百度 (BIDU) 2015 Q4 法說會逐字稿

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  • Operator

  • Hello.

  • Thank you for standing by for Baidu's fourth-quarter and full-year 2015 earnings conference call.

  • (Operator Instructions).

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

  • Please go ahead.

  • Sharon Ng - IR Director

  • Hello everyone and welcome to Baidu's fourth-quarter and full-year 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 statements, 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 - Co-Founder, Chairman and CEO

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

  • We had another quarter and year of strong performance, driven by solid growth in our core search business, and Transaction Services continued to demonstrate clear momentum.

  • Over a year ago we set forth our ambitious vision and laid the groundwork to connect people with services and build an integrated online marketing and transactions services platform.

  • From the solid mobile foundation of our leading search and Maps gateway products, in 2014 we launched cornerstone pieces of our closed loop offerings, Baidu Nuomi, Takeout Delivery and Baidu Wallet.

  • In 2015, with all the key pieces in place, we saw Baidu Nuomi, Takeout Delivery and Baidu Wallet truly ramp, and at the end of 2015, we launched our new Local Express initiative.

  • I'm immensely proud of the progress we've made to redefine search and expand the scope of what search can deliver in the age of mobile.

  • As the largest, most extensive online marketing platform in China, our core capabilities in technology and data are unparalleled.

  • We continue to provide a unique value proposition to users, to help them find whatever it is they are looking for at the exact time at the exact place in the best, most intuitive and convenient way possible.

  • More than ever, we are seeing our vision of the Next Baidu really take shape, underpinned by the cross-pollination and integration of gateway, content, and transaction services products across our platform.

  • While we monitor the progress of our products individually, the real beauty is in the integration.

  • The true potential of products such as Maps, Baidu Nuomi, Takeout Delivery, and Baidu Wallet lies in the way the products support each other and elevate the whole platform.

  • The end result is a seamless, closed loop transaction of discovery, connection, and payment that delivers a delightful and enriched experience to our users, further reinforcing Baidu as the go-to partner for our merchants.

  • Starting with our core search business...

  • Our core P4P search business, which accounts for the large majority of Baidu's revenue, continues to see very solid growth, on the strength of mobile.

  • For P4P search, overall traffic continued to grow, driven by mobile, with mobile accounting for about two-thirds of total search traffic.

  • Key monetization metrics CPM and click through rates continued a clear upward trend, with mobile search monetization showing particular strength.

  • As of the fourth quarter, the P4P search CPM monetization gap between PC and mobile narrowed to less than 20%.

  • The consistent and apparent upward trend of mobile monetization is due, in no small part, to the investment we have made in artificial intelligence, which has helped make search results faster, more structured and more personalized.

  • As we have shared previously, mobile encourages longer and more frequent engagement, allows for more innovative ad formats, and generates richer data.

  • We have confidence that mobile monetization has ample headroom for growth, and will eventually exceed PC.

  • In addition to monetization improvement, we see tremendous potential in the growth of verticals that we service.

  • Even as China's overall growth slows, services and domestic consumption are growing faster, with growth in services outpacing overall GDP in 2015.

  • Providing an additional tailwind is the Chinese government's "Internet Plus" initiative, which is pushing traditional industries to work more closely with Internet companies, bringing structural change to those sectors.

  • Baidu largely services these growing sectors, with our top revenue verticals, by broad classification, including retail/ecommerce, local services, healthcare, financial services, and education.

  • We are confident in our outlook for Baidu and China's growing sectors.

  • Baidu plays a vital role as the platform to connect users and merchants in these verticals, and we stand to benefit from their growth and transformation.

  • In particular, we see tremendous potential to further penetrate the massive, incremental local opportunity, nascent in both online marketing and online transactions.

  • No platform is better positioned to service local merchants, than Baidu.

  • We already have the local traffic with intent, the gateways, the technology, the extensive salesforce, and ever-expanding infrastructure.

  • Local Express, an infrastructure initiative we launched in late October last year, enables local merchants to easily be a part of our platform and we are very happy with the progress.

  • By mid-February, well over 100,000 new and existing customers in local services verticals-including housekeeping, auto repair, wedding services and moving companies-have adopted Local Express, and the early feedback has been great.

  • For example, one Hebei-based housekeeping service saw its revenue close to double, with nearly all mobile transactions coming from Local Express after joining in January.

  • Another local service merchant, a Xiamen-based wedding photography studio, saw its overall revenue double after signing on at the end of November, crediting over 50% of their revenue to Local Express.

  • On the user side, over the past few years, through our investments in machine learning and deep learning in particular, we've made significant strides in voice and image search-the most intuitive, accessible, and naturalistic interfaces for mobile devices.

  • Our AI scientists at Baidu Research used deep learning algorithms and massive neural networks to achieve breakthroughs in speech recognition.

  • We lead the industry in speech and image technology, and saw voice and image-activated traffic across our products far more than double in the fourth quarter compared to the year prior.

