limitless.

  • We see huge potential ahead for mobile marketing, online to offline, and key select verticals, such as healthcare, education, and financial services, by leveraging our solid mobile foundation, exceptional technology advantage, and proven operational experience.

  • We are redefining the search box, by going beyond returning information, like websites, addresses and phone numbers to our users.

  • We are now connecting users with services, and enabling closed-loop transactions.

  • We are pioneering a different approach to the basic interface, creating more naturalistic, intuitive and convenient ways for people to perform search, and delivering results that are more intelligently predictive and better matched to the needs of time and place.

  • To fulfill our vision, we are building our ecosystem by investing heavily in R&D, operating our own Baidu offerings, like Nuomi group buying, Baidu Takeout Food Delivery, and Baidu Wallet, partnering with and investing in best-in-class players, like Qunar and Uber, and working closely with platform partners across verticals on Baidu Connect.

  • This is the right time for Baidu to seize the opportunity and we are moving boldly and quickly.

  • Tectonic shifts creates openings for forward-looking, forward-thinking companies, to really drive innovation and get in front of tremendous new opportunities, and Baidu is ready to lead.

  • Now for an update on our core search business.

  • The fundamentals of core search remain very robust.

  • Mobile, now having reached 50% of topline, continued to be the main driver of revenue growth.

  • Mobile search, driven by robust traffic growth and improving monetization, again contributed the majority of our mobile revenue.

  • We see much more growth ahead from our mobile marketing platform, as traffic increases, infrastructure improves, ad targeting grows more precise, and ad formats proliferate and become more diverse.

  • Meanwhile, we continue to be pleased with our PC business, which continues to grow healthily.

  • We again raised the bar in search by focusing on improving the user experience, making enhancements to our bidding system and further pushing infrastructure development.

  • In user experience, we've taken further steps to make search faster, more relevant, more immediate and more tailored.

  • This quarter, we upgraded instant search by improving speed and relevance.

  • We made our search results more visual and personalized, by dramatically increasing the coverage of images in paid search page views and saw a marked increase in click-through rates, as a result.

  • We are taking a vertical approach to the powerful click-to-action buttons, which provide unambiguous direct ROI to our customers.

  • For example, in addition to the existing click-to-call, click-to-chat, and click-to-download mobile ad formats, in healthcare, we are now offering click-to-consult and click-for-appointment.

  • In education, we offer click-to-register for a class and click-to-listen to a course.

  • And in restaurants, we offer click-to-book a table.

  • We will be extending these vertical specific click-to-action buttons to financial services, travel, transportation, and courier services.

  • In February, we made search even more local, by further targeting geographic areas for bidding from over 300 cities in China, to bidding by distance proximity.

  • We are rolling out distance proximity bidding in phases, and the early response has been very encouraging.

  • We've seen that customers who use distance proximity bidding have a higher propensity to spend on mobile and enjoy higher ROI.

  • We are attracting a new, incremental, local customer base, as our marketing offering grows more targeted and more local.

  • These merchants are thinking mobile-first, and we offer easy-to-use tools and infrastructure, as well as compelling mobile marketing solutions, to meet their needs.

  • Earlier this month, we began our annual nationwide search engine marketing campaign -- our largest yet, spanning 500 cities -- to reach SMEs and local merchants, and further penetrate lower tier cities.

  • Mobile infrastructure has come a long way over the past two years, with Baidu playing an active role in pushing the development.

  • Over two years ago, we recognized the importance of mobile infrastructure to the user experience.

  • Early on, we made increasing the number of mobile optimized landing pages one of the key performance indicators for our sales force.

  • We also provided free software to our customers, to convert PC pages to mobile optimized ones.

  • And we adjusted our algorithm to factor in mobile landing page quality in our search rankings.

  • Now nearly all of our customers have mobile landing pages, but we're not stopping here.

  • The next step is to continue to improve the overall landing page quality and really unlock the value of mobile, by enabling services and transactions on Baidu.

  • Now for progress in mobile and O2O.

  • In Q1, Baidu mobile search reached 600m monthly active users, up from 540m in the previous quarter.

  • And in mobile maps, we hit 270m monthly active users.

  • And we continue to occupy the top slot in app distribution in China.

  • The scale and reach of these assets are the foundation of our mobile platform.

  • And Mobile Baidu search app and mobile maps serve as powerful gateways that not only support the growth of our newer O2O offerings, such as Nuomi and Wallet, but also enable closed-loop transactions.

  • Baidu products share rich, diverse resources within our platform and across our ecosystem.

  • For example, in Q1, 25% of Nuomi movie ticket transactions originated from and were completed on mobile Baidu and maps.

  • In March, over International Women's Day weekend, we ran a successful movie ticket marketing and promotional campaign.

  • Nearly 15% of all online and offline movie tickets sold in China on March 7th flowed through Baidu-Nuomi, with nearly 70% of those transactions completed with Baidu Wallet.

