百度 (BIDU) 2015 Q2 法說會逐字稿

Hello, and thank you for standing by for Baidu's second 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 hand the meeting over to your host for today's conference, Sharon Ng, Baidu's Director of Investor Relations.

Hello, everyone, and welcome to Baidu's second 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 be available on Baidu's IR website.

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

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

During the second quarter of 2015, Baidu extended our leadership in key mobile gateways and strengthened our platform, while delivering solid financial results.

Our core search business remains robust and continue to exhibit strong growth, attractive profitability, and tremendous scalability.

We continued to enrich the user experience by enhancing mobile discovery whether through search or maps, and improving mobile engagement.

We reached new, notable milestones of 100m daily active users for our Mobile Baidu search app, and 100m daily Baidu universal logins at the end of June.

According to Analysys International, our flagship gateway apps, Mobile Baidu search app and Baidu Mobile Maps were also both among the top ten most used apps in China as of June 2015, at Number 3 and Number 8, respectively.

Mobile continued to contribute 50% of total revenues.

In the past quarter, we boosted both mobile and PC monetization, as we further optimized mobile infrastructure, ad formats, and targeting.

Today, Baidu stands at the cusp of an opportunity of truly rare magnitude-an opportunity that lets us redraw the boundaries of our addressable market, from online marketing to O2O services.

China is in the early stages of a boom in its on-demand economy, but local commerce remains highly fragmented and happens predominantly offline.

By our estimates, Qunar and our owned and operated Baidu Nuomi and Baidu Takeout Delivery O2O services together address a RMB10 trillion local e-commerce market, which includes restaurants, takeout food and grocery delivery, entertainment, online travel and other verticals.

In China, there are 24 cities that have more than 8m people-the size of New York City or bigger.

O2O is an area where China has leapt ahead, because the Chinese service sector and local business owners have eagerly embraced what Internet technology can do for them, and because Chinese Internet companies have been willing to invest in educating the market and shaping consumer behavior.

But it's still the early days.

We are optimistic on the outlook of O2O, and Baidu has all the key pieces in place to win.

Indispensable foundational products, like Baidu Maps and Mobile Baidu, the strength of Baidu's brand, our enormous traffic resources, powerful data-driven technologies like recommendation and logistics optimization, a large and well-trained sales force, and perhaps most importantly, the vision and unshakeable commitment to see it through.

The solid performance of our search business has given Baidu tremendous financial and operational leverage, and has afforded us the freedom and flexibility to pursue major areas of future growth.

O2O is a major strategic focus that will define "The Next Baidu"-a new stage of growth that will unleash not only the potential of our mobile platforms, but also the energy and enthusiasm of Chinese consumers as they increasingly look to mobile to engage and to transact.

This quarter, we are reporting for the first time O2O GMV as an operating metric.

For Baidu, O2O GMV is comprised of Qunar, Baidu Nuomi, and Baidu Takeout Delivery.

As we continued to connect people with services on our platform, we more than doubled the GMV year on year, reaching RMB40.5b in Q2 2015 and making Baidu the fastest-growing e-commerce platform by GMV, and the fourth largest in China, behind only Alibaba, JD, and Ctrip.

We will be reporting GMV regularly from this quarter onward as we ramp up our O2O initiatives.

Now for an update on our core search business.

The fundamentals of core search remain very robust, with a tremendous growth trajectory ahead.

We continued to innovate and find new ways to delight our users with an ever-improving discovery experience.

Meanwhile, innovation also delivered increased click-through rate, drove growth in CPC, and ensured paid click growth for improved monetization capability.

Improved voice and image-based search technology drove higher click-through rates and a meaningful CPM increase.

In the quarter, for example, we introduced Phoenix Nest Images, a deep learning-driven system that identifies relevant, attractive images from an online marketing customer's website, and automatically and intelligently crops and resizes images, and imbeds them in paid search ads.

Ads featuring Phoenix Nest Images showed a marked increase both in CPM and in click-through rates.

Search queries from mobile devices are highly location sensitive, and this opens up a new incremental online marketing opportunity for Baidu, focused on local customers.

We've made continuous upgrades to our Phoenix Nest bidding system over the past few years, and over the past quarter we've enabled premium targeting options, allowing our customers to bid higher for demographic and proximity targeting.