  • The same algorithms that allow our Deep Speech system to produce industry-leading results in English speech recognition can, with almost no modification, also learn to transcribe Mandarin Chinese.

  • Just this week our efforts in speech recognition were named one of the top ten breakthrough technologies of 2016 by MIT Technology Review.

  • We believe that speech will continue to open up access to and transform the mobile experience for hundreds of millions of users.

  • Now moving to transaction services...

  • Momentum continues to build in our transaction services.

  • Excluding Qunar, overall GMV grew nearly five-fold year-on-year, in Q4.

  • Baidu Nuomi, Takeout Delivery and Baidu Wallet continued to show momentum, and we broadened our platform with key partnerships with players such as Ctrip and Uber, and with other third party service providers, such as eDaixi.

  • We further leveraged our large salesforce to extend coverage to local services verticals.

  • Baidu Maps is an indispensable service to help online users navigate, discover and transact in the offline world.

  • With over 300m monthly active users and over 70% market share by daily active users, Baidu Maps is a high-intent local gateway that continues to expand its closed loop ecosystem.

  • Maps has the largest points of interest database, of which 1.2m POIs-up from 1m in Q3-enable closed-loop transactions.

  • Our users express intent for local services when they use our map: 40% of map queries are for local services, up from 30% in the Q3 quarter.

  • China now has 150m private cars and 75m monthly users rely on Baidu's real-time navigation system.

  • Maps integrated Ctrip's hotel inventory in December and the growth in hotel bookings over the past few months-on holidays and events in particular-has been very encouraging.

  • Baidu Nuomi continues to show a clear upward trajectory, with GMV growing nearly three times from Q1 to Q4 and more than four-fold full year 2015 over 2014.

  • By the end of December Nuomi had over 1m merchants, more than doubling from the beginning of the year.

  • On the user front, ARPU and the number of orders per user continue to trend higher.

  • Nuomi showed particular strength in the movie theater vertical, and is now neck-and-neck for the market lead.

  • Many movie cinemas are anchor tenants in shopping malls in China, and movie ticketing is a strategic vertical to cross-sell into other verticals, such as restaurants.

  • Our 2015 data shows 65% of our existing users who discovered the Nuomi platform through movie ticketing, not only stayed on our platform, but also purchased products in categories outside of movie tickets within the year.

  • We know our users and we use personalized recommendations to cross-sell these products in other categories.

  • Nuomi continues to expand as a platform and has the most third-party partners in the industry, complementing its core verticals of restaurants and movie tickets with partners in industries like travel, event ticketing, laundry, housekeeping and auto services.

  • Baidu Takeout Delivery continued to grow strongly, increasing GMV nearly eight times from Q1 to Q4.

  • We continued to differentiate from the competition by focusing on the less price sensitive, more quality-conscious working age demographic, and by working with high quality, licensed restaurants.

  • Nearly 50% of orders are delivered last-mile by Baidu, the highest portion in the industry.

  • This is enabled by the largest multi-point to multi-point on demand logistics delivery system in China.

  • We've expanded into a number of other popular verticals, including pharmacies, convenience stores, grocery stores, florists and cake shops.

  • At the end of Q4, Baidu Wallet had 53m activated accounts-up from 45m in September and continuing to grow at a rapid pace.

  • Nuomi and Takeout Delivery customers are increasingly using Baidu Wallet to complete transactions, and the portion of transactions paid with Baidu Wallet continues to grow.

  • As of February, over 50% of Nuomi's transactions were completed with Baidu Wallet.

  • Baidu Wallet gives us better visibility on consumer behavior and helps us to improve our service to both merchants and users.

  • Baidu's core competence is in data and technology and our vision underscores our commitment to changing the world through technology.

  • 2015 was a great year for important new technology initiatives at Baidu.

  • In December, we held very successful road tests of our autonomous car.

  • The car passed a series of tests with flying colors, performing maneuvers in different traffic and road conditions.

  • Our strength in AI, computer vision and high-definition mapping were key to this success.

  • We see a very bright future for autonomous driving, especially here in China, where we face severe pollution, frequent traffic jams, and high mortality rates from traffic accidents.

  • Baidu believes we can transform transportation as we know it.

  • We will keep you updated with new developments from this exciting area.

  • We are beginning to see encouraging traction on international products.

  • Apps like Du Battery Saver and Du Speed Booster have helped drive total MAUs of international apps to 260m in Q4 2015.

  • We continue to expand our international presence, with focus on mobile products in Japan and in emerging markets including Brazil, Indonesia, Thailand, Egypt and India.

  • In November we announced two important new initiatives in internet finance.

  • We submitted an application for a direct banking license, in partnership with CITIC bank, and submitted one for online insurance license, in partnership with Allianz and Hillhouse Capital.

  • iQiyi continued to perform very well, with full year 2015 revenue nearly doubling over 2014.

  • In the fourth quarter.

  • iQiyi reached new milestones, with ads and subscription revenues reaching historical highs off the back of our popular variety show, Running Man 3 and hot self-produced content.