  • The campaign educated users on discovering O2O services through our gateway products and demonstrated the ease of buying movie tickets through Baidu, driving user adoption for both Nuomi and Baidu Wallet.

  • Speaking of Baidu Wallet, it now boasts nearly 26m connected accounts, where users have both linked a bankcard to an account and spent at least once with Baidu Wallet.

  • Baidu Connect now has over 700,000 merchants.

  • We continue to build out the infrastructure for this platform more fully, and work more closely with verticals, to tailor our offering.

  • A great example is Koolearn, the online arm of New Oriental Education.

  • Koolearn's students, on average, spend RMB1,000 per transaction.

  • Baidu worked with Koolearn to drive leads through our marketing platform and enable a closed-loop transaction through Baidu Connect.

  • Over the past month, Koolearn tripled monthly revenue, as compared to October last year, when they launched their Baidu Connect account.

  • Our takeout food delivery service was launched last August.

  • In less than nine months, we grew to cover 70-plus cities, and we believe we are already the leader in nearly half of those cities; within the working-age demographic by GMV, including Beijing and five additional provincial capitals, and we are the leader in 16 cities overall that also includes Beijing, by GMV.

  • Takeout food delivery not only complements our group buying business, but also leans on our technology advantage.

  • The key sustainable edge in takeout food delivery is scale and optimizing logistics and resource allocation.

  • Our technology platform pools the resources of our maps, data, and software capabilities.

  • Baidu Takeout Food Delivery offers a differentiated experience, by targeting the working-age demographic, higher quality, licensed restaurants, and faster delivery time.

  • O2O addresses the enormous opportunity in local, and it's still early days.

  • The majority of consumption and transactions takes place locally and offline.

  • With the rise of mobile, connecting local services from online to offline becomes possible.

  • Bringing these services online opens up information transparency, and allows for better matching of supply with real-time demand.

  • That means increased efficiency in resource allocation.

  • For example, in the restaurant industry -- a multi-trillion RMB industry in China -- behind only real estate and automotive in market size, more than half of seats are left empty, daily, only 1% of reservations are made online, and online takeout food delivery represents only a low single-digit percentage of overall restaurant GMV.

  • On average, 85% of movie theater seats are unsold, and more than 40% of trucks on the road carry no merchandise.

  • By connecting people with services, Baidu is providing users with convenience and choice, and enabling merchants to fulfill real-time demand, which can drive incremental revenue and improve capacity utilization.

  • This is a long-term strategy and ecosystem build-out for Baidu.

  • We still have a lot of work to do, but the results thus far are very encouraging.

  • We will continue to run online and offline marketing and cross product promotional campaigns for Mobile Baidu, Maps, Nuomi, and Takeout Food Delivery in the coming quarters.

  • These campaigns will educate users about new services that can be discovered through our platform and foster the right user behavior.

  • But connecting people with services goes beyond local.

  • Our gateway position, our focus on data and technology, our enormous accumulated user base and customer base, all combine to put us in a unique position, to truly transform major service verticals, like healthcare, education, financial services, which in aggregate represent nearly 20% of China's economy.

  • Baidu has an opportunity to play an impactful role in transforming each of these sectors.

  • In healthcare, we are helping to better match patients to the right doctors.

  • In China, people sometimes line up for days to make a medical appointment to see a doctor, who might not be the right one to treat their condition.

  • Baidu Doctor, which we launched in Q1, addresses this situation and supports online registration.

  • The platform has brought nearly 700 hospitals and over 25,000 doctors, across three provinces to the platform.

  • We will work to expand the service in the coming quarters.

  • We are also making education more accessible, by providing an online education platform and funding where appropriate.

  • Our online education platform Chuanke, which we acquired last August, already partners with nearly 7,000 educational institutions, providing over 25,000 courses to millions of registered users.

  • In financial services, we launched a pilot program to offer consumer loans or consumer credit to lower the barriers to access for potential students.

  • A few words on Baidu Research.

  • Our research program with its three labs in Beijing and the Silicon Valley continues to yield great results.

  • In addition to advances in our "Deep Speech" approach, which uses deep learning to deliver the highest accuracy in English speech recognition in the industry to date, we are making great strides in vision as well.

  • In January, Baidu Research announced industry-leading results, achieved by the Baidu Deep Image image recognition system.

  • And our systems continue to improve.

  • iQiyi continues to perform very well and grew its Q1 topline revenue over 80%, year on year.

  • It continues to offer a superior user experience among China's Internet video sites, and we remain highly committed to and supportive of iQiyi.

  • We are clearly excited by the opportunities ahead of us, and we have been selective about choosing the right ones.

  • Baidu's strategy is very focused, and we do regularly review our portfolio for effectiveness and we have in the past and will continue to prune our portfolio and sunset products that do not meet our expectations.

  • In closing, Baidu is redefining the search box and redrawing the boundaries of our addressable market.

  • We are working hard and investing aggressively to fulfill our vision and tap into our platform's true potential.

  • With that, I'll now turn it over to Jennifer, for a look at our financials.

