百度 (BIDU) 2016 Q4 法說會逐字稿

Hello and thank you for standing by for Baidu's fourth quarter and full year 2016 earnings conference call.

At this time, all participants are in a listen-only mode.

After management's prepared remarks there will be a question-and-answer session.

Today's conference is being recorded.

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

I would now like to turn the meeting over to your host for today's conference, Linda Sun, Baidu's Senior Manager of Investor Relations.

Hello everyone, and welcome to Baidu's fourth quarter and full year 2016 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, Jennifer Li, Baidu's Chief Financial Officer, and Qi Lu, Baidu's Chief Operating 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 U.S. 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.

Hello everybody, and thank you for joining today's call.

2016 was a busy year in which we experienced both significant breakthroughs and challenges as Baidu transitioned into the newest and most exciting stage of our journey so far.

In 2016, we began to see glimpses of AI revolutionizing the internet and traditional industries.

The PC era and the rise of mobile over the past four or five years are in our rearview mirror; we are now living and breathing the era of artificial intelligence.

We believe that AI is the new electricity which will transform industry after industry, spawn new applications and products that we have yet to even imagine and fundamentally change how users interact with technology.

AI represents an enormous opportunity and Baidu is primed to lead the AI revolution in China as a result of years of investment and our position at the intersection of big data, technology and search, as well as our access to the best R&D talent in China and globally.

To seize this opportunity, we have continuously shifted our strategy, organization, and resources to AI.

And we continue to gain industry recognition.

Just yesterday, MIT Technology Review singled out face recognition technology as one of the 2017 top 10 breakthrough technologies, with Baidu as a key player.

Launched last September, our artificial intelligence platform, Baidu Brain, is already deployed across nearly all of our products including search, Newsfeed, Maps, Nuomi and PostBar to name but a few.

Users experience the magic of AI when they use voice and image search, or when we push targeted content in Newsfeed, recommend dishes in Nuomi, optimize a route in Maps or intelligently identify video content on PostBar.

With AI, we are able to better match and predict user intent and deliver results that are more relevant and more targeted.

By opening up Baidu Brain's APIs to the Chinese developer community, we are also leading the charge to transform traditional businesses into AI enabled ones.

And our AI-driven initiatives such as DuerOS, supported by our leading Chinese language voice recognition technologies, opens up a new human digital interaction paradigm.

We have announced a DuerOS powered TV assistant in collaboration with Citic Guoan and a DuerOS powered home robot named Little Fish with Xiaoyu Zaijia, and we recently completed our acquisition of Raven Tech, a smart home hardware startup.

We are excited to welcome Raven Tech CEO Jesse Lu[L1] and the team to the Baidu family.

Our AI technology is even showing signs of besting humans.

Last year, Deep Speech, our voice recognition technology for search was just slightly better than human-level voice recognition accuracy at 82%.

To date, our technology has further widened the lead, performing at 86% accuracy.

In December, our AI capabilities were showcased on the popular Chinese television show The Super Brain where our Xiaodu robot competed in three mind-bending voice and image recognition challenges against human geniuses.

Xiaodu won two out of three challenges, and tied for the third.

Beyond our core platform, our leadership in AI creates vast opportunities in areas such as financial services, cloud and autonomous driving.

We are investing in these opportunities for the long-term and have attracted some of the best talent to drive these efforts to fruition.

In 2016, we made tremendous efforts to upgrade the search user experience to ensure that users have confidence in the quality of content on our platform.

To date, we have largely completed the process of verifying ICP licenses and enterprise banking accounts for all of our customers.

In the process of this cleanup effort, some portion of our customer base may not be able to meet our stringent requirements and we may experience a short-term reduction in the number of online active customers.

The higher standards are healthy and good for our platform, and customers who comply with our stringent requirements may be able to enjoy a higher volume of leads and even more attractive ROI, and in turn, spend more of their budget on our platform, be it through search, Newsfeed or our other AI-powered products.

Our untapped customer pool also remains vast.

With search, Newsfeed, and other products serving both direct response and branded advertising to key accounts, small and medium enterprises and local merchants, our value proposition to customers is highly compelling.

With hundreds of millions of users seeking and consuming content on the Baidu platform, our content ecosystem is a key focus for investment and innovation.

In particular, Newsfeed is a very exciting AI-powered product that has seen fast user adoption over the past several quarters.

Newsfeed complements search by bringing users fresh, tailored content, creating a virtuous circle of content push and pull.

Nearly half of Mobile Baidu version 7.3 and above users engage with Newsfeed on a daily basis and spend on average twice as much time in the app as compared to users who have yet to use Newsfeed.