  • iQiyi has rapidly expanded its paying subscriber base, which surpassed the 10m mark in December.

  • As you may already be aware, Baidu has received a non-binding offer from myself and iQiyi's CEO Gong Yu to acquire Baidu's stake in the company.

  • While I cannot comment on that offer at this time, I do want to assure you that Baidu intends to adhere to the strictest standards in corporate governance and has established a special committee to independently evaluate the offer under advice of retained legal and financial advisors.

  • Whatever the outcome, iQiyi will continue to be an important strategic partner for Baidu.

  • To wrap up, we are extremely pleased with the solid foundation we've laid for future growth.

  • Our faith in the transformative power of technology is only stronger.

  • So too is our commitment to our mission of providing the best and most equitable way for people to find what they're looking for.

  • This mission has very naturally broadened from connecting people with information to include connecting people with services.

  • We entered the Year of the Monkey-my own year-with terrific momentum in our transactions business, and unshakeable confidence in the course we've charted, in the enormous value that remains for us to unlock, and in the capabilities of our crew.

  • The wind is squarely at our back, and we are at full sail.

  • With that, I'll now turn the call over to Jennifer for an update on the financials.

  • Jennifer Li - CFO

  • Thank you, Robin.

  • Hello everyone.

  • We're very pleased to deliver a strong set of results in the fourth quarter.

  • In 2015 we further executed on our vision to connect people with services.

  • We deployed significant resources to ramp Nuomi, Takeout Delivery and Wallet, and drove great momentum.

  • We also supported the stellar growth of iQiyi.

  • Looking into full year 2016, we remain very confident in the growth outlook ahead of us.

  • As Robin highlighted, the Baidu platform plays a key role in connecting users with merchants in growing consumer-orientated services sectors.

  • These sectors are undergoing transformational change and buck the overall softness felt in China's 2B manufacturing and infrastructure sectors.

  • Under a broader classification of verticals-with some previous subverticals rolled up-Baidu squarely services the growing verticals of retail ecommerce, local services, financial services, healthcare and education, to name just a few of our top verticals.

  • We have limited exposure to 2B manufacturing and infrastructure.

  • This year we'll continue to execute on our plan to build out the Next Baidu.

  • We'll continue to spend to support Nuomi, Baidu Takeout Delivery and Baidu Wallet.

  • Key investment areas include sales and marketing and operational costs.

  • We'll continue to focus on generating value to our users and merchants and closely monitor ROI.

  • We'll continue to support iQiyi, which performed exceedingly well in 2015 and has truly differentiated itself from the competition through its content and business model.

  • For 2016, the key investment focus for iQiyi remains content acquisition, both licensed and self-produced.

  • In the fourth quarter, we deconsolidated Qunar's financials after October 26, 2015.

  • Baidu's exchange of Qunar shares with Ctrip impacted a number of line items on our P&L, including revenue, expense items, effective tax expense and net income.

  • Also note, that Qunar was excluded in operating metrics of GMV, online active customers and headcount in the fourth quarter, and it will continue to be excluded in subsequent quarters.

  • Starting the first quarter of 2016 we will have equity pickup from our minority stake in Ctrip on a quarter lag basis.

  • In the first quarter of 2016, we will get two months of equity pickup of Ctrip's fourth quarter 2015 net income based on our minority stake in Ctrip.

  • Now moving to the financials.

  • All monetary amounts are in RMB unless stated otherwise.

  • Reported historical financials include Qunar up through October 26, 2015.

  • For the fourth quarter total revenues were RMB18.7b, representing a 33% increase, year-over-year.

  • Total revenues for the full year 2015 were RMB66.4b, an increase of approximately 35% from 2014.

  • During the fourth quarter, Baidu had approximately 555,000 active online marketing customers, a 6% increase from the corresponding period in 2014 and an 11% decrease from the previous quarter.

  • Revenue per online marketing customer for the fourth quarter was RMB31,000, a 17% increase from the corresponding period in 2014 and an increase of 10% from the previous quarter.

  • For the full year 2015, active online marketing customers increased by 29% and revenue per online marketing customer increased by 2% over the full year 2014 figures.

  • Excluding Qunar, on an apple-to-apples basis for the full year 2015 active online marketing customers increased by 18% and the revenue per online marketing customers increased by 11% over the full-year 2014 figures.

  • Traffic acquisition cost as a component of cost of revenue in Q4 was RMB2.6b or 14% of total revenues compared to 13.4% in the corresponding period in 2014 and 13.1% in the third quarter of 2015.

  • Full-year 2015 TAC as a percentage of revenues was 13.3%, up from 12.9% for 2014.

  • Bandwidth and depreciation costs as a percentage of revenues in Q4 were 5.4% and 3.7% respectively, compared to 5.3% and 4% in the corresponding period in 2014.

  • In 2015, bandwidth and depreciation costs as a percentage of revenue decreased to 5.6% and 3.9% respectively compared to 5.8% and 4.1%, respectively, in 2014.