  • Jennifer Li - CFO

  • Thank you, Robin.

  • Hello, everyone.

  • In Q1, we again saw dramatic growth from mobile and continue to see tremendous opportunities on the horizon.

  • We're executing on our investment plans and closely tracking and monitoring trajectory, scale, and conversion metrics, to measure return.

  • While investments in some of our newer products, such as Nuomi, Takeout Food Delivery, Wallet and Baidu Connect are still at an early stage, we're pleased with the progress that we have made thus far, and will continue working hard to ramp up these services in the coming quarters.

  • In Q2, we'll continue our marketing and promotional spend, to take advantage of springtime travel and various consumer-oriented shopping days.

  • As we've said before, sales and marketing will be an area of particular focus.

  • We'll be opportunistic, and spend will vary from quarter to quarter.

  • iQiyi continues to be a highly strategic asset, with attractive long-term growth prospects.

  • We'll continue to invest in content and spend where needed, to procure high-quality, licensed content and develop self-produced content, to support iQiyi's growth.

  • Content costs will vary quarter on quarter.

  • The fundamentals of our business are very strong, and the growth opportunities ahead for Baidu are vast, but also very much within reach.

  • We're working hard and moving quickly to execute on our plan.

  • In addition to leveraging on our existing platform, we'll continue to deploy the necessary resources to further build out our ecosystem and create long-term shareholder value.

  • Now moving to the financials, all monetary amounts are in RMB, unless stated otherwise.

  • For the first quarter, total revenues were RMB12.7b, representing a 34% increase year on year.

  • Over the first quarter, Baidu had approximately 524,000 active online marketing customers, a 17% increase from the corresponding period in 2014, and flat from the previous quarter.

  • Revenue per online marketing customer, for the first quarter, was RMB23,800, a 14% increase from the corresponding period in 2014 and a 10% decrease from the previous quarter.

  • Traffic acquisition costs, as a component of cost of revenue in Q1 were RMB1.7b, or 13.5% of total revenues, compared to 12.4% in the corresponding period in 2014.

  • The increase was mainly due to increased contribution of contextual ads.

  • Bandwidth and depreciation costs, as a percentage of revenue in Q1 was 6.7% and 4.6%, respectively, compared to 6.8% and 4.5% in the corresponding period in 2014.

  • Content costs, as a component of cost of revenue was RMB608m, representing 4.8% of total revenues, compared to 4.1% of the corresponding period in 2014.

  • This increase was mainly due to iQiyi's increased content costs.

  • SG&A expenses in Q1 were RMB3b, an increase of 47% year on year.

  • The increase was primarily due to an increase in promotional spend for mobile products and services.

  • R&D expenses in Q1 were RMB2.3b, an increase of 79% over the corresponding period in 2014.

  • 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 RMB291m in the first quarter, from RMB169m in the corresponding period in 2014.

  • SBC increased due to more shares being granted to employees.

  • Operating profit for Q1 was RMB2.2b, a decrease of 9% over Q1 2014.

  • Total headcount, on a consolidated basis, including invested entities, was about 46,800, as of the end of Q1.

  • This represents an increase of 1% as compared to the end of Q4 last year.

  • Income tax expense was RMB541m for the first quarter.

  • The effective tax rate for the first quarter was 20.7%, compared to 15.1% in Q1 2014.

  • The higher effective tax rate reflects that some loss-generating entities in the group cannot be consolidated for tax purposes under PRC tax law, and the expiration of a preferential tax license for one of our subsidiaries.

  • For the remainder of the year, we expect our effective tax rate to be around this range of 20%.

  • Net income attributable to Baidu for Q1 was RMB2.4b, a 3% decrease from the corresponding period in 2014.

  • Basic and diluted earnings attributable to Baidu, per ADS, for the first quarter, amounted to RMB6.79 and RMB6.76, respectively.

  • Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure, for Q1 was RMB2.7b, a 1% increase, year over year.

  • Basic and diluted earnings attributable to Baidu per ADS, excluding share-based expenses, both non-GAAP measures, were RMB7.62 and RMB7.58, respectively.

  • As of Q1, the Company had cash, cash equivalents, and short-term investments of RMB58b.

  • Net operating cash inflow and CapEx for the first quarter were RMB2.8b and RMB1b, respectively.

  • Now let me provide you with our top-line guidance for the second quarter of 2015.

  • We currently expect total revenues for the second quarter to be between RMB16.365b and RMB16.750b, representing a 36.5% to 39.7% 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 with questions.

  • Operator

  • (Operator Instructions).

  • Eddie Leung, Merrill Lynch.

  • Eddie Leung - Analyst

  • Good morning.

  • Thank you for taking my questions.

  • Just two questions.

  • The first one is about the Internet landscape, in general.

  • We have seen some consolidations among certain verticals in the Internet landscape.

  • So just wondering how that could affect the positioning of a search engine, and how Baidu could cater for the changes in the industry.

  • So that's my first question.

