Baidu's CEO Discusses Q4 2012 Results - Earnings Call Transcript

 |  About: Baidu, Inc. (BIDU)
by: SA Transcripts


Hello and thank you for standing by for Baidu’s Fourth Quarter and Full Year 2012 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. And if you have any objections, you may disconnect at this time.

Now, I would now like to turn the meeting over to your host for today’s conference, Victor Tseng, Baidu’s Investor Relations Director.

Victor Tseng

Hello, everyone, and welcome to Baidu’s fourth quarter and full year 2012 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 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 statement, except as required under applicable law.

Our earnings press release in this call includes 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 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

Hello, everyone, and thank you for joining today’s call. In many ways, the atmosphere over the last year with the whole industry shifting into the mobile views a lot like the early days of the Internet. This is the huge change and we are feeling energized by the opportunities before us. The mobile and cloud based products we are developing are a best and most creative work to-date and I’m incredibly excited about the innovation that’s coming out of Baidu campus. This is a kind of atmosphere in which Baidu strives. This is a great time to be at Baidu.

And going into 2013, I am more pleased than ever that we’ve got the right recipe for success. We want to give users the best experience across desktop and mobile devices, integrate with the cloud and push out the most exciting new technologies. With these ingredients in place, Baidu is in a great position to lead the next stage of China’s Internet innovation.

Of course, there is a lot of work ahead of us as we transform Baidu for a new world of mobile. But we are off to a great start. Our internal tracking shows, Baidu is a clear market share leader with around 80 million daily active users for our flagship web search product on mobile. We expect this trend to continue as Baidu search results become more and more location specific and personalized.

In time of disruptive change, having killer app is the key and Baidu’s LBS and MAP services continue to be stars. Installations of the Baidu MAP’s app grow over 50% quarter-over-quarter in Q4 and ours is now the clear number one MAP’s app in China with over 3.5 million daily active users. On top of this organic growth, we are expanding partnerships with the handset makers to drive more acoustic installations and usage.

We are turning the low usage MAP service into the high usage LBS platform to solve people’s problems.

By integrating data and information from our own verticals and from a whole range of third parties like cellphone in real estate, Qunar in travel and URN application to name a few, Baidu now has the most comprehensive data set of any LBS service provider. There is a huge database of merchants and other useful local information. And with more coming on board all the time, users will want to use us daily instead of weekly or monthly.

A real break through this last quarter was Baidu voice assistant, built and self developed voice-recognition technology with the highest accuracy invented in Chinese on any system on the market today. Our voice assistant gives users fast intuitive and accurate responses from their device. This is more than just a voice activated search, voice commands are a key functionality, now if I can ask my device sing a song of Andy Lau for me, show me TV at under RMB 300 or where is the nearest Bank of China. I can ask voice assistant to set an alarm to wake me up at 6 am tomorrow morning or to show me the holiday schedule for the upcoming Chinese New Year break. And voice assistant is fully integrated with all our vertical services, Baidu Post Bar and Baidu Knows as well.

And our image recognition technology continues to become more sophisticated as well. Today we have the world’s most comprehensive index official images, and increasingly powerful image matching technology, within ever widening range of applications from fighting information to mobile commerce. We are just in the initial stages. We are rapidly fulfilling our vision for image recognition to be just as effective ending both method and text for indeed voice.

In terms of client-side software, we launched an updated version of our Mobile Browser in Q4, which is being excellent up tick. The new version is 30% faster and includes better categorized, the content. The browser combines unrivaled speed with very efficient data compression, both of which were big factors in securing the deal we signed recently with France Telecom-Orange in the Middle East and Africa.

The exciting work we’re being doing in mobile also extent to our strategically important verticals in area such as online video and travel. As we’ve said, iQiyi is well established as a top clear in the market. This is the leading position in terms of user time spend. We’re very encouraged by the progress we have made in the mobile space, traffic and app installations are both going exponentially. The iQiyi app has already hit over $100 million and 32% all this traffic is now from mobile.

And our content costs have stabilized, iQiyi has established a firm position in mobile and it’s very well recognized brand by brand advertisers. So we are very optimistic about the future here.

Qunar is also positioned as a market leader in an area that is seeing some very exciting roles. In what’s the most popular travel act on the market not here, with over 24 million downloads. According to [CNEK’s] annual report, the same report showed around 20% of Internet users in China, booked to travel online in 2012. We should over double the figure from 2011.

This includes train tickets, air tickets, hotel rooms and package tours, all of which Qunar enjoys a strong positioning. And with mobile booking penetration rates under 6%, there is too huge room for growth here.