This strong traction is encouraging and we look forward to adding new app features and further improving our Newsfeed product.

Another key part of our content ecosystem is our Baidu Brain-powered open content platform Baijiahao, which we launched at the end of September.

The Baijiahao content distribution platform creates high quality content across media formats such as images, texts, videos, AR and VR, which Baidu hosts and operates within our ecosystem.

Content creators are eager to be part of the Baijiahao platform due to our vast user traffic and targeted matching of users to content.

The platform has shown rapid growth, with over 200,000 content creators registered.

On the customer front, Newsfeed is showing early signs of being a natural, incremental complement to search.

We are very encouraged by the momentum we have gained so far with both users and customers, and we see strong potential for Newsfeed to help expand our customer pool and attract more large customers in verticals such as retail and auto, and more SME customers in verticals such as education and local services.

Maps and Nuomi continues to support our search ecosystem by providing rich, local services content.

In the fourth quarter, Baidu Maps, Nuomi and Local Express added breadth and depth to our points of interest data base, bringing users direct access to over 2.4 million merchants as of the end of December, which is a 117% increase year-over-year.

Now, looking to some of our longer-term investment areas?

We made progress in our autonomous driving initiative and demonstrated our technology at the World Internet Conference in Wuzhen this past November.

Over 200 attendees and journalists experienced Level-4 fully autonomous driving under real world conditions in our fleet of 18 self-driving cars powered by Baidu Auto Brain - our AI platform for autonomous vehicles.

Our teams in Beijing and the US are making incredible progress on a daily basis with the accuracy of Baidu's vehicular recognition already above 90% and Baidu HD mapping exceeding 90% accuracy with centimeter-level precision.

We launched our Baidu Cloud business in the second half of 2016, and have been making solid progress in building out our cloud product offering.

With our AI, big data and cloud infrastructure at our core, we are able to provide our customers with a highly differentiated value proposition.

For example, Baidu helped the Taiyuan Railway Administration build up its "intelligent logistics cloud platform" by leveraging our cloud technologies and real time big data algorithms to help optimize the customer's storage, shipment and route plan.

We've also introduced advanced solutions such as logistics navigation, image recognition and IoT offerings.

Customer feedback for our cloud service has been very positive and growth this year has been very encouraging.

Our financial services business continues to transform the traditional financial services industry.

Here, our AI strength is a crucial advantage for areas such as credit risk management and matching customers with the most appropriate products.

Baidu Wallet, which serves as a user gateway to branch into other financial products, expanded its reach with activated user accounts surpassing 100 million as of the end of the fourth quarter, compared to 90 million as of the end of the third quarter.

With Baidu's innovative approach to financial services products, we are creating new supply and demand and producing new markets, all the while helping to support the growth of traditional industries such as education, travel, home decoration and cosmetic surgery.

In the education loans, we continue to dominate with roughly 75% market share.

iQiyi performed very well in the quarter too, with revenue and paid subscriber numbers ramping up nicely.

In December of 2016, according to iResearch, iQiyi's mobile app maintained its industry leadership with 125 million daily active users, 480 million monthly active users, and 335 billion minutes monthly user time.

iQiyi is an important part of Baidu's content ecosystem and we look forward to supporting its further growth.

iQiyi has also recently completed the issuance of $1.5 billion convertible notes, of which Baidu invested $300 million.

Baidu Deliveries also grew rapidly, nearly doubling GMV year-over-year.

Baidu Deliveries' differentiated go-to-market strategy of choosing select attractive markets combined with our technology-driven AI powered competitive advantage, are helping to build a sustainable business for the long term.

As announced in our earnings press release earlier today, Mr. Greg Penner will step down from our Board, having served as a board member since July 2004.

On behalf of Baidu's Board of Directors, I would like to express my gratitude to Greg for his long-standing dedication and invaluable contribution to Baidu.

And last but not the least, on behalf of the entire Baidu team, I would like to welcome Dr. Qi Lu, our new Group President and Chief Operating Officer, who is joining our earnings call for the first time.

Qi has been appointed as our new director and vice chairman of our Board of Directors.

As you know, Qi is one of the most experienced leaders in the global technology industry and also a foremost expert in AI.

Qi oversees our products, technology, sales, marketing and operations.

I look forward to working closely with Qi to take Baidu's management and technology to the next level.

Qi, do you have a few words to say?

Thank you very much, Robin, and hello to everyone.

It is a real honor to be joining my first Baidu earnings call as Group President and COO.

As a leader in China's Internet industry for over a decade, Baidu has built up an incredibly strong set of reinforcing assets in terms of technology, data, talent and insights.

This is a very exciting time as China plus AI is an enormous opportunity for growth, which Baidu is very well positioned to lead.