  • And then secondly, besides what's disclosed in the 20F, just wondering if you could share a bit more color on some of your key advertising industries, in terms of contribution.

  • And perhaps more importantly, what are some of the opportunities and challenges you have seen in some of your key advertiser industries?

  • Thank you.

  • Robin Li - Chairman and CEO

  • Eddie, I'll take the first question, and Jennifer can talk about the second one.

  • Yes, we also noticed that there are some consolidation in certain verticals.

  • But overall, I think the Internet is -- especially the mobile Internet, is still in its early days.

  • There will always be new players coming in.

  • And old players, some of them, will fade.

  • Baidu's position as the gateway to mobile Internet stays strong.

  • Our Mobile Baidu app, our Baidu Maps continue to hit new highs, both in terms of number of page views, number of searches, daily active users, monthly active users.

  • So we are quite confident that our vision, which is in addition to connecting people with information, we are connecting people with services.

  • There are lots and lots of verticals that we can connect with.

  • Some of those verticals, we decided to do it by ourselves, such as the takeout food delivery service or movie tickets.

  • But for most of the verticals, we will choose to work with one or more of those players.

  • And we believe we will continue to be one of the most important channel for those service providers, if not the most important channel.

  • And we will be able to work with many, many verticals, not just 360 verticals, maybe 3,600 verticals, and users will benefit.

  • I think the user experience for starting from one place and getting all things that's possible is the best user experience.

  • Plus we have the best voice recognition, image processing, natural language understanding technologies.

  • Not only users can type in text, they can talk to our apps and they can take pictures and initiate queries.

  • All those kind of conveniences add the attractiveness of our platform.

  • And we are quite confident this will be the main form of connecting online with offline services.

  • Jennifer Li - CFO

  • And with regards to your question, Eddie, on the advertiser base and the future opportunities, as of last year end, you know that we have over 800,000 customers.

  • A lot of the customers have been really doing business with us throughout the years, and I think the large customer base has been built over time, and predominantly over the majority of our lifetime, that is PC dominated.

  • And with now mobile becoming a much more imposing trend, these advertisers already recognize the opportunity and are fully embracing the opportunity that mobile brings.

  • So as you have already seen, much of the existing customers are spending, also very investing heavily on the mobile side.

  • And what mobile opportunities really brings for these existing customers are some of these customers can really take incremental opportunities on the mobile side, and increasing their overall spend and contribution to the Baidu platform.

  • As an example, if you look at some of the B2C business services, such as business services, financial services, travel, and education, these sectors are growing their spending on Baidu very, very nicely.

  • As an example, in Q1, if we look at the top sectors, others than the familiar ones, like medical, education and travel, we see financial services and business services becoming part of the top five also.

  • So that is encouraging with existing customers.

  • And with mobile, it really brings a lot more new customer base and advertiser base for us.

  • As we mentioned earlier, in Robin's comments, developing local merchants, as we develop our technology and roll out the infrastructure platform, and also with the data points that mobile can bring to us, we can help the advertisers with more precise targeting.

  • And that helps even smaller advertisers to be able to spend with us.

  • So I think as we look at the advertiser base, existing advertisers really continue to see the huge value that search engine brings.

  • At the same time, new customers can start to take advantage of the platform, the power of search, because of mobile.

  • And so as we look at past and future opportunities, I think the customer base Baidu can service continues to be very huge and promising in the future.

  • Eddie Leung - Analyst

  • That's very helpful.

  • Thank you, Robin and Jennifer.

  • Robin Li - Chairman and CEO

  • Thank you, Eddie.

  • Operator

  • Alan Hellawell, Deutsche Bank.

  • Alan Hellawell - Analyst

  • Thank you very much.

  • Regarding the relatively robust 79% growth in R&D, I was just hoping to find out how much incrementally relates to new initiatives and connected devices, how much to app development, and what other areas of growth maybe I have not mentioned?

  • I would assume that R&D would grow maybe very moderately, as a percentage of revenues.

  • We don't seem to be tracking that, so I'd love to get an update around how that relates to the full year.

  • And then any further color on some of the e-commerce initiatives, Baidu Mall and others that you have now.

  • Thank you.

  • Jennifer Li - CFO

  • Alan, on the R&D expenses, you know, we commented last quarter as I was trying to help providing some light on the whole year spending.

  • Throughout Baidu's history, we are very committed to invest in R&D capabilities.

  • And R&D expense as a percent of revenue continue to edge up, that reflects our commitment to R&D and our focus on technology.

  • Over the past quarter, I think we net added about 1,000 headcounts in the R&D workforce.

  • And you know, we already have a large workforce and these adds are spread throughout the different functions.

  • Within the Baidu R&D infrastructure, it is really a very powerful house.

  • You have really the team that does Baidu research, leading into the cutting edge world class technologies and we have the workforce to really continue to refine our search technology as well as the monetization power.

  • And for new initiatives, such as medical, financial services and education that leverage on the existing platform and it will be incurring only a small incremental spend.

  • But I think the commitment to R&D is not like one project focus.