  • Operational costs as a component of cost of revenues in Q4 were RMB1.2b, representing 6.3% of total revenues compared to 4.4% in the corresponding period in 2014.

  • Total operational costs for 2015 were RMB3.9b, representing 5.8% of total revenues compared to 4.6% in 2014.

  • This increase was mainly due to salesforce, delivery and payment costs associated with Transaction Services, and iQiyi-related operating costs.

  • In 2016, as we grow Transaction Services and iQiyi, related operational costs are expected to increase at a similar rate but slightly more moderately as compared to last year.

  • Content costs as a component of cost of revenue in Q4 were RMB1.4b, representing 7.4% of total revenues, compared to 4.2% in the corresponding period in 2014.

  • Total content costs for 2015 were RMB3.7b, representing 5.6% of total revenues, compared to 3.7% in 2014.

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

  • In 2016, we also expect a step up in content costs but at a slightly more moderate pace than in 2015.

  • Content costs will be used to invest in high-quality licensed and self-produced content for iQiyi.

  • SG&A expenses in Q4 were RMB4.5b, an increase of 28% year-on-year.

  • Total SG&A expenses for 2015 were RMB17.1b, a 64% increase from 2014.

  • The increase was primarily due to an increase in promotional spending for Transaction Services.

  • As we move forward to further ramp Transaction Services, we expect a similar run-rate for SG&A in 2016 as the second half of 2015.

  • We plan to engage in cross-platform marketing and promotional campaigns and will monitor effectiveness closely.

  • R&D expenses in Q4 were RMB2.5b, an increase of 16% over the corresponding period in 2014.

  • Total R&D expenses for 2015 were RMB10.2b, a 46% increase from 2014.

  • The increase was primarily due to the increased R&D-related personnel costs.

  • Share-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to RMB341m in Q4 from RMB339m in the corresponding period in 2014.

  • SBC expenses for 2015 increased 44% over the 2014 level.

  • Operating profit for Q4 was RMB3.5b, an increase of 20% over Q4 2014.

  • Operating profit for the full year 2015 decreased 8.8% from 2014.

  • Total headcount on a consolidated basis, including invested entities, as of December 31, 2015 was about 41,500, a decrease of 18% as compared to the end of last quarter.

  • The decrease was mainly due to the deconsolidation of Qunar.

  • Other income, net was RMB24.3b in the fourth quarter of 2015.

  • The increase from RMB96.1m of the corresponding period in 2014 was primarily attributable to the investment gain recognized in Baidu's exchange of Qunar shares with Ctrip.

  • For the full year, other income, net was RMB24.7b in 2015, compared to RMB261m in 2014.

  • Income tax expense was RMB3.6b for the fourth quarter.

  • The effective tax rate for the fourth quarter was 12.7% compared to 15.6% in Q4 2014.

  • For the full year our effective tax rate was 14.4% compared to 15.4% in 2014.

  • There was a 10% tax accrual on the gain associated with Baidu's exchange of Qunar shares with Ctrip.

  • For 2016, we expect our effective tax rate to be in the low 20s.

  • Net income attributable to Baidu for Q4 was RMB24.7b, a 663% increase from the corresponding period in 2014.

  • Basic and diluted earnings attributable to Baidu per ADS for the fourth quarter amounted to RMB71.1 and RMB70.92, respectively.

  • Diluted earnings attributable to Baidu per ADS, excluding net gain recognized in Baidu's exchange of Qunar shares with Ctrip, for the fourth quarter of 2015 was RMB7.61.

  • Net income attributable to Baidu for the full year increased 155%.

  • Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure, for Q4 was RMB25.1b, a 600% increase year-on-year.

  • Basic and diluted earnings attributable to Baidu per ADS excluding share-based compensation expenses, both non-GAAP measures, were RMB72.09 and RMB71.90 respectively.

  • Net income attributable to Baidu, excluding share-based compensation expenses, for the full year increased by 148%.

  • As of Q4 the Company had cash, cash equivalents and short-term investments of RMB67.9b.

  • Net operating cash inflow and capital expenditure for the fourth quarter, were RMB6.1b and RMB1.4b respectively.

  • Full-year net operating cash inflow and capital expenditures were RMB19.4b and RMB5.2b respectively.

  • Now let me provide you with our top-line guidance for the first quarter of 2016.

  • We currently expect total revenues for the first quarter to be between RMB15.41b and RMB15.97b, representing a 21.1% to 25.5% year-over-year increase.

  • On an apples-to-apples basis excluding Qunar from Baidu's financials, the guidance represents a 27.8% to 32.5% year-over-year increase.

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

  • I will now open the call to questions.

  • Operator, please go ahead.

  • Operator

  • (Operator Instructions).

  • Dick Wei, Credit Suisse.

  • Dick Wei - Analyst

  • Hi.

  • Good morning.

  • Thanks for taking my questions.

  • I have a question in the fourth quarter marketing revenue.

  • I wonder if you can give some more color on the dynamics.