We have a great journey ahead of us and I have already been very energized by the amazing work that is going on here.

I look forward to speaking with you more in the months ahead for many of the initiatives - especially in AI - that are underway.

Back to you, Robin.

Thank you, Qi.

To conclude, AI represents a revolution in how humans and businesses interact with and benefit from technology.

China plus AI will be a tremendous field of opportunity that Baidu is well-positioned to lead as a result of our long track record of investment and innovation.

Looking ahead, we will continue to apply our expanding portfolio of AI based technologies to an ever-widening range of applications, while we strengthen Baidu's role as an essential distributor of dynamic content on the Chinese Internet from news and images to video, data and connected services.

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

Thank you, Robin.

Hello, everyone.

2016 was a challenging year and a busy year, with the proactive implementation of stringent customer requirements and compliance with the new advertising law impacting our revenue.

These efforts are necessary and will help us build a better user experience and a healthier, more robust platform.

We largely completed our cleanup initiative in the fourth quarter and believe that the most significant revenue impact is behind us.

Revenue in the fourth quarter resets our revenue base and we look forward to 2017 as a time of gradual recovery and growth.

Over the past year, we have carefully reviewed our strategy and business portfolio.

As Robin mentioned, the mobile transition is behind us and we are at the cusp of an AI revolution.

Baidu's strategic focus, organization, and resources have shifted increasingly towards AI and we are excited to execute on our vision in this new era.

Given this strategic shift to capture the opportunities in the new AI era, we do not believe metrics such as mobile search MAU, mobile maps MAU, GMV and Wallet user numbers are indicative of our business performance.

As such, this will be the last quarter that we will report that set of operating metrics.

We always seek to be open and transparent and we'll continue to update the investment community on the most important metrics to track our progress.

In 2017, we will continue to invest to build our content and services ecosystem and execute on our plan to capture the AI opportunity in China.

Content continues to be an important investment area as we continue to support iQiyi's growth and build out our Baijiahao content platform to attract content and service partners.

Maps and Nuomi, and key relationships with partners such as Ctrip, will support our services ecosystem.

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

For the fourth quarter, total revenues were RMB18.2 billion representing a 2.6% decrease from the corresponding period in 2015, and flat year-over-year, excluding Qunar in the fourth quarter of 2015.

Total revenues for the full year 2016 were RMB70.5 billion, an increase of approximately 6.3% from 2015 and a 12% year-over-year increase, excluding Qunar.

During the fourth quarter, Baidu had approximately 452,000(corrected by company after the call) active online marketing customers, an 18.6% decrease from the corresponding period in 2015 and a 13.7% decrease from the previous quarter.

Revenue per online marketing customer for the fourth quarter was 35,400, a 14.2% increase from the corresponding period in 2015, and an increase of 13.1% from the previous quarter.

Traffic acquisition cost as a component of cost of revenue in Q4 was RMB2.6 billion, or 14.5% of total revenues, compared to 14.0% in the corresponding period in 2015 and 14.2% in the third quarter of 2016.

Full year 2016 TAC as a percentage of revenue was 14.7%, up from 13.3% for 2015.

Bandwidth and depreciation costs as a percentage of revenue in Q4 were 6.8% and 4.5% respectively, compared to 5.4% and 3.7% in the corresponding period in 2015.

In 2016, bandwidth and depreciation costs as a percent of revenue increased to 6.7% and 4.4% from 5.6% and 3.9% respectively in 2015.

Operational costs as a component of cost of revenues in Q4 were RMB1.2 billion representing 6.5% of total revenues, compared to 6.3% in the corresponding period in 2015.

Total operational costs for 2016 were RMB4.4 billion, representing 6.3% of total revenues, compared to 5.8% in 2015.

Content costs as a component of cost revenue in Q4 were RMB2.6 billion, representing 14.1% of total revenues compared to 7.4% in the corresponding period in 2015.

Total content costs for 2016 were RMB7.9 billion, representing 11% of total revenue, compared to 5.6% in 2015.

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

In 2017, we expect content cost to step up at a similar pace as 2016.

Content cost will be used to invest in high quality licensed and self-produced content to support iQiyi and support search and Newsfeed products through our Baijiahao platform.

SG&A expenses in Q4 were RMB3.3 billion, a decrease of 26.4% year-over-year and a decrease of 22% excluding Qunar over the corresponding period in 2015.

The decrease was mainly due to a decrease in promotional spending for transaction services.

Total SG&A expenses for 2016 were RMB15.1 billion, an 11.7% decrease from 2015, and a 5.6% year-over-year increase, excluding Qunar.