  • It is Baidu's long-history of committing to technology.

  • And frankly, if you look at the absolute dollar spend for Q1 compared to Q4, and that is consistent with prior year trends.

  • Robin Li - Chairman and CEO

  • And regarding to e-commerce, the overall market is still growing very quickly and evolving very quickly.

  • Mobile e-commerce has shown some new characteristics that is different from the desktop e-commerce.

  • Baidu Mall is really an advertising oriented model that we can aggregate all kinds of different e-commerce players and drive traffic to them.

  • So although it is a new initiative for Baidu, it is very consistent with our prior practices in enabling e-commerce and driving traffic to our partners.

  • Alan Hellawell - Analyst

  • Thank you very much.

  • Operator

  • Dick Wei, Credit Suisse.

  • Dick Wei - Analyst

  • Hi, good morning.

  • Thanks for taking my questions.

  • Looks like we got pretty good progress in food delivery and ticketing area.

  • I wonder for other areas of O2O e-commerce like the real estate or second hand car or like cleaning services, what is our plan in those kind of other e-commerce area?

  • Are we going to be more heavily involved or will be picking into some partners or we are just focusing on advertising with some of the players in the space.

  • I'm not sure if there's anything you can add some color on.

  • Thank you.

  • Robin Li - Chairman and CEO

  • Yes, I think our O2O strategy really has three layers.

  • The first one, the internal one is owned and operated services like you mentioned, the takeout food delivery and movie ticketing.

  • And the second layer is for companies that we will have typically a stake, either a minority or majority stake.

  • And we will be able to work together with them in a very tight fashion to integrate those services into our native apps.

  • We invested in companies that do second hand car or other verticals like you mentioned, but we have been selective on those.

  • The third layer is really the majority.

  • We don't need to have an equity relationship with those companies, but we are equally happy to work with those companies to integrate their services into our platform, into Mobile Baidu and Baidu Maps.

  • So that is how our users are served and those services get customers and traffic.

  • So we are very open and we provide all sorts of collaboration opportunities for the overall mobile Internet ecosystem in China.

  • Dick Wei - Analyst

  • Got it.

  • And just a quick follow-up question.

  • I think Baidu Wallet, we have got like 26m users.

  • I wonder what the Company plans say -- within like in two years' time, like what kind of target the Company has in terms of user number or in terms of maybe the non-Baidu platform transaction or offline transactions.

  • Any thoughts do we want to be market leaders or not?

  • Maybe if you can share some thoughts on the plans that would be helpful.

  • Thanks.

  • Robin Li - Chairman and CEO

  • Well, I think the true fundamental issue is connecting people with services, and in order to finish a closed-loop transaction, Wallet is a very necessary part.

  • So in that regard, we've been very aggressively pushing the adoption of Baidu Wallet.

  • But having said that, this is an early stage development for connecting people with services.

  • There are lots of things that we need to do to really complete those closed loops.

  • Wallet is probably the last part of the closed loop transaction.

  • Before that, we need to figure out how we direct user queries to the necessary service providers and how we integrate those services seamlessly so that users are best served.

  • There are lots of things we need to worry about and we will really examine the current market condition and competitive landscape, and we will selectively to decide where to invest more from time to time.

  • But yes, this is a very important part of our overall plan.

  • Dick Wei - Analyst

  • That's great.

  • Thank you, Robin.

  • Robin Li - Chairman and CEO

  • Thanks.

  • Operator

  • (Operator Instructions).

  • Alicia Yap, Barclays.

  • Alicia Yap - Analyst

  • Hi.

  • Good morning, Robin, Jennifer and Sharon.

  • Thanks for taking my questions.

  • I have a question regarding the active customer growth.

  • So you added 78,000 net add for the active customer this quarter.

  • You also grew on the flat sequential basis despite a weak seasonality.

  • How should we read into this?

  • So can we assume that your effort of cleaning up and verifying accounts and putting higher quality requirements over the past one and a half year is now largely done?

  • And should we expect a similar growth rate on the customer accounts going forward?

  • And that any of these 700,000 Baidu Connect accounts contribute to the active customer number in the first quarter?

  • Thank you.

  • Jennifer Li - CFO

  • No.

  • The active online marketing customers are really advertising customers that does online marketing services with us.

  • So the Baidu Connect accounts, those customers are not included in here.

  • And sequentially, we think we had about 1,000 net customer add in Q1 compared to Q4.

  • Yes, I think you are right in saying that on one hand, we put in good discipline to make sure that we have high quality customer base.

  • We continue to make that a priority to make sure that lower quality customers do not really show up on Baidu's platform.

  • At the same time, there is a vast customer base that is out there for us to tap and that is the marketing effort that we are currently conducting nationwide.

  • And we continue to see that with the power and extension of our platform, much more online marketing customers can be brought on our platform.

  • So we will continue to develop the customer base.

  • The customer potential is big.

  • But at the same time, we also want to ensure quality and that is an ongoing process.