We're also further realigning our salesforce to better service our larger SME customers as well as our newer base of smaller local merchants.

Now for progress in mobile and O2O.

In Q2, Baidu mobile search reached nearly 630m monthly active users, up from over 600m in the previous quarter.

Our Mobile Baidu search app reached a key milestone of 100m daily active users, demonstrating the daily habit our users have formed towards our flagship gateway app.

In mobile maps, we hit over 300m monthly active users and further extended our lead by reaching over 70% of the market, by daily active users on Android.

With the mobile experience intrinsically tied to location, the map will only continue to play a bigger role in helping users on the move discover new services and points of interest.

And we continue to maintain the leading position in app distribution.

This strong mobile foundation sets us up optimally to seize the opportunity in local.

For local merchants, Baidu offers not only search, but also Baidu Nuomi, Baidu Takeout Delivery to help grow their businesses.

Through Baidu Nuomi and Baidu Takeout Delivery, we provide offline brick-and-mortar businesses with an easy way to establish an omni-channel presence that can improve efficiency and drive incremental repeat business.

Over the past year, we have been busy integrating Nuomi into the Baidu family, aligning the sales force and upgrading its back-end systems.

And now, Baidu Nuomi is ready for prime time.

A few weeks ago, I announced that Baidu would commit RMB20b to address the vast local e-commerce opportunity that over time will build to become a profitable, multi-billion dollar business.

We have been very happy with Baidu Nuomi's rapid ascent and astonishing momentum.

Baidu Nuomi has nearly doubled its market share by GMV since January this year, experiencing exponential growth after running several successful campaigns between May and July.

In the month of June, Baidu Nuomi nearly tripled the number of new users, as compared to March.

Over the past 30 days, keyword searches on Baidu Search for Nuomi more than doubled year over year.

That's multiple times faster than its peers.

We plan to gain GMV market share by further penetrating high-priority cities and verticals.

Baidu Nuomi now covers 400 cities, and is currently number one by GMV in about 60 of them.

Restaurants are the most important vertical for local e-commerce.

We have further segmented the merchant base by first targeting large restaurant chains and will work to further expand the merchant base from there.

Beyond restaurants, key verticals for further expansion include movie ticketing and other local entertainment.

Baidu Nuomi's strategy is differentiated from its competitors in that it works more closely with merchants to drive repeat users through the "Membership Plus" CRM programs, such as stored value card and priority seating, etc.

We view the relationship with our merchants as one of the long-term relationship, working closely with them to grow their businesses.

In the current phase of building out our position at this early stage of Chinese O2O, we are deploying offers and promotions to seed the market, nurture our user base, and shape user behavior.

We know our users.

With our technology and data analytics capabilities, we segment our users and personalize recommendations to them based on time, location and preferences.

We tailor promotions based on user profiles and their relative sensitivity to price and convenience, track user adoption and conversion closely, and use these metrics to continue to refine our model.

The Baidu Nuomi team is primed to execute swiftly on our go-to-market strategy, and we are very committed to the space.

Baidu Takeout Delivery continued its impressive growth, more than doubling GMV quarter-on-quarter.

From its inception last year, Baidu Takeout Delivery has followed a differentiated strategy by working with high-quality licensed restaurants and targeting the price-elastic working age demographic.

This user segment's average food order dollar value on Baidu Takeout Delivery is approximately twice that of our closest competitors.

In the span of the year, we have built the largest multipoint-to-multipoint logistics delivery team in China, and deliver more orders than our closest competitors.

This technology-driven platform enables us to provide a better user experience -on average delivering a food order in less than 45 minutes by leveraging our Maps, resource allocation, and capacity utilization software capabilities.

In addition to restaurants, which remain a huge vertical yet to move online, we are also beginning to work with other local verticals such as grocery stores, convenience stores, and flower shops.

We have welcomed financial and strategic investors to partner with Baidu to take part in this exciting venture, with Baidu Takeout Delivery raising $250m in a transaction signed last week.

We also continue to add more platform partners and build out our ecosystem more fully.

In the second quarter, we integrated ride-sharing services, including Uber and carpooling services, from other providers with our Maps.

And Qunar became the exclusive provider of hotels on Baidu Maps and Nuomi.