In 2017, SG&A will remain at a similar level to that of 2016, with spending shifting to Mobile Baidu and Newsfeed to further drive user adoption.

R&D expenses in Q4 were RMB3 billion, an increase of 19.5% over the corresponding period in 2015 and a year-over-year increase of 25%, excluding Qunar, in the fourth quarter of 2015.

Total R&D expenses for 2016 were RMB10.2 billion, a 0.2% decrease from 2015 and a 12.5% year-over-year increase, excluding Qunar.

In 2017, we will continue to invest in R&D.

Share based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to RMB632 million in Q4, from RMB341 million in the corresponding period in 2015.

SBC expenses for 2016 increased 27% over the 2015 level and increased 60% year-over-year, excluding Qunar.

Operating profit for Q4 was RMB2.2 billion, a decrease of 38.2% over Q4 2015 and a decrease of 40%, after excluding Qunar's impact in the fourth quarter of 2015.

Operating profit for the full year 2016 decreased 14% from 2015 and 25% year-over-year, excluding Qunar.

Other income, net was RMB1.8 billion in the fourth quarter of 2016, which mainly consisted of the investment gain recognized as a result of Baidu's exchange of Uber China shares with Didi.

Other income, net was RMB24 billion in the corresponding period of 2015, which mainly consisted of the investment gain as a result of Baidu's exchange of Qunar shares with Ctrip.

For the full year, other income, net was RMB3.8 billion in 2016, compared to RMB24.7 billion in 2015.

Income tax expense was RMB401 million for the fourth quarter.

The effective tax rate for the fourth quarter was 8.9% compared to 12.7% in Q4 2015.

The decrease in effective tax rate was due to the newly granted preferential tax licenses for certain PRC subsidiaries.

For the full year, our effective tax rate was 20.1% compared to 14.4% in 2015.

Excluding the share exchange transactions impact for the past two years, the effective tax rate was flat year-over-year.

For 2017, we expect our effective tax rate to be in the mid to high teens.

Net income attributable to Baidu for Q4 was RMB4.1 billion.

Basic and diluted earnings attributable to Baidu per ADS for the fourth quarter amounted to RMB11.43 and RMB11.40 respectively.

Diluted earnings attributable to Baidu per ADS, excluding net gain recognized as a result of Baidu's exchange of Uber China shares with Didi for Q4 was RMB6.49.

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

Net income attributable to Baidu for the full year was 11.6 billion.

Non-GAAP net income attributable to Baidu for Q4 was RMB4.6 billion.

Non-GAAP diluted earnings per ADS for Q4 was RMB13.23.

Non-GAAP net income attributable to Baidu for the full year was RMB13.2 billion.

As of Q4, the Company had cash, cash equivalents and short-term investments of RMB89.8 billion.

Net operating cash inflow and capital expenditure for the fourth quarter were RMB8 billion and RMB1.2 billion, respectively.

Full year net operating cash inflow and capital expenditures were RMB22.3 billion and RMB4.2 billion, respectively.

Total headcount on a consolidated basis including invested entities as of December 31, 2016 was about 45,900, an increase of 2.3% as compared to the end of last quarter.

Now let me provide you with our top line guidance for the first quarter of 2017.

We currently expect total revenues for the first quarter to be between RMB16.48 billion to RMB17.03 billion, representing a 4.2% to 7.6% year-over-year increase or a negative 9.5% to negative 6.5% quarter-over-quarter.

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

I will now open the call to questions.

Operator, please go ahead.

Thank you.

(Operator Instructions).

Our first question comes from the line of Eddie Leung from Merrill Lynch.

Please go ahead.

Good morning, thank you for taking my questions.

And many congratulations in bringing Qi to the team as well.

I have a question on Newsfeed.

I think Robin mentioned that so far you've been seeing some complementary results between search and Newsfeed.

Could you share more color with us on how your marketing clients are looking at these two applications, how they are allocating their budgets between Search and Newsfeed?

Should we also see a bit of cannibalization to some clients as well?

Thanks.

Eddie, this is Robin.

I think when we say that Newsfeed is complementary to search and will bring incremental traffic and revenue to Baidu, it really means that many of our marketing clients, especially when I mentioned large clients in the industries of auto and real estate, they were not able to find enough number of queries or traffic to show their ads in the search context, but it's much easier for them to find targeted users in the Newsfeed context.

And similarly, for providers of local services or education services that have a local focus, it's again easier to use Newsfeed to target their customers instead of using search.

So, our customers or advertisers can actually find more qualified traffic on the Baidu platform.

Currently, we've seen a very good adoption rate.

Many of the marketing clients, are already coming up with specially created for the Newsfeed context, which is a very encouraging sign, that they embrace and like our Newsfeed product.