  • I guess marketing services were down quarter over quarter slightly, the customer number down pretty significantly, while you launched the Local Express.

  • So if you can comment on what kind of color we see in the core search, and maybe other marketing services and how the trend going to be like in 2016, that will be good.

  • Thank you.

  • Jennifer Li - CFO

  • Hi Dick.

  • For Q4 the marketing expenses have come down sequentially compared to Q3.

  • The big reason is because of the deconsolidation of Qunar.

  • Qunar's results was included for one month and so the sequential decrease in sales and marketing expenses, the biggest component is because of Qunar.

  • Also what's happening in Q4 was we have increased the focus on measuring the effectiveness of the promotional events related to our Transaction Services and we are continuing on that effort going into 2016.

  • So the sequential sales and marketing expense reduction is mainly because of that.

  • At the same time, when you look at active online marketing customers, the sequential decrease is again mainly attributable to the deconsolidation of Qunar.

  • Net-net, as I mentioned in the earlier comment, year on year there is about 18% increase on active online marketing customers if we look at apples-to-apples comparison.

  • And sequentially, if without the Qunar's impact, there is a sequential online marketing customer increase as well.

  • We launched the Local Express business last year and the full-speed ahead of adding these customers online for the service is mainly happening this year, as Robin mentioned in his prepared remarks.

  • So, as you are looking at Q4 numbers, these active online marketing customers are not yet included in there.

  • Operator

  • Eddie Leung, Merrill Lynch.

  • Eddie Leung - Analyst

  • Good morning.

  • Thank you for taking my questions.

  • Just have a question on mobile monetization?

  • We heard Robin saying that he expects mobile monetization one day could surpass PC, so just wondering if we can get a little bit of granularity on his thoughts qualitatively.

  • Are we thinking about from an inventory point of view that your mobile could have more inventory than PC, or are we thinking about the conversion rate and click-through rate could be better than PC, and why?

  • Thanks.

  • Robin Li - Co-Founder, Chairman and CEO

  • When I talk about mobile monetization capabilities, it has nothing to do with inventory.

  • Of course mobile traffic continued to grow at a very solid rate, but I was more talking about the monetization capabilities measured by CPM, or how much money we can make by each search query on mobile.

  • I think that the click-through rate and conversion can be higher than it is on PC because on mobile we can be more targeted with more of users; we know the exact location of the user, and we can enable all kinds of user actions on the mobile.

  • Because of the smaller screen for mobile phones, the click-through rate can actually be higher; because the nature of the queries on mobile are more towards local services, which inherently have more commercial value than those more content-driven queries; and because we have more service-oriented queries on mobile and relatively less content-driven query on mobile, I think eventually the monetization capability for mobile will be higher than PC.

  • Eddie Leung - Analyst

  • That's very helpful.

  • Thank you.

  • Operator

  • Chi Tsang, HSBC.

  • Chi Tsang - Analyst

  • Good morning.

  • Thanks for taking my questions.

  • I have two questions.

  • The first question revolves around machine-learning.

  • So machine-learning has already helped your core search business, driving relevant results and click-through rates.

  • I'm wondering over the next two to five years what are some of the other commercial applications for your investment in machine-learning and also how big is your lead in machine-learning relative to your competitors?

  • And secondly, in regards to O2O, I was wondering if you could comment on the overall competitive intensity in the marketplace today.

  • And I'm wondering whether or not you've moved past the stage of heavy subsidies and on to more customer retention.

  • Thanks so much.

  • Robin Li - Co-Founder, Chairman and CEO

  • Machine-learning is a fundamental technology to our business.

  • Five years ago, search was pretty much based on statistical tactics.

  • These days the search algorithm itself is pretty much machine-learning.

  • So for a lot of our existing products and services, including the algorithmic search, paid search, the queries are based on voice, based on images, those are all heavily driven by machine-learning, especially deep-learning technologies.

  • And I'm actually very proud of our speech-recognition capability.

  • Now when you talk to Mobile Baidu, the accuracy is very high and generally the result is very relevant.

  • People are increasingly using Mobile Baidu in the voice format, query format.

  • Those are all very valuable, not exactly directly making money, but it's enhances the stickiness of our search service, Therefore, it will be able to make more money for us going forward.

  • There are those other new areas that can also benefit from machine-learning and the self-driving car is one apparent example.

  • You asked for two to five years of horizon, but I think self-driving car can become a commercial product probably within the next five years.

  • That is very dependent on our machine-learning and artificial intelligence capabilities.

  • On the O2O competitive landscape, the reality is that it's not that heavily subsidized for the past quarter or so.

  • But more importantly, I think Baidu's O2O initiative is tightly integrated with our search services and will be even integrated tighter going forward.

  • People who go through Mobile Baidu or go through Nuomi or go through Baidu Maps, they have a clear impression that they can get quality local services or O2O services from our offerings.

  • And for those very highly-frequent O2O activities, such as movie tickets, restaurants, it will continue to be low margin or we'll not be able to make money out of it anytime soon, but it actually drives stickiness to our service offerings.