Online travel is a classic example of O2O, and Qunar, which we fully consolidate in our financial statements, is now included in our O2O & Other business line.

Qunar has grown at a remarkable pace, since our initial investment in June 2011.

Over the past four years, Qunar has established itself as a leading mobile and online travel platform as the number-one player in terms of total flight tickets sold, and number-two in terms of room nights stayed, in a vertical with a multi-trillion RMB annual market size that is also growing rapidly.

We built out our ecosystem more fully through Baidu Connect, which now has over 760,000 merchants.

We believe over time, this open platform and infrastructure can help merchants across a huge range of verticals to more effectively reach consumers and convert new leads.

Baidu Wallet continued to show strength, adding nearly 9m new active users in the quarter to reach 35m active users by June.

iQiyi continues to stand out as the premium online video platform, and continues to perform well, with Q2 revenue topping RMB1b.

iQiyi leads the industry with well over 5m paying subscribers, among its vast base of over 500m users.

Hit self-produced shows, such as 'The Lost Tomb' and popular licensed content such as 'Running Man' were enormously popular among its young, digitally-savvy demographic.

Paying subscribers enjoyed value-added services, such as ad-free content and the instant gratification of watching the entire season of 'The Lost Tomb' rather than waiting for the weekly episode release.

Before I hand off to Jennifer, I want to emphasize once again how excited we are by the prospects of O2O.

O2O opens our total addressable market in China by a factor of more than 10, to a RMB10 trillion opportunity.

Baidu has established its position in online marketing, an industry with an ample runway ahead, and continuing to enjoy secular tailwinds.

But with O2O, we are at the cusp of an even larger, earlier stage opportunity, where online penetration is in the single digits.

We are seizing the opportunity to grow our business model beyond online marketing, to expand into the rich territory of local e-commerce.

This time, we have even greater talent, resources, experience, and advanced data-driven technology at our disposal.

The new revolution in the service sector is a revolution where technology will make the difference.

We are positioned to win this contest: To capture the opportunity, and to build "the Next Baidu".

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

Thank you, Robin.

Hello, everyone.

In Q2, we delivered solid financials, with our core search business growing strongly.

We further expanded our market leadership position.

Search continues to deliver handsome margins, and it represents a reliable base of operations from which we have been able to launch successful new initiatives that continue to show traction.

Mobile opens up new opportunities.

Robin mentioned the vastness of the O2O market.

The online penetration of O2O is currently in a low single digit.

With the mobile Internet, O2O presents the opportunity to connect the businesses with consumers.

Already we have witnessed the rapid online adoption of some important services, including travel, local transportation, and movie ticketing.

In each of these, merchants have adopted new ways of doing business and witnessed the active push of Internet companies and consumers readily embracing the Internet for convenience.

In these sectors, the online portion has seen manifold increase in penetration during a span of a few years.

Take for example, movie ticketing, where the online penetration was 10% in 2012 and now stands at approximately 50%.

These verticals continue to benefit from strong secular trends.

Other verticals such as restaurants, takeout food delivery and local entertainment, are much earlier in their shift online.

We believe we can create value for these businesses, by bringing new leads, increasing efficiency and maximizing capacity utilization.

From this core value proposition in the context of this massive market opportunity, we are building a new business that defines Baidu's next chapter.

Baidu is well-positioned to service the O2O opportunity.

We already serve nearly all Chinese Internet users.

We understand SMEs, who have always comprised the core of our customer base.

With mobile, we have foundational products -map and search-to support and host smaller local businesses.

Our newer O2O services have gained great traction.

Over the past few months, with every promotional campaign, we have gained market share and witnessed rapid GMV growth, while improving operational efficiency and ROI.

We have added new value-added features to deliver better user experience and have seen record adds of new users.

These market experiments have shown good momentum.

Our direction is clear, and we'll continue to focus on and invest in O2O in an aggressive but deliberate manner.

With this progress and these learnings in mind, we will step up our investment in the second half, deploying more targeted promotional campaigns and adding offline channels to attract and convert new users.

We will do so while maintaining rigorous standards to monitor ROI results.

When looking at the investments and opportunities in the market, we always have our long-term goals in mind.

We think about our long-term growth and profitability.

O2O is important for the future of Baidu, addressing a much bigger market opportunity and creating a new transaction-based business.