And as I mentioned many times before, I think our business is very much traffic-bound, not budget-bound.

So the more traffic we can provide to our advertisers, they will have more budget to match with this.

Thank you.

Our next question comes from the line of Chi Tsang from HSBC.

Please go ahead.

Good morning, good evening.

Thank you so much for taking my questions.

I also want to congratulate you on hiring Dr. Qi Lu, as well as ending 2016 and putting it behind us.

I wanted to ask you a little bit about strategy and also about core search.

In particular, I was wondering if you could give us a little bit more details on some of the strategic imperatives you might put in place over the next few years and what that game plan might be.

And relatedly, I'm wondering if you can give us your current thinking on the importance of O2O?

And then on core search, you're guiding to about 6% revenue growth in the first quarter.

I'm wondering what that might indicate for search revenue, and also if you can give us some color on just the pace of the recovery of the core search business this year, that'd be very helpful.

Thank you very much.

Chi, I'll give you a bigger picture on the core business and new opportunities and I'll let Jennifer address the Q1 growth guidance.

I think we have entered the era of artificial intelligence, and fortunately we have invested in this area for the past five to six years.

Actually, both the existing core business of Baidu and the new opportunities we are addressing are powered by AI today, especially for search.

Five, ten years ago, when you think about search technology, it was very different.

It's basically statistic-based technology.

Today, search is almost all about machine learning, natural language understanding.

So it's all about search.

And people will be able to express their interest or queries in a much more natural way and we support voice as well as image as queries, and we've seen an increasing number of people using this kind of new form of queries to find what they need, which are all AI-based technologies.

And Newsfeed again is also pretty much AI.

Essentially, it's a technology that matches user interest with relevant content.

So we find we can leverage our strength in AI technology to come up with much better products for our users.

O2O, again, we reduced the subsidies as well as marketing costs for Nuomi and Baidu Deliveries, but we think this is an integral part of our core business.

People come to Baidu search for all kinds of things, including information, content and services.

And Nuomi provides the perfect content for services.

And we are fine-tuning the Nuomi content as well as services and making them friendlier to the Mobile Baidu users and making more opportunities for Nuomi merchants to show up in the Mobile Baidu platform.

So, going forward, we think we will be able to see solid growth in both our core products, which now include search, Newsfeed, O2O, and also new initiatives in terms of cloud, financial services, autonomous driving, and a few other AI-related initiatives.

And Chi, as you recall, last year was a busy year, lots of activity, particularly related to addressing the customer base, happened in the middle of the second quarter.

So as we look at 2017, I think, thinking about 2016 was not a very normal year.

Maybe looking and thinking about the revenues pattern from a sequential quarter-over-quarter perspective would be more meaningful.

And that I think is perhaps an easier way to think about the revenue growth.

As I mentioned earlier, Q4 largely resets our revenue base, particularly for search business.

Much of the cleanup activities, the higher requirements for our customers are put in place, and the revenue impact, as a result, is largely behind us.

So as we're going into Q1 and for the rest of the year, I think the search - we have been carrying out this business for years and it does have its quarterly patterns.

And thinking it in that way as a normal pattern, maybe that's a helpful way to think about the business this year.

And this year, as we are looking towards gradually recovering and we'll drive growth in the search business, of course other than search we have the feed product that is complementary to the core search business, so that's perhaps helpful as you think about the 2017 revenue growth.

Thank you.

Our next question comes from the line of Alan Hellawell from Deutsche Bank.

Please go ahead.

Thank you very much.

And yes, I just want to join the chorus of congratulations with the senior management changes.

Just with regard to iQiyi, if I'm not mistaken, we talked about a 110% growth in content cost last year and I believe Jennifer said we should expect a similar degree of growth, and I assume that's a percentage statement.

And if so, would that suggest that there's a further expansion in loss margin or are there things going on in revenues that would somehow lessen that negative contribution?

And then secondly, I was just curious, how would we view the margin profile of Newsfeed versus core search both in these early days -- and then, where would they be on a steady state basis?

I assume you have content-related expenses associated with procuring news flow.

So I was just curious how those two margins might compare.

Thank you very much.

Hi, Alan.

Yes, as I indicated earlier, content investment will continue to be an important investment area for us going into 2017.

For iQiyi, over the past two years, we have invested strategically and very successfully in iQiyi's content.

And as you can see, iQiyi's subscription user base is growing, and that nicely complements its advertising revenue business model.

So I think going into 2017, we'll continue to execute on that strategy.

iQiyi has demonstrated over the years a high competency in quality content selection.

And going into 2017, more of the effort will be spent in self-produced content, and that will help further strengthen and expand our subscription user base.