  • So I would say, to the specific question on that, there is no end to how you ever ensure that -- there is continued effort to make sure that there is high quality customer base.

  • And the customer base is dynamic and the platform, the products, the services that they can conduct continue to be dynamic.

  • And we will keep close eyes on it.

  • But we are very confident that the customer base can grow and it is because of the vast opportunities out there.

  • Alicia Yap - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Alex Yao, JPMorgan.

  • Alex Yao - Analyst

  • Hi.

  • Good morning, everyone.

  • Thank you for taking my questions.

  • I have a question regarding the mobile ad services.

  • We understand a meaningful portion of the PC advertising revenue is from non-search products such as Baidu Union, the affiliates network and Hao123.

  • Just wondering what is the development of the similar non-search ad service on mobile and what kind of a monetization gap is there for these mobile services versus PC.

  • Thank you.

  • Robin Li - Chairman and CEO

  • I think similarly, on the mobile front, we have affiliate programs that show display ads or other form of advertising properties that are not on Baidu.

  • These are at very early stages.

  • The monetization capability right now is relatively low and of course, we see a lot of growth potential here.

  • We see opportunities that we can come up with interesting ad formats that are really related to the context both in terms of format and content.

  • So going forward, we expect a very dramatic growth of those kinds of areas.

  • But right now, it's a very low base.

  • Alex Yao - Analyst

  • Thank you.

  • Operator

  • Piyush Mubayi, Goldman Sachs.

  • Piyush Mubayi - Analyst

  • Thank you for taking my question.

  • How do you determine which verticals you'd like to get into and how would you be leveraging the resources across all of your subsidiaries?

  • Robin Li - Chairman and CEO

  • Yes, we cannot afford to get into too many verticals, so we have to select them very carefully.

  • The basic criteria is frequency.

  • Because we run the major gateways like Mobile Baidu and Baidu Maps, people use our services on a daily basis, many times, actually, everyday.

  • There are certain vertical services that people use on a more frequent basis and we'd like to integrate those services more tightly with our gateways and therefore we need to own those services.

  • You've seen we have done group buying, movie tickets, and takeout food delivery.

  • Those are high frequency activities in terms of consumption and we decided to do it by ourselves.

  • Right now, I think that pretty much all the areas that are high frequency and we intend to get in, we already got in.

  • So we do not expect to add a lot more of those owned and operated vertical services.

  • Piyush Mubayi - Analyst

  • Thank you.

  • Operator

  • Ming Zhao, 86Research.

  • Ming Zhao - Analyst

  • Thank you very much.

  • I want to ask this very latest incident-- there is some news about the PHICC, their action towards using Baidu search.

  • We understand it's a negotiation process.

  • Maybe could you update us on that?

  • Is that a concern?

  • Thank you.

  • Jennifer Li - CFO

  • Yes, I think Ming, as you mentioned, when it comes to contract signing with the customers, there are specific issues that we deal with the customers.

  • I will say the specific incidents you are referring is by far, already finished and behind us.

  • And I think that if you look at our Q2 forecast as we indicated, that reflects our current view, the best view.

  • And so I think that just obviously, in all the customers we service, there will be different issues and that we talk to our customers and engage with our customers.

  • The particular issue you mentioned, I would say, is behind us and moving forward, it's not an issue for us.

  • Ming Zhao - Analyst

  • Thank you.

  • Operator

  • Chao Wang, Nomura.

  • Chao Wang - Analyst

  • Good morning.

  • Thanks for taking my question.

  • I just wonder, for those key advertising categories, do you have a sense that -- how the ROI on mobile is and how does it compare to the ROI on the PC side?

  • And also for the financial services category, are they mostly brand ads from the traditional financing institutions or more performance based ads from the Internet finance companies?

  • Thank you.

  • Robin Li - Chairman and CEO

  • We actually manage the ROI so that it's roughly the same on mobile and desktop.

  • We use price as a leverage.

  • We constantly monitor the performance or ROI for our customers and advertisers, and we make sure they get good value out of those traffic clicks and conversion.

  • Jennifer Li - CFO

  • And with regards to the financial services, I think it is a little bit of both.

  • But I would say the majority of these are really brand companies.

  • They come to our platform to really sell their financial services, insurance and also investment vehicles.

  • Customers, such as Ping-An, Industrial Bank, China Merchants Bank, CPIC, these are really high quality customers and we are very happy to see this sector's growth.

  • Chao Wang - Analyst

  • Thank you very much.

  • Operator

  • Thomas Chong, Citigroup.

  • Thomas Chong - Analyst

  • Hi.

  • Good morning, Robin and Jennifer and Sharon.

  • Thanks for taking my questions.

  • I have two questions.

  • The first question is about the long-term competitive landscape regarding performance-based advertising.

  • As we see, Tencent has already started doing these new advertising models.

  • And my second question is about the second half outlook.

  • Given we see the revenue, the acceleration in the second quarter, how should we think about the third quarter and the fourth quarter revenue growth?

  • Thanks.