What's more, O2O ties directly back to search, further reinforcing the richness, relevance and convenience possible in the mobile age.

We're excited by the vast opportunity and our work to build "The Next Baidu" is underway.

We prioritize our initiative thoughtfully and will execute diligently and aggressively.

To complement the use of our own capital, we leverage existing partnerships and our broader ecosystem.

Where appropriate, we have and will continue to invite financial and strategic investors to co-invest with us to help grow these new areas.

To provide the investment community with a clearer picture of our business, as well as the progress of our growth initiatives, we report the total GMV related to O2O and margin impact of major investment areas.

Specifically, for this quarter, GMV was RMB40.5b, reflecting transaction value generated through Qunar, Baidu Nuomi and Baidu Takeout Delivery.

Core Search commands margins of over 50%.

On a consolidated basis, O2O & Other had a negative margin impact of 25.3 percentage points on our overall margin.

iQiyi, on a stand-alone basis, had a negative margin impact of 5.1 percentage points on our overall margins.

For the second quarter, total revenue was RMB16.6b, representing a [38%] (corrected by company after the call) year-on-year increase.

During the second quarter, Baidu had approximately 590,000 active online marketing customers, a 21% increase from the corresponding period in 2014 and a 13% increase from the previous quarter.

Revenue per online marketing customer for the second quarter was RMB27,400, a 13% increase from the corresponding period in 2014 and a 15% increase from the previous quarter.

Traffic acquisition cost, as a component of cost of revenue in Q2 was RMB2.1b, or 12.7% of total revenues, flat from the corresponding period in 2014.

Bandwidth and depreciation costs, as a percentage of revenues in Q2 were 5.4% and 3.7%, respectively, compared to 5.8% and 3.9%, respectively, in the corresponding period in 2014.

Content costs, as a component of cost of revenues, were RMB840m, representing 5.1% of total revenues, compared to 3% in the corresponding period in 2014.

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

SG&A expenses in Q2 were RMB3.9b, an increase of 81% year on year.

The increase was primarily due to an increase in promotional spend for O2O.

To support our O2O initiatives, we expect SG&A to ramp up significantly in the second half of the year, stepping up 80% to 90%, from the SG&A expense in the first half of 2015.

R&D expenses in Q2 were RMB2.7b, an increase of 56% over the corresponding period in 2014.

The increase was mainly 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 RMB355m in the second quarter from RMB221m in the corresponding period in 2014.

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

Operating profit for Q2 was RMB3.5b, a decrease of 2.5%, over Q2 2014.

Total headcount on a consolidated basis including invested entities was about 50,700 as of the end of Q2.

This represents an increase of 8%, as compared to the end of last quarter.

Income tax expense was RMB763m for the second quarter.

The effective tax rate for the second quarter was 19%, compared to 15.4% in Q2 2014.

Net income attributable to Baidu for Q2 was RMB3.7b, a 3% increase from the corresponding period in 2014.

Basic and diluted earnings attributable to Baidu per ADS for the second quarter amounted to RMB10.22 and RMB10.19, respectively.

Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure, for Q2 was RMB4b, a 7% increase year on year.

Basic and diluted earnings attributable to Baidu per ADS excluding share-based compensation expenses, both non-GAAP measures, were RMB11.23 and RMB11.19, respectively.

As of the end of Q2, the Company had cash, cash equivalents, and short-term investments of RMB75b.

Net operating cash inflow and capital expenditures for the second quarter was RMB5.7b and RMB923m, respectively.

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

We currently expect total revenues for the third quarter to be between RMB18.17b and RMB18.58b, representing a 34.4% to 37.4% year-on-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, please go ahead.

(Operator Instructions).

Eddie Leung, Merrill Lynch.

Good morning.

Thank you for taking my questions.

I have a question on your O2O and others business.

Robin mentioned a lot of benefits this business would receive from your core search applications.

How about the other way around, how this business and applications can help your search business, in the sense how you see we can separate them into independent businesses, without any impacts to your core search business?

Thanks.

Eddie, I think, as I mentioned, the core search continued to grow very robustly and there are a lot of room for growth going forward, too.

Traditionally, search is considered as a tool to connect people with information, but we think in the age of mobile, search can function as a tool for connecting people with services.