From a margin perspective for iQiyi, over the past two years, their margin is actually improving, and we expect that will be the trend going forward.

So iQiyi is on a solid path and I think the investment is very warranted, and they have demonstrated good returns for those kinds of content investment.

I included in 2017 content, as you mentioned, you have correctly pointed out that we also invest in content for our feed business.

The feed business product, from a margin profile perspective, is different from search.

Related at this early stage, part of the investment for feed is content related, and also we will be aggressive in rolling out user adoption mechanisms for feed to be more penetrated into the user base.

So in early stage, you know, monetization may be ramping up, but at the same time we're investing in distribution channels, in sales and marketing, as well as content for feed.

Over time, as we mentioned earlier, this is also an integral part of our search service and that offers a bigger product selection for our advertiser customers and also, very importantly, offers more ad inventory if our users' adoption is good.

So, early stage for feed but it does carry a slightly different margin profile, but overall it's complementary and enhancive to our search service.

Thank you.

Our next question comes from the line of Alicia Yap from Citigroup.

Please go ahead.

Thank you.

Good morning, Robin, Jennifer and Qi.

Thanks for taking my question.

So my question is also related to Newsfeed.

I wanted to get a sense, does the 1Q guidance that you provided includes any expectations from the Newsfeed ad contribution?

And what is management expectation and target regarding how fast and how big the Newsfeed could achieve in 2017?

And also given your comment on shifting to AI and all this content platform, Jennifer, you just mentioned about some spending, just roughly, could you get a sense how much the investment spend that we should expect related to this Newsfeed ad initiative?

Thank you.

Alicia, thank you for the question.

For Q1, specifically, Newsfeed is a product that we launched for a few quarters now, and is early stage in monetization.

So for Q1 guidance, we do have a small part that is contributing from feed.

It will grow over the years, over the quarters into 2017 as we're growing the user base, users' time on it, the advertiser pool.

And we expect Newsfeed to add more contributions to our overall revenue contribution.

For investment related to Newsfeed, I mentioned earlier, content is one, specifically related to building up the ecosystem and provide rich content and good user experience as our users use the product and engage with our service.

For Newsfeed investment, I also mentioned about sales and marketing related expenses.

So this is more for user adoption.

The investments in AI, particularly are more in the technology side, and that has to do mainly with R&D expenses.

And therefore, as I mentioned earlier, we'll continue to invest in R&D steadily but that is more gradual, it's competency build-up, it's talent, but that's not different from the way that we have been approaching R&D investment over the years.

Thank you.

Our next question comes from the line of Alex Yao from JPMorgan.

Please go ahead.

Hi, good morning everyone.

Thank you for taking my question.

I have a question on the core search business.

The mobile search MAU this quarter, the growth rate slowed down to 2% on year-over-year basis.

As you guys mentioned in the past, that search is a traffic-bound business.

Now that the mobile search traffic is slowing down and PC is most likely declining, how should we think about search growth outlook for the next two to three years?

Thank you.

Yes, I think the MAU for mobile search has to slow down because we basically penetrated almost all the Internet users here in China, and the penetration rate, when it's more than 50%, that the growth rate will inevitably slow down.

What we are hoping is that we will continue to innovate in search technology to enable people to ask questions or enter queries in more natural ways, such as asking questions in natural language or in the form of voice, or when they take a picture, they can use that picture to search.

This will increase the dependency of users to our product.

So I think overall that the traffic growth for mobile will slow down, but we think it should be able to continue to grow over the next two to three years.

Thank you.

Our next question comes from the line of Juan Lin from 86Research.

Please go ahead.

Hi, good morning, Robin, Jennifer, Dr. Qi Lu and Linda.

Thank you for taking my questions.

Actually I have one follow-up question on Newsfeed.

I'm wondering if you could share with us some metrics in terms of Newsfeed advertising and what is the current pricing policy click-through rate.

And what is our strategy to compete for user time spent with our Newsfeed product, particularly in terms of user experience, when competing against market leaders?

Thank you.

I think we allow users to create designated created for Newsfeed advertisement.

Therefore, the advertisers have the power to name their own price.

If they don't do that, I mean, when they show the same creative words for both search and Newsfeed, we will typically apply a smart discount to the cost per click on the Newsfeed.

So, on average, the click price for Newsfeed is meaningfully lower than that of Search.

We're thinking about probably half of the search-related click price.

Right now the ad load on our Newsfeed is relatively low, and user experience has been very good, versus our search-related customers, as well as those created-dedicated for Newsfeed.

Right, thank you.

Our next question comes from the line of Piyush Mubayi from Goldman Sachs.

Please go ahead.

Thank you for taking my question.