  • Therefore, we can make money out of those lower-frequency activities such as auto repair or moving services.

  • I think longer-term the overall Baidu platform will benefit deeply from our O2O initiatives.

  • Operator

  • Wendy Huang, Macquarie.

  • Wendy Huang - Analyst

  • Thank you.

  • So the number of the advertisers decreased sequentially.

  • I just wondered whether that has anything to do with the macro slowdown in China.

  • And also on the other hand it actually reflects the ARPU increased significantly, whether it was more driven by the key-accounts ARPU expansion or it was more due to the mobile CPC expansion that you mentioned earlier?

  • Also a small question.

  • What percentage of the search traffic right now is video-related?

  • Thank you.

  • Jennifer Li - CFO

  • The sequential customer accounts decreased as well as the ARPU that you're seeing is the resulting effect of the deconsolidation of Qunar, basically Qunar's whole population of customers are not counted in this number.

  • And overall Qunar's customer also has a lower ARPU on balance, so as a result you see the reduction in active online marketing customers and somewhat step up in ARPU.

  • Wendy Huang - Analyst

  • So then what's organic advertisers' number in Q4.

  • Is the difference between the two quarters the pure Qunar number?

  • Jennifer Li - CFO

  • There should be a net increase of less than 30,000 customers.

  • Robin Li - Co-Founder, Chairman and CEO

  • On the video content, it has been a very important vertical for Baidu.

  • A lot of users search for video content on Mobile Baidu.

  • That being said, I think we need to continue to improve the user experience so that we'll be able to match those independent media apps related to video.

  • Wendy Huang - Analyst

  • Thank you.

  • Operator

  • Ming Zhao, 86Research.

  • Ming Zhao - Analyst

  • Thank you for taking my question.

  • Jennifer, I want to ask about your guidance for the expense.

  • You said that 2016 the expense would be the run rate of second half's expense.

  • Can you clarify if the second half's expense includes Qunar's expense or not?

  • And relating to this question, just on the O2O business, so we have seen the consolidation in the market.

  • Your expense, how does that compare with the RMB20b expense invested in this area, you guys said before?

  • Is it more or less and what are your current thinking about the O2O business?

  • Are you still trying to gain market share or have you started working on the monetization a little bit?

  • Thank you.

  • Jennifer Li - CFO

  • Basically we are trying to give you some visibility into the movements of the different line items.

  • As you know, we typically do not provide guidance, but whenever there are significant changes in our business, we'll try to provide as much clarity as possible.

  • So basically I highlighted the three line items of expenses to bring to your attention.

  • These are related to Transaction Services cost as well as iQiyi.

  • For Transaction Services' cost, there are two line items, one is the operational cost and one is SG&A.

  • Last year the operational cost has stepped up mainly because of the handling expenses related to Transaction Services and also there is a component for iQiyi as well.

  • And going into 2016, as I mentioned earlier, you should expect a similar but a slightly more moderate rate of increase for operational expenses.

  • For SG&A, if you recall, we kicked in the full total of efforts for the Transaction Services in the second half of the year and so the major step-up in SG&A last year is because of Baidu's own effort.

  • And the run rate you see for the second half of last year, it's representative as we move into the 2016 level.

  • So you can see that is basically the momentum has been built, the investment has kicked in action and there's no major swings of the activity or focus that we're doing, so that momentum will carry on in 2016.

  • With regards to the RMB20b that we referred to last year that was related to Nuomi, our O2O service platform.

  • That investment is still ongoing and there is no change to that plan.

  • When you look at the Transaction Services, included in there, is not only Nuomi, there is also Takeout Delivery service, there is also Wallet and other services like Maps are all included in the transaction services.

  • So the RMB20b, Ming, you mentioned, is a component of the overall Transaction Services.

  • Robin Li - Co-Founder, Chairman and CEO

  • For the success of O2O, it's not really measured by market share.

  • We care more about the service quality and the user experience people get from Baidu Nuomi, from Baidu Maps and Mobile Baidu.

  • We care more about the coverage, how many restaurants do we cover, the price, are we giving our consumer the best price on the market, and how convenient it is for users to buy from us.

  • As far as we can provide the best of service quality in the most convenient way for people to buy from the Baidu platform, I think eventually we will be able to make money, so the overall goal is not to drive market share, but to ensure service quality.

  • Ming Zhao - Analyst

  • Thank you.

  • Operator

  • Piyush Mubayi, Goldman Sachs.

  • Piyush Mubayi - Analyst

  • Thank you for the opportunity.

  • Robin, I have a question first on the long-term outlook for search, both if you could spell that out in terms of the number of years you could expect search to outperform overall ad spend or any other metric that you think is a better way to express that?

  • And a second question and very quick one, is an initial sense of the take rates we can expect in the different O2O segments for delivery, cinema tickets, local repair etc.

  • Thank you.

  • Robin Li - Co-Founder, Chairman and CEO

  • I think search is still quickly evolving, essentially in the mobile age, we talked a lot about integrating services into search offerings.