When we try to connect people with services, the O2O services we operate will be a very valuable asset.

It will ensure that Baidu search users have the best experience, the most smooth user experience, when they try to order something from the Baidu search tool.

So we are trying to provide a holistic experience for our users or consumers from query to transaction.

So right now, people can search for movie tickets, or for restaurants, for lots of things that can be connected to local services.

And we provide a lot of those high-frequency services through the owned and operated entities, like Baidu Nuomi and Baidu Takeout Delivery.

So this is the benefit search can get from the O2O and other we are investing now.

Dick Wei, Credit Suisse.

Hi.

Good morning.

Thanks for taking my questions.

I have the questions about the core search growth.

I wonder if we can share what's the growth rate for core search in the second quarter, as well as for the third quarter because I think the third quarter guidance may be a bit lower than the consensus number.

I wonder if you are seeing any of the macro slowdown or any kind of particular reason for somewhat a lower year-over-year growth from 2Q to 3Q.

Thank you.

Dick, I think that given the information we provided, you can extrapolate the core search revenue performance for Q2.

And you do know that we mentioned iQiyi's revenue topped RMB1b for the quarter.

You also know that Qunar provides guidance in its revenue into the Q2.

And at the same time, if you look at the rest of the revenue are predominantly search, because today in the O2O business commission-based revenue is very minimal.

So if you extrapolate that, you can see that core search continues to be very solid, very robust.

As we get into Q3, I think we continue to enjoy very strong growth on the search business.

If you look at, I think last year, the sequential growth Q3 versus Q2 was about 12.8%.

And I think, given what we're providing on the sequential growth around 11% and year-on-year growth of around mid-30s points, given the large base, our business continues to be very solid and very robust.

I think of course there are still many ways that we can continue to improve our business.

Mobile revenue contributed 50%.

And I think if you look at the composition of our customers, we are still in the process of really developing local customers or customers that are catered to the mobile environment.

And so there is more work to be done on that front, but I think the team has delivered solid results and the search business continues to be very robust.

Dick, I think one thing you may want to also consider is that we increasingly allocate a lot of resources to our O2O services.

This will occupy search traffic that could affect our core search revenue going forward.

Alan Hellawell, Deutsche Bank.

Thank you very much.

Forgive me, actually a point of clarification.

Jennifer, did you mention that our SG&A might rise 80% to 90% in the second half?

And if that's the case, would that imply roughly 90% to 97% year-on-year overall growth?

And I guess we were thinking initially a 50% year-on-year growth this year.

Is that correct?

Yes.

I think your understanding is correct, Alan.

I think, as I mentioned in my earlier comments, we have already started running our O2O business.

They are ready for the prime time, and we have run promotional campaigns.

And every activity we conduct, we learn from it.

We continue to gain market share, we are very encouraged by the momentum.

Second half of the year, we'll step up.

For our business, we'll basically double down our investment.

And we wanted to see a really phenomenal growth continue to come from the O2O.

We are very committed to the O2O area and we're very determined to really build that business quickly.

Alicia Yap, Barclays.

Hi.

Good morning, Robin, Jennifer and Sharon.

Thanks for taking my questions.

My question's also related to your O2O business.

So what is management's expectation for the O2O GMV, excluding Qunar, could be in three years' time?

What is the reasonable take rate that you can achieve on this GMV and how would O2O ex-Qunar margins to look like in three years?

And in related to that, will management have any plans in the future to divest you O2O business or spin off into like the Asian listing?

Will there be any hurdle for subsidiary spin-off if Baidu remain with the VIE structure?

Thank you.

Alicia, I think, in the O2O area we pretty much directly compete with a lot of non-public companies, such as Meituan, Dianping and some of the Alibaba affiliates.

Because of the early-stage nature, we will have to invest aggressively to make sure we will be successful.

So when we talk about GMV that includes pretty much three parts, the Qunar part and Baidu Nuomi and Baidu Takeout Delivery.

I think Baidu Nuomi is growing like 200% year-on-year and Baidu Takeout Delivery is growing like 100% quarter-on-quarter.

They are all growing very, very fast.

And together with our peers and competitors, we are educating the Chinese consumers that there's a better way to order services, so eventually we will be able to take a sizeable cut from that, but whether that's in three years or five years, it's really hard to tell at this point.