Jennifer, you talked about MAU and GMV being less relevant for gauging success of the business.

What would be the relevant metrics you'd look at going forward and could you give us a sense of which ones are the ones that you would share with us going forward.

And a question for Robin.

Robin, you made a push into software and hardware AI applications, including the acquisition of Raven Technology and the establishment of a few business units.

How do you see this evolve?

And could you talk about the shape and size of this opportunity?

Thank you.

With regards to the operating metrics, as we mentioned earlier, the mobile transition is pretty much behind us.

And our services are very much penetrated into the current Internet population in China.

Also, related to Nuomi services, it helps provide service-related content for our search ecosystem, and the GMV won't be a meaningful target objective for us.

And so we will always seek to be transparent and open with our business performance and provide relevant indicative metrics to give you insight into our business.

As we develop and focus on the ecosystem for Search, the service of the feed products, information such as what we commented on how many parties are registered with Baijiahao, that helps build our content ecosystem.

We talked about how much of our Mobile Baidu users are using the feed product and we might share more insights as our product is tracking and giving the indicative insights into the business.

So, with meaningful metrics that we feel is reflective of our business, we will be very open and transparent about that, as we have always been doing so.

Yes.

On the hardware, software integration, I think this is one of the most important characteristics of the AI era.

With this kind of integration, - a lot of innovations become possible and the user experience is significantly improved based on that.

That's why we are investing in both hardware and software for AI-related technologies.

That is true for the mobile platform, but it's also true for the home environment as well as the auto environment.

For example, when you're at home, we mentioned we have collaborated with Citic Guoan when you are watching a TV show, you can instantly ask - who is that actor?

in natural language, we will be able to find the answer for you.

In the car environment, we have CoDriver, we have CarLife, which integrate a lot of Internet and AI, voice-based commands in those environments.

That's just a couple of examples when you integrate software with hardware, what could be possible going forward.

Thank you.

Our next question comes from the line of Natalie Wu from CICC.

Please go ahead.

Hi.

Good morning management.

Thanks for taking my question.

So I have one question regarding your transaction-related service.

I've seen that the GMV declined sequentially by RMB1.3 billion.

But you also mentioned that the transaction service reduced operating margin by 21.8, versus 23.8 last quarter.

So, just wondering, why is it that the related losses expanded, why GMV scale contracted?

And also what's the management's guidance for the margin for this year?

Any color would be helpful.

Thank you.

For Q4, I think the margin impact from transaction services isn?t ? it also has to do with the overall base business.

As you recall, our search service, our service is sequentially a slight decrease.

Normally in Q4 we would have increased.

But because of all the activities going on, we didn't grow our revenue in Q4 per se.

So I think that sets the base and the component for transaction services, even if it stays similar with our continued investment in R&D and all that, that would translate into a bigger impact.

At the same time, just looking at the transaction services, within it, we have reduced the spending for Nuomi-related promotional expenses.

But at the same time, we see good traction on the take-out delivery service.

That continues to do well.

And also, included in transaction service is financial services, and we're growing that business very nicely too.

And so I think our strategy is quite clear, and components of the transaction services, different elements are performing differently.

And I think as we go into 2017, it is quite clear.

I think the whole package that you're focused on, GMV and Nuomi can help search ecosystem on the service content side, and both take-out delivery service and financial services can also take advantage of the AI technology and enable business growth and also good user experience.

Thank you.

Our next question comes from the line of Evan Zhou from Credit Suisse.

Please go ahead.

Hi, good morning, Robin, Dr. Lu and Jennifer.

Thanks for taking my question.

The question is regarding our paid subscription business on iQiyi.

So you've been actually sharing with some updated paid subscriber numbers I remember by 2Q last year we have reached the target of roughly 20 million, which is the leader across this sector.

I was wondering if you can provide an update on that.

And also regarding the comments about the cost structure and profitability for iQiyi, I think, are we looking into the possibility that iQiyi can be close to breakeven in the next year or two?

And also a quick follow-up on the content guidance comments you had just now, regarding the similar level of increase, is it referring to the percentage terms increase year-over-year or about the absolute amount of incremental cost run rate hike?

Thank you.

On the iQiyi membership question, the number of subscribers continues to grow at a very rapid rate, and we believe we are solidly number one in terms of subscription revenue and will continue to grow very fast.

I think on your other comments, specifically for content costs for 2017, what we were trying to provide you some color is it will increase at the same rate, a very similar rate compared to last year.

So over the past two years, steadily, content cost has been following a similar increase in investment levels.

iQiyi, as we mentioned, iQiyi is doing well in its business, both on the user front as well as revenue front, and we're the market leader.