Turning now to the customer front, we added over 100,000 customers in 2012 to bring us to a full of almost 600,000 on the Baidu platform. The vast majority of these customers are still coming to terms, those have shifted to mobile.

At present, only a small fraction of merchants have optimized the mobile website. And we see it as our job to help them develop the right infrastructure, resources, and know-how to convert mobile use effectively. Although, there is a lot of work ahead on this front, we are confident in the potential for growth. But as I have said before, it will take a couple of years to close this gap.

We also continue to make exiting progress with large customers. Most recently our sales team has been rolling out a new model of cooperation in important industry of ourselves like the leading in short, Ping An. In this model, the customer allocate budgets for a joint project with us and we in turn open our platform to make certain data resources available in order to facilitate more simplest cooperation and better marketing ROI.

Our strategic partnership with Ping An is developing new products to reach China’s fast growing region of car owners. We all look to replicate this model with pioneer visiting on with other leading players into this new industry work source like finance, FMCG, retail, and automotive. In turn, the tolls working relationship we are establishing as this leading virtual player should create more opportunities in this key sector.

As I said earlier, 2012 was the year of transition as we enter a new period of really exciting opportunity in the mobile Internet space. We expect this transitional phase to accelerate in 2013 as we aggressively market offers with our products and increase our ability to monetize mobile search.

Along side this, initiatives like the institute of the learning, our first research lab, launching this year will enhance our ability to innovate and develop cutting edge new product. By deploying the knowledge and resources we have at our disposal, I’m confident that the future opportunities will outmatch anything with everything, we are just getting started.

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

Jennifer Li

Thank you, Robin. Hello, everyone. I’m pleased that we’re ending another productive year with a strong set of results for the fourth quarter. I’d like to share a few highlights with you before turning to our financial results.

As Robin laid out in his prepared remarks, this is a transformative period for the industry, the opportunity is enormous and we are fully focused on growing our business. 2012 so as launched many great products that we’ve integrated seamlessly into the Baidu ecosystem.

In 2013, we’ll continue to invest and we’ll be stepping up promotional efforts to drive the installation and usage of our product. M&A efforts will continue to complement our disciplined approach to investment and channel building. As you all have seen, we completed the IT transaction and consolidated their financials on December 1.

All the line items in our P&L now reflects this consolidation. I will now take you through the highlights of our Q4 and full year financial results. All mandatory amounts are in R&D unless otherwise noticed. For the fourth quarter, total revenues were $6.3 billion, representing a 42% increase year-on-year. Total revenues for the full year 2012 were $22.3 billion, an increase of approximately 54% from 2011.

During the fourth quarter, Baidu had approximately 406,000 active online marketing customers, a 31% increase from the corresponding period in 2011 and a 4% increase from the previous quarter. Revenue per online marketing customer for the fourth quarter was approximately RMB15500 a 8% increase from the corresponding period in 2011 and a decrease of 3% from the previous quarter.

For the full year 2012, active online marketing customers increased by 22% and revenue per online marketing customers increased by 26% over the full year of 2011.

Traffic acquisition cost as a component of cost of revenue in Q4 was RMB607 million, or 9.6% of total revenues, compared to 7.9% in the corresponding period in 2011 and 8.6% in the third quarter of 2012.

TAC as a percent of revenue for the full year 2012 was 8.7% up from 8% for 2011, which primarily reflects the increased revenue contribution of contextual ads and hao123 promotions through our network.

The Baidu union network continues to be an important driver of Baidu’s overall revenue growth. We expect to leverage our network further to extract more growth in the long-term. We will manage our network partnership dynamically and use them to aggressively promote our product.

As a result, we expect TAC as a percent of revenue to continue increasing over the medium term. Bandwidth cost and depreciation cost as a percent of revenue in Q4 were 5.3% and 5% respectively, compared to 4.3% and 4.8% in the corresponding period in 2011.

In 2012, bandwidth and depreciation cost as a percent on revenue increased to 4.8% and 4.9% respectively compared to 4.3% and 4.5% respectively in 2011. The increase was mainly due to a increase in network infrastructure capacity. We expect to see more bandwidth and depreciation cost in 2013 as we sustained investment in network infrastructure and also the contribution from iQiyi consolidation.

Content cost was included in operational cost previously and mainly consist of amortization of licensed content cost from copy write owners or content distributors and cost of self produced content. With the iQiyi consolidation we have separated this line item. Content cost as a component of cost of revenue in Q4, were 120 million representing 1.9% of total revenue compared to 0.6% in the corresponding period in 2011.

Total content cost for 2012 were RMB250 million representing 1% of total revenue, compared to 0.5% in 2011. This increase in content cost was largely attributable to the consolidation of iQiyi as said before.