Piyush Mubayi, Goldman Sachs.

Thank you for the opportunity, Jennifer, Robin and Sharon.

In O2O, what is the rationale for inviting investors at this very early stage, which seems to be a different strategy from what you've pursued in the past?

I mean the upside is tremendous here from what you've described.

Could you explain the rationale there?

Thank you.

I think O2O right now will require a lot of investments, and also we would like to build a friendly ecosystem that supports the overall Baidu strategy.

We think having strategic or financial investors in some of the O2O initiatives will help us to do better.

Those investors will help to manage and grow our business.

Because we manage a lot of businesses simultaneously, we want to get help from outsiders.

Not only from the money point of view but also from a strategic and management point of view, we think those outsiders can provide help and provide value.

Also they will become a friendly party for the overall Baidu ecosystem.

We think that will benefit Baidu in the long term too.

And Robin, would that friendly party be potentially someone in the fin-tech area or would the ability to monetize data that you will be accumulating in the next couple of years be exploited by Baidu itself?

It really depends, it's case by case.

And we evaluate all those potential investors and try to assess their value.

Sometimes it's just smart people who are willing to spend time with the management and help us to streamline our operations and provide a more objective opinion on things we're doing.

Chi Tsang, HSBC.

Good evening and good morning, everybody.

Thanks for taking my question.

I'd like to ask also about O2O.

So Robin you've outlined your assets.

You have a lot of users, you have the technology advantage as well as a very large sales force.

I was wondering if you could discuss some of the biggest challenges to being successful in O2O?

Thank you.

Yes.

Of course not only Baidu sees the potential of O2O.

I think many other companies also view this as a huge opportunity for them, especially those venture-backed companies at a smaller scale.

Because they're private there's not much pressure from them to spend aggressively and the investors like to support those kind of startups.

I pointed out we have advantages in branding, in technology, in traffic, in a lot of things.

But this is a long-term thing.

This requires a lot of commitment, determination and investments.

I would say that would be the challenge for Baidu as a public company.

We have been public for like 10 years and we need to compete with those non-public companies at this point.

Ben Lin, Morgan Stanley.

Hi.

Good morning.

My question is actually on the search business.

Very simply, where are we with mobile search monetization?

I remember that previously you've given a figure that it's monetizing about 60% of PC.

How is that figure trending in the second Q and how do you intend continue to narrow the gap?

Thank you.

Like I mentioned during the prepared remarks, during the past quarter, both PC monetization and mobile monetization went up quite well.

So right now the ratio is higher than the 60% you pointed out.

But I think going forward there is still more room for improvement in the mobile search area than in the PC search area.

Wendy Huang, Macquarie.

Thank you.

Just a very simple question.

Regarding the mobile search revenue, previously you said it was about 42% of the total revenue.

And also you mentioned earlier that total mobile revenue contribution was just flattish quarter on quarter at 50%.

But we all know that Qunar's actually mobile penetration is certainly higher than this number.

So does that mean the mobile search revenue contributions to total actually have already peaked out?

If not, what can actually drive this mobile search revenue contribution to total continue to grow?

And also, if you can give us an update on the top advertising categories and how this composition has changed over the quarter, that would be helpful.

Thank you.

Wendy, I think you're aware Qunar's mobile revenue continues to grow very well and it's a bigger proportion of their total revenue.

But to put that in the context of the overall Baidu consolidated picture, I think if you look at their revenue base in the hundreds of millions versus Baidu's base of RMB16b, their only-mobile revenue contribution is not going to significantly move the picture.

But of course for the main online marketing service business that Baidu performs, there is still a long way ahead of us.

Of course mobile monetization has not peaked, and there are ways, things and jobs that we need to do that we can continue to improve the mobile monetization.

When you look at the quarter-on-quarter change for mobile revenue as a percentage of total revenue, from Q1 to Q2, there's also some seasonality factor.

Mobile search traffic usually are higher during weekends and holidays, and in Q1 there was Chinese New Year, there are more holidays in that quarter than it is in Q2, so the traffic mix is not favorable to mobile revenue from Q1 to Q2, and I again said that the PC monetization did well in Q2 too.

And also to your question on the top sectors, as just Robin mentioned, we did further improvements on the PC monetization side.