  • I think it largely depend on how good we execute on our strategy.

  • If we can provide the best experience for people to connect people with services, I think the long-term growth rate for search will be able to outpace the overall advertising market.

  • But if we cannot do a good job on these new initiatives then it will probably on par or even grow slower than the overall advertising market.

  • And the take rate for O2O businesses will vary from one vertical to another.

  • Restaurants could be different, takeout delivery could be different and auto repairing or moving services, these can all be very different.

  • In the near to mid-term, it's largely driven by competition, but longer term I think many of the verticals can have the take rate as high as like 20%.

  • The more frequent the activities are, the lower the take rate will be.

  • Operator

  • Natalie Wu, CICC.

  • Natalie Wu - Analyst

  • Hi.

  • Good morning Robin, Jennifer and Sharon.

  • Thanks for taking my questions.

  • I have two questions actually.

  • The first one is you have mentioned in your transcript that the number of outstanding customers and ARPU does not include Nuomi and Qunar in the fourth quarter.

  • So if I multiply those two items and subtract from online marketing revenue, also take out Qunar one-month contribution, should it be the revenue of Nuomi, mainly Nuomi?

  • Is the calculation right?

  • How come what I generate is the negative number?

  • And the second one is in terms of your search business, so just wondering what the current contributions from your direct sales, also from your agency.

  • And what's the current contribution from KA and SME?

  • And have you noticed any difference in terms of KA and SME spending on PC or mobile, especially during economic headwinds?

  • Thank you.

  • Jennifer Li - CFO

  • Natalie, to your first question, I'm not sure I fully understand.

  • For Qunar, because of the deconsolidation they are excluded from the customer accounts.

  • Excluding the Qunar's effect, on apples-to-apples basis sequentially there is a customer accounts' increase.

  • And the Nuomi's customers, because it's a different model -- it's not an online marketing model -- so their customer accounts are never included in the online marketing customer base.

  • Natalie Wu - Analyst

  • Yes, but just that I multiplied the customer number with the ARPU and I got a number.

  • And I subtracted that number from your online marketing revenues.

  • Also I take out the Qunar's one-month contribution from your online marketing revenue.

  • So should I get the revenue of Nuomi by that method?

  • Jennifer Li - CFO

  • No.

  • But I think, Natalie, maybe I don't truly understand the question, your calculation.

  • Maybe we can follow up with you.

  • Natalie Wu - Analyst

  • Sure.

  • So what about the second question?

  • Robin Li - Co-Founder, Chairman and CEO

  • Okay.

  • On the second question, from the sales point of view we have three segments, the direct sales, channel sales and the KA sales.

  • Direct sales is pretty much 100% direct; we don't use agency.

  • And channel sales we rely on our channel partners.

  • They generally do not use agency either.

  • For the KA sales, I think majority of this revenue comes from agency.

  • Natalie Wu - Analyst

  • Okay.

  • Thanks a lot.

  • What's the current maybe contribution percentage?

  • Can management share a little bit color on that?

  • Jennifer Li - CFO

  • We have not in the past broken down the components of the different sales units, but what you should know is that majority of our revenue comes from SMEs.

  • KA is a very important component as well, and I think the pattern itself hasn't really changed over the years and I think these three are equally important for us.

  • Natalie Wu - Analyst

  • Okay.

  • Thank you Jennifer and Robin.

  • Robin Li - Co-Founder, Chairman and CEO

  • Thank you.

  • Operator

  • Claire Cao, Morgan Stanley.

  • Claire Cao - Analyst

  • Hi management.

  • Thanks for taking my questions.

  • I am asking on behalf of Rob Lin.

  • I have two questions.

  • The first one is that we noticed that local services is growing well, but the mobile map MAU declined 7% quarter on quarter.

  • Just wondering what's the reason behind that?

  • And the second question is that can we have a decomposition of Other Revenue?

  • What's the contribution of Qunar and iQiyi for the quarter?

  • Thanks.

  • Robin Li - Co-Founder, Chairman and CEO

  • I didn't quite get the first question.

  • What's declining?

  • Claire Cao - Analyst

  • The MAU of our mobile map.

  • Robin Li - Co-Founder, Chairman and CEO

  • It's purely seasonal.

  • During the summer holidays people travel more so they all use map more.

  • On year-over-year basis the growth pattern is still very normal.

  • Claire Cao - Analyst

  • Okay.

  • Thanks.

  • Then how about the second question?

  • Jennifer Li - CFO

  • I think we do have segment reporting due in the 20-F timeframe and you will have a view of the full picture for iQiyi.

  • And Qunar has been included in Transaction Services and in particular for this one quarter, its results is going to be included in the Ctrip's results.

  • And I don't think it's time for them yet to report on their results, so we're not in a position to disclose that.

  • Claire Cao - Analyst

  • Understood.

  • Thanks.

  • Operator

  • Thomas Chong, Citigroup.