Selling general and administrative expenses in Q4 were RMB792 million, a increase of 52% year-on-year. Total SG&A expenses for 2012 was RMB2.5 billion, a 48% increase from 2011 mainly due to increased headcount related expenses, marketing expenses, related mostly to mobile product and the consolidation of iQiyi.

2013 will be an important year to position Baidu’s many great products, particularly in mobile. We will look to aggressively drive installation and usage.

In Q1 we will up our marketing efforts during the Chinese New Year period to promote our mobile product. These expenses are necessary and will be closely monitored for effectiveness. R&D expenses in Q4 was RMB702 million, an increase of 70% over the course bumping period in 2011, primarily due to increased head count. Total R&D expenses for 2012 were RMB2.3 billion, a 73% increase from 2011 reflecting our continued emphasis on investing in R&D talent.

Share-based compensation expenses which were allocated to related operating cost and expense line item increased in aggregate to RMB67 million in the fourth quarter from RMB47 million in the corresponding period in 2011. SPC expenses for 2012 increased to 40% over the 2011 level, we plan to put greater emphasis on SPC to attract and incentivize key talent.

Operating profit for Q4 was RMB2.8 billion, a increase of 24% over Q4 2011. Operating profit for the full year 2012 increased 46% from 2011. The one last consolidation of iQiyi negatively impacted our overall operating margin by a little over one point. Loss from equity method accounting was RMB122 million in Q4 2012 and RMB294 million in 2012 versus RMB8 million in Q4 2011 and RMB179 million in the whole year of 2011. This increase mainly reflects the loss pickup from Baidu’s cash investment in iQiyi for the month of October and November 2012, and other invested entities. Having consolidated iQiyi in December, we will now be incurring any more loss pickup related to this investment going forward.

Other Income was RMB381 million in Q4 and RMB455 million in the whole year of 2012 versus RMB21 million in Q4 of 2011 and RMB78 million in the whole year of 2011. This increase mainly reflects a one-time gain for fair value adjustment arising from the iQiyi transaction.

Total head count as of December 31, 2012, was approximately 20,900, an increase of 4,800 versus the end of 2011. R&D and the consolidation of iQiyi’s 1000 employees were the main drivers of net increase. In the fourth quarter, head count increased by roughly 2,200 sequentially. In 2013, we will continue to increase head count with more emphasis on R&D expansion.

Income tax expense was RMB540 million for the fourth quarter. The effective tax rate for the fourth quarter was 16.2% compared to 16.5% in Q4 2011. For the full year, our effective tax rate was 13.2% compared to 15.2% in 2011. The year-over-year decrease in the effective tax rate was mainly due to recognition of tax benefit obtained in 2012 for the year before.

For 2013, we expect our effective tax rate to be in the mid to high teen level. Net income attributable to Baidu for Q4 was $2.8 billion, a 36% increase from the corresponding period in 2011. Basic and diluted earnings attributable to Baidu per ADS for the fourth quarter of 2012 amounted to RMB8 and RMB7.99 respectively.

Net income attributed to Baidu for the full year increased by 58%. Net income attributable to Baidu excluding share-based compensation expenses, our non-GAAP measure for Q4 was $2.9 million, a 36% increase year-on-year. Basic and diluted earnings attributable to Baidu per ADS excluding share-based compensation expenses both non-GAAP measures were RMB8.19 and RMB8.18 respectively.

Net income attributable to Baidu excluding share-based compensation expenses for the full year increased by 57%. As of December 31, 2012, the company had cash, cash equivalents, and short-term investment of $32.5 billion; net operating cash inflow and capital expenditure for the fourth quarter of 2012 were $3.4 billion and $786 million respectively.

Full year net operating cash inflow and capital expenditures were $12.6 billion and $2.3 billion respectively. In 2013, we plan to sustain our network infrastructure to spend.

Now, let me provide you with our top line guidance for the first quarter of 2013. We currently expect total revenue for the first quarter of 2013 to be between RMB5.89 billion and RMB6.08 billion, which would represent a 38.1% to 42.6% year-over-year increase. I do wish to emphasize that this forecast reflect Baidu’s current and preliminary view, which is subject to change.

I will now open the call to questions. Operator, please go ahead.

Question-and-Answer Session


(Operator Instructions) And the first question comes from Dick Wei. Please ask your question.

Dick Wei – JPMorgan

Hello, good morning. Thank you for taking my questions. My question is on iQiyi, what is the – can management talk more about the impact on iQiyi consolidation into the financial numbers. I guess first of all, I’m not sure if you can share about the revenue contribution and was it booked on the other revenue or other services line? And also some of the cost item for example