The composition for the top sectors hasn't really moved too much.

The traditional sectors like medical, education-those continue to be very robust and occupy the top sectors.

But at the same time, I mentioned last quarter, financial services, real estate and construction work, those kind of local businesses are growing in their contribution to overall revenue.

So I think along the lines of PC and how we continue to improve our monetization over Q2, mobile monetization continues to also making progress, and there are further a long way ahead of us for mobile monetization.

Ming Zhao, 86Research.

Thank you for taking my question.

Robin, if you look at the past 10 years, it is your search technology that really makes Baidu outstanding.

But for O2O, the business seems very heavy in the model and a lot of competitions, a lot of subsidies.

So my question is what made you feel comfortable to gain market share in this area.

Do you think, if the subsidy stops, consumers will still use your service?

And do you expect to see large consolidations in this space, so that each one actually can build a profitable model, like in the taxi hailing segment?

Thank you.

Ming, if you look at the past like 10 to 15 years of Baidu's operating history, we are not a pure online company to begin with.

In the very early days, we had to rely on on-the-ground sales force to talk to our online marketing customers face to face.

So along the way we actually built one of the largest sales force in the Internet space globally.

We have a presence in hundreds of cities across China.

And when the O2O market opportunity presented, we thought it's actually right for us in the sense that not only we have the huge traffic, the user demand for services like that, but also we have a very large sales force and operational experience to manage those on-the-ground teams to talk to folks who are not Internet savvy.

We have been very successful in that sense.

Of course our technology also gives us huge advantage over the competition, especially in the sense of how do we recommend services to our users based on user behavior data we collected and the technology we have that can have a very good sense on what the user habits are and how likely they're going to buy something, so we have this kind of technology that's uniquely better than many of the competitors.

I think we also have an advantage in terms of capital.

We have many billions of dollars in cash.

And if we need to fight a war through subsidy, we're willing to do that.

We basically have a deeper pocket than any of the competitors you can think of in the O2O space.

So when you consider all those successful factors, we think we are better positioned than anyone else to win this war, and that's why we are so determined and confident that this is the way to go.

Thomas Chong, Citigroup.

Hi.

Thanks for taking my questions.

I have three questions.

The first question is about any color about the recent macro headwinds to your advertising business?

And the second question is about the trend in operating expenses.

Any color about the 2016 outlook?

And the third question is any color about the cooperation with Uber?

Thanks.

Hi Thomas.

I think that for your question on the macro headwinds, I think all along the online sector, the Internet sector has enjoyed some level of resilience regardless of the macro environment.

We are not totally insulated from the environment, but I think overall there are just many fundamental drivers and levers that will propel the growth of our business.

So I think, in short is we really haven't seen anything.

And in particular with mobile, what we afforded also the vast improvement in assets to the Internet users and growth in traffic, our business continues to grow very nicely.

Operating expenses for 2016 and I think it's a little premature to get into that.

And I think if you reflect back on the early part of this year, we set out to do our O2O and we did earlier preliminary work.

And we find these paths are the paths that we want to pursue, and we built upon this momentum and invested in a decisive manner.

And going into 2016, I think this direction is not going to change.

And I think along the way we're going to manage our operating expenses dynamically and making sure that we are spending our money wisely, and they're generating the kind of results we would like, and continue to build upon that the O2O business that we see will benefit the Company over the long term.

For the third question, I think that the partnership is doing very well.

We actually have a very tight integration between the Baidu Maps and Uber services.

Uber has done a tremendous job in the past eight months.

They are number one in many of the Chinese cities, and we are trying hard to help them to become even more successful going forward.

Jin Yoon, Mizuho.

Hi.

Good morning, guys.

Jennifer, you mentioned about doubling down on the O2O space and increasing the SG&A count for this year.

In the first couple of quarters or so, what are you seeing in the O2O space from both the advertisers as well as the users to give you that confidence to double down?

Can you guys share with us in terms of metrics-what percentage of your customers or the users in the last quarter or couple of quarters, are repeat customers?

And when you say the ROI, improving in ROI in O2O, how are you comping that with?

Are you comping that ROI return versus search or versus other social media?

Can you just give us some color on your confidence in terms of doubling down?

Right.