  • Robin Li - Chairman and CEO

  • On the performance-based advertising, I think Baidu dominated the market for many, many years and we expect to stay in a dominating position for a very long time.

  • We believe that our platform, either Mobile Baidu or Baidu Maps or other Baidu properties provide the best scenario for users to be converted into customers.

  • And time and time again, it has been proven by hundreds of thousands of customers.

  • And most of the Internet companies who are very, very performance sensitive spent most of their advertising dollar or marketing dollar on our platform.

  • For other companies who also run ads on their properties, I think those are pretty much brand-oriented instead of performance-oriented.

  • So there is still a big difference between us and the rest.

  • Jennifer Li - CFO

  • And I think, you know that we provide one quarter's guidance, it's too early to comment on the second half of the year.

  • But I think the one thing I can say is the fundamentals are very robust and we continue to see many areas of monetization efforts and customer base that we can drive the future growth.

  • Thomas Chong - Analyst

  • Thanks, Robin and thanks, Jennifer.

  • I will get back to the queue.

  • Robin Li - Chairman and CEO

  • Thank you.

  • Operator

  • Chi Tsang, HSBC.

  • Chi Tsang - Analyst

  • Yes, good morning.

  • Thanks very much for taking my questions.

  • I just had a question on SG&A.

  • You are spending a lot of SG&A and you have really seen a lot of success with that in terms of your O2O efforts.

  • I was wondering how you prioritize and how you might allocate your SG&A into things such as Nuomi, Baidu Connect, Wallet, and Delivery.

  • Thank you very much.

  • Jennifer Li - CFO

  • Obviously, we have a very key strategic focus.

  • And I think on one hand, our key gateways such as Mobile Baidu and Baidu Maps, these are pretty solid entry points to connect and synergize with our other new initiatives such as takeout food deliveries, such as Baidu Nuomi.

  • So I think the advertising spend, as we allocate, for one it has to be a strategic focus.

  • And also at the time of those SG&A expense to occur, there has to be a product readiness.

  • At the same time, there will be opportunities that whether it's a seasonal holiday or consumer events that we can take advantage of.

  • So you should expect that SG&A expense vary quarter on quarter.

  • At the same time, as we deploy these resources of advertising efforts, I commented in the past and a lot of the efforts will be spent on the promotional activities to drive these new products and user adoption.

  • And we closely monitor these ROIs and tractions.

  • And as you noted already that we are gaining great traction and we are pleased with the progress.

  • And we will continue on this path to exercise discipline and really have a very focused approach to SG&A.

  • Chi Tsang - Analyst

  • Thank you.

  • Operator

  • Cynthia Meng, Jefferies.

  • Cynthia Meng - Analyst

  • Good morning.

  • Thank you, Robin, Jennifer, and Sharon.

  • My question is on the Baidu Connect.

  • Can management provide any feedback on Baidu Connect in terms of conversion ratio of traffic into orders for the merchants?

  • And are these merchants also bidding for keywords and if not, do you expect them to be bidding for keywords and place search advertising budget on Baidu in the future?

  • And related to that, the Baidu Mall strategy.

  • What is the differentiation of Baidu Mall versus other e-commerce players or platforms?

  • Thank you.

  • Robin Li - Chairman and CEO

  • On Baidu Connect, the conversion has been very encouraging.

  • I have given you examples during the prepared remarks.

  • There are a lot of users or accounts or customers using Baidu Connect.

  • We basically provide more closed-loop or socially-oriented features on the Mobile Baidu app.

  • So the conversion is definitely better than before.

  • 'Before', I mean a simple website.

  • But it's a sophisticated mechanism.

  • Different customers use it at different level.

  • Those who use it to a very advanced stage will have a better conversion than those who use it at a more basic stage.

  • We're also seeing improvement over their previous version, but they may not be able to close the loop in our native app yet.

  • I think this is pretty much independent from their app budget.

  • Some of them spend money to promote their sites on gateways.

  • Some of them have not, but I believe once they are hooked and they see the performance, they will be able to convert to our customers.

  • And for Baidu Mall it's really an aggregation of those name brand that users can trust and have a good selection of quality goods.

  • That's the basic characteristic and of course we can drive traffic to them.

  • Operator

  • Natalie Wu, CICC.

  • Natalie Wu - Analyst

  • Hi.

  • Good morning, everyone.

  • Thank you for taking my questions.

  • Just one follow-up question on the mobile revenue.

  • Firstly congratulations on the over 50% mobile contribution.

  • But can you give us some color on the mobile revenue contributions from those O2O initiatives, for example ticket sales, food delivery sales etc.?

  • And can you update us your current mobile CPC, RPM level as well as mobile traffic relative to PC?

  • Thank you.

  • Jennifer Li - CFO

  • The mobile revenue that we currently are generating are predominantly search related.

  • For the O2O side, that is really to drive the transactions so that doesn't get categorized as online marketing revenue.

  • And as you know that our O2O initiative is focused on user growth and also the GMV transaction and so that really does not account for as our mobile revenue.