So I think the business has demonstrated a two-powered engine revenue source, and I think in the near term we'll continue to invest in content and differentiate iQiyi's service.

And it's tracking very well.

Thank you.

Our next question comes from the line of Ella Ji from China Renaissance.

Please go ahead.

Thank you for taking my questions.

I have a question for Dr. Lu Qi.

So I just wonder, after you have joined the Company for several weeks, what do you think would be your to-do list for 2017?

Is there any specific strategy that you can share with us?

And then as an ordinary user, as we use Baidu products, what should we expect to see differently going forward?

Thank you.

First of all, thank you very much for your question.

Since I've been here only for a few weeks, I would say I've been able to spend a lot of time with Robin, thinking about our overall Company's long-term strategy, particularly in the context of AI and China.

And the focus is to land the opportunity in concrete user experience and concrete economic opportunities.

That will take some time to unfold, to evolve, as I mentioned a bit earlier.

I look forward to the opportunity of the coming months, speaking to many of you about those ongoing initiatives, and I have full confidence over time they will generate real user values and economic opportunities for the Company.

And that's perhaps all I'm able to say at the time for now, but I do very much appreciate your question.

Thank you.

Our next question comes from the line of Wendy Huang from Macquarie.

Please go ahead.

Thank you.

So I have three housekeeping questions.

The first, can you give us an update about the search revenue breakdown between mobile and PC?

And also, how has the pricing gap between the two actually evolved over time, in terms of CPM?

And secondly, the number of advertisers seem to be the lowest point in the past ten quarters.

I assume that was partly due to the seasonality, partly due to the lingering impact from the medical advertising law.

So, going forward, how should we expect the number of advertisers to trend, in Q1?

When should we expect the advertiser base to normalize?

Lastly, on the iQiyi, you recently did a CB, but I noticed Baidu only contributed $300 million out of $1.5 billion.

So, previously, Baidu hold about 80% in iQiyi.

So what will be the Baidu holding after this?

Thank you.

Wendy, I think we reported on the mobile revenue contribution for total revenue.

So for the fourth quarter, it stands at 65%, and continues to grow, and obviously we're living in the mobile age and undoubtedly mobile is contributing more, and we do see monetization power on the mobile front growing at a much faster pace compared to PC, and we expect that to exceed PC's monetization capabilities very soon.

On the customer front, I think you understand last year we went through the whole review of our customer base, we have much higher and more stringent requirements for our customers, for particularly the ICP license and bank account validation for enterprises.

Basically we block out individuals who do search engine marketing business on our platform.

So having raised the bar, it's no doubt that some of the customers may not meet that requirement.

But we know it's good for our user experience, it's good for the business long term, and that's what we'll do.

At the same time, we know the addressable market for the customers that we can service is vast, and we are innovative on the product side.

So, not only search, with feed products, there is much more inventory for our advertisers, and that can serve both brand players as well as the smaller players.

So we expect our customer pool to be able to grow.

We will continue to have the high requirement for our customers and gradually build up our customer base, ensuring that we have high-quality advertisers with us.

For iQiyi, Baidu will continue to strongly support iQiyi, and iQiyi is a very important content provider for our search ecosystem.

With this transaction, Baidu continues to have a majority ownership of iQiyi.

Right, thank you.

Our last question comes from the line of Thomas Chong from BOCI.

Please go ahead.

Hi, Robin and Jennifer, Dr. Lu.

Thanks for taking my questions.

I have a quick question about the number of headcount in 2017.

Given that we are investing in R&D and in particular in AI, are we going to hire a lot more talents in China or from overseas?

And Jennifer, can you give us some color about the headcount trend on an overall basis in 2017?

Thanks.

Yes, we have steadily invested in talent, and R&D capability is really a key differentiating and competitive advantage Baidu has over the years.

And we have steadily invested in R&D talent.

As I mentioned earlier, particularly in the AI age, with many of the AI-enabled services that we're working on, we'll continue to invest in R&D.

But I think from an overall headcount perspective, if you look at last year, the headcount overall has not materially changed.

Obviously with more mature business, we look to the business to produce results more efficiently and therefore getting more efficiency and productivity out of our existing business.

But at the same time, redirect resources to invest in new areas.

So, overall, I think R&D expenses will be a bigger component of the overall headcount.

And that is how we deploy and allocate the human capital.

So I think in 2017, we should expect R&D trending normal patterns compared to before as we invest in AI, but at the same time, the Company is approaching workforce planning with a disciplined approach and getting productivity out of the whole way we approach business.

Thank you.

Ladies and gentlemen, we are now approaching the end of the conference call.

Thank you for your participation in today's conference.

You may now disconnect.

Good day.

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