  • Thomas Chong - Analyst

  • Hi.

  • Thanks for taking my questions.

  • My first question is about your Baidu Wallet strategy.

  • Given the number of Wallet users is over 50m, compared to your competitors, which have a much bigger scale, so I just want to get a sense about how your Wallet strategy in 2016 will help you to catch up with the leading players?

  • And my second question is about your use of cash, would management think about paying dividends etc?

  • Thanks.

  • Robin Li - Co-Founder, Chairman and CEO

  • On the Wallet, I have said during the prepared remarks that we care more about integration than the competition.

  • We strive to provide the best user experience.

  • When people initiate their query on Baidu, they could search on Mobile Baidu, they could search Baidu Maps, they could search something on Baidu Nuomi.

  • From their query until our transaction is completed.

  • We want to make sure that this kind of experience is the best.

  • And we cover hundreds of millions of users on our Mobile Baidu app and mobile maps so we would like to cover these users through Baidu Wallet too.

  • That's why we've been driving up the adoption rate of Baidu Wallet.

  • By having this fully-integrated experience, we think we can monetize our users through all kinds of steps of their online activities.

  • Our goal is not to catch up to other payment platforms.

  • Our goal is to integrate with our existing services.

  • Jennifer Li - CFO

  • And then for the cash balance, we do have about RMB68b of cash.

  • And the business has a very strong cash-generation capability.

  • We continue to generate positive and very strong operating cash flows.

  • But having said that, as you can also see, we're in a strong investment mode to take the opportunities that's really represented by the mobile developments.

  • We are investing significantly in the transaction services area.

  • And so there we still see a lot of opportunities ahead of us and we want to retain the cash as our strategic tool to grow the organic services as well as use it for M&A purposes.

  • Having said that, I think we do keep in mind that if we have excess cash we will be open minded to deploy that through different ways of shareholder paybacks.

  • Dividend may not be in the plan as of now, as we do have share buyback plans that's approved by the Board.

  • So when opportunity is right and we see the good return for our cash, we will deploy the cash accordingly.

  • Thomas Chong - Analyst

  • Thanks Robin and Jennifer.

  • Operator

  • Jason Helfstein, Oppenheimer.

  • Bo Pang - Analyst

  • Thank you management for taking my questions.

  • This is Bo asking questions on behalf of Jason.

  • I have two questions basically.

  • The first one, just want to follow up on the core search revenue growth.

  • If my calculation is correct, the fourth quarter and potentially one-quarter guidance implying a mid 20% to high 20% year-over-year growth, I just want to clarify on that.

  • And trying to correctly understand the trend going forward as Robin just commented that as we better collected and analyzed the data point, so we're potentially seeing the mobile monetization capability to continue to grow, catch up on the PC monetization, and ultimately drive the ARPU or accelerate the ARPU going forward.

  • And also as we continue to onboard more and more local transaction accounts, we're seeing the number of advertisers to continue to grow as well.

  • So basically we are seeing strength coming from both the number of advertiser and revenue per advertiser.

  • Just want to clarify on that as well.

  • And my second question is basically that trying to follow up on the margin impact from the non-core business, including basically iQiyi and the O2O business.

  • Thank you.

  • Robin Li - Co-Founder, Chairman and CEO

  • That's a lot of questions, but the simple answer is that for the first question your calculation is correct.

  • And for the second question, you are right; the number of customers and the monetization capability will both grow.

  • But I did not get the third question?

  • Jennifer Li - CFO

  • Didn't quite understand your margin question.

  • Bo Pang - Analyst

  • So previously management provide margin, operating margin impact from iQiyi and Nuomi separately so that we have better visibility on the core search operating margin.

  • So just want to know if management can continue to provide that color.

  • Jennifer Li - CFO

  • Yes, certainly.

  • We did do that in this release as well and we are providing the full segment reporting in 20-F as well.

  • Bo Pang - Analyst

  • Okay.

  • Thank you management.

  • Operator

  • Erica Poon, UBS.

  • Erica Poon - Analyst

  • Hello.

  • Thank you.

  • Hi Robin.

  • Just in light of the softer macro, how do you expect the industry's online advertising budget to change in 2016 versus last year?

  • And do you expect Baidu's overall market share of this budget to go up or down, combining search, online video, transaction services etc?

  • Thank you.

  • Robin Li - Co-Founder, Chairman and CEO

  • I said this repeatedly, search is very unique in the sense that it's always traffic-bound instead of budget-bound.

  • The super majority of online marketing customers, they always want to buy more traffic from us.

  • Our focus has always been to try to improve the user experience, try to provide better ways for people to find what they are looking for.

  • And as long as we can provide that we can generate inventory; there's enough appetite to buy this kind of inventory from us.

  • So it's not that tuned to the macro.

  • Erica Poon - Analyst

  • Great.

  • Thank you.

  • Operator

  • Thank you.

  • Ladies and gentlemen, thank you for your participation in today's conference.

  • This concludes the presentation.

  • You may now disconnect.

  • Good day.