I think, starting in Q1 of this year, almost every month we carry out some promotional campaigns.

We experiment on different kind of things.

Every campaign we carry out, we start out setting out a target, and we want to identify the number of users we want to recruit, new user base that we want to build, the overall GMV that we want to generate, so we're going into a campaign with a clear objective.

And as we carry out those campaigns, we come back and reflect on things that we learned and progress or improvements that we can make.

And so all along for the past few months, over the first half of the year, we continued to see the daily active users is growing at a very fast pace.

Our market share, for every campaign we carry out, is going up and is settling at a higher level.

Our new users continue to grow with every campaign we carry out.

And we continue to improve on the conversions, the coverage and the availability and the price of all the products that we offer.

So when we track the ROI, we're basically tracking, not really versus other products because they're not really comparable.

We are comparing that with the investment that we put in and see if we continue to generate higher returns for those investments.

So obviously we experiment with multiple channels to promote our services, and we track the performance of each different channel and the effectiveness of them and make decisions to really increase our spending or modify our campaign activities.

We also track the repeat purchases of our users.

So as we continue to build our business and drive on this momentum, we will accumulate a lot more data and experience with this market, and that's -what it gives us confidence, as we're going into the second half of the year.

We have learned a lot.

The business is building a tremendous momentum.

We continue to improve our products and as Robin mentioned earlier, we're already market leader in some of the markets that we operate.

And we are gaining, really narrowing the gap versus our peers.

And so that is quite encouraging and that's why we're so committed and determined, as we're going into the second half of the year.

Fawne Jiang, Brean Capital.

Good morning.

First question, Robin, you mentioned that Baidu is committed to invest RMB20b into O2O.

It seems like it's is a fairly major step up on sales marketing this year, which is close to like RMB9b/RMB10b.

I just wonder what's the timeframe for the rest of the investment and how would that impact the marketing trend for 2016/2017?

I'll ask Jennifer to answer this question.

I think, when we made to that, we basically set out a three-year timeline and that would be the commitment that we are prepared to do.

Obviously that takes into account the target GMVs that we want to generate, the efficiency or the ROI level that we today have and the desired level that we would like to have.

And that would be the required or the calculated investment that we think we need to allocate.

And obviously, the competitive environment is dynamic.

And as we go forward, we will really approach our business growth in a disciplined and diligent manner.

But I think this is a business that we're building that's not going to finish in 2016 or 2017.

I think we benefit from many strengths of the platform that we have offered and also the technology, the workforce, the many existing gateway positions that we have, and so we'll leverage that.

And going into 2016 and 2017, I think we will see much progress with this business we're just starting.

Henry Guo, Summit Research.

Hi.

Thanks for taking my questions.

So a very quick one on the city-level and the proximity-level bidding, what kind of incremental benefit, really the city-level and proximity-level bidding delivered to the Company so far in terms of incremental number of customers and incremental spending per customer?

Thank you.

I think it really depends on which kind of customers that is.

For some of the services, if a user is close enough to their store, it's much more likely for them to get them as a potential customer.

So they are willing to bid at a higher price.

This is what we have seen in reality too.

Tian Hou, TH Capital.

Morning, Robin and Jennifer and Sharon.

The question is related to your verticals, and on financial verticals and auto verticals.

In China the stock market has some issues, and in the second quarter, I do believe the activities in this area was quite high.

However, entering into third quarter it's slow.

So I wonder if you see any impact in that area.

And also in the auto sector, we noticed that in the past year you have sold Aladdin program to Bitauto, AutoHome, but this year you direct traffic to your own site XGO.

So I wonder what the plan is in those vertical Aladdin program.

That's all my two questions.

Well, when you talk about each specific vertical, it could vary from quarter to quarter and the macro economy could have an effect on that.

But overall, Baidu is a quite diversified company in terms of our customer base.

We've given you the guidance for the next quarter, and we think longer term that the solid growth will continue for our core search business.

And in the O2O front, I mentioned it to you that in order to support the growth of this sector, especially for our [owned] entities, we would allocate more traffic resources to those places that we think we have more control of.

That's why you see some of the Aladdin resources used by our internal guys instead of the previous customers.

Thank you.

Thank you, ladies and gentlemen.

Unfortunately, we have run out of time for any further questions.

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.