  • I think your question is related to mobile monetization.

  • I don't think CPC itself is representative for monetization power.

  • If we look at the overall monetization capabilities on mobile, it continues to narrow the gap versus PC.

  • The trending is encouraging and going smoothly and we'll continue to spend effort to narrow the gap.

  • And we are very confident about the mobile monetization power in comparison to PC.

  • At the same time obviously the mobile traffic continues to grow as a percent of the total traffic.

  • And overall both the monetization trend and the traffic trend are, as I mentioned, very robust and healthy.

  • Natalie Wu - Analyst

  • Thank you.

  • Operator

  • Eric Wen, Blue Lotus.

  • Eric Wen - Analyst

  • Hi, good morning.

  • Thanks very much for taking my questions.

  • Good morning, Jennifer and Robin.

  • I just have some housekeeping questions

  • Eric Wen - Analyst

  • Yes my question is just about the bandwidth cost that spiked up this quarter.

  • Is there any one-time reasons that lead to that cost increase?

  • And second is if you can give us some color regarding to the growth profile of iQiyi literature and music in your other revenue line?

  • Thanks.

  • Jennifer Li - CFO

  • Yes, I think the bandwidth did increase a bit this past quarter but this sequential increase is not out of line compared to prior quarters.

  • But specifically to this quarter, a majority of that driver is iQiyi.

  • iQiyi is a business that's growing nicely.

  • And their business growth and user traffic growth occupies bandwidth cost as you understand.

  • In the other revenue line, yes, as you rightly noted, these are I would say non-online marketing related revenue and the contributors are predominantly iQiyi and the other services such as music and online reading.

  • I think they continue to grow.

  • These are a smaller part of the overall business and I think the main part is iQiyi subscription membership revenue growth and that continues to track very nicely.

  • Eric Wen - Analyst

  • Thanks.

  • Operator

  • Ella Ji, Oppenheimer.

  • Ella Ji - Analyst

  • Thanks.

  • Just a quick question.

  • Can management provide us an update of your total OpEx budget spending level for the year on a full year basis including for example, SG&A, content cost and TAC?

  • Jennifer Li - CFO

  • I think I provided the ballpark outlook last quarter in our call and that remains the same.

  • There is no additional update.

  • Ella Ji - Analyst

  • Got it.

  • And then a quick follow-up relating to iQiyi.

  • I think you mentioned that the revenue growth is around 80% and this quarter the content cost is up around 55%.

  • So it seems like you are making some nice progress in terms of moving towards less loss.

  • Is this trend sustainable for the rest of the year?

  • Jennifer Li - CFO

  • I think you should look at iQiyi's top line and maybe the content cost separately.

  • They do not necessarily match on a quarter-over-quarter basis.

  • iQiyi's general business continues to grow very nicely and we're very pleased to see that.

  • At the same time, I mentioned last quarter content cost is a strategic asset for iQiyi and you should expect that overall content cost to step up.

  • And I mentioned also earlier that content cost can vary very much, quarter over quarter, depends on what kind of program is brought online and the content cost, because it's amortization based, will start to trigger.

  • So you should expect content cost to vary quarter over quarter.

  • But I did give you the outlook for the whole year and that will remain the same.

  • Ella Ji - Analyst

  • Thank you, Jennifer.

  • Operator

  • Wendy Huang, Macquarie.

  • Wendy Huang - Analyst

  • Thank you.

  • I just want to get more color on the SG&A given the different dynamics at industry and company level.

  • So we have seen actually handset shipment in China actually declined recently, and previously you actually guided the mobile pre-installation cost to be flattish year over year in dollar amount.

  • So will you adjust budget given the industry change?

  • And also I think your cooperation with Uber and other private car companies was really announced after you made that RMB5b budget guidance a quarter ago, and also given the recent R&D cost of search.

  • So how likely do you think that you may spend up more than RMB5b for the whole year?

  • Thank you very much.

  • Jennifer Li - CFO

  • As every company does, you do have a plan as you try to manage the company, whether it's strategic focus and execution resources.

  • As mentioned that -- as we're looking forward for this year the new products we push such as Baidu Nuomi, Takeout Food Delivery, and movie tickets -- a lot of these relates to marketing spending and that would be very much promotional effort focused.

  • And that is not the kind of channel spending that you used to see.

  • And for this year, majority of the SG&A expenses will be incurred on the promotional efforts to drive these product adoptions and among users and also to make sure that there is synergy among cross-sell between these products.

  • I would say, obviously we manage the SG&A expenses as a whole group category.

  • There is no specific budget just for the channel and the resources can be deployed, depends on the situation, depends on competitive landscape and also it depends on how the market is evolving, user behavior is shaping and also products that gets ready.

  • So it is managed dynamically.

  • But from the whole year's perspective the guidance that I provided last quarter for SG&A continues to hold.

  • Wendy Huang - Analyst

  • Okay.

  • Thanks, Jennifer.

  • Operator

  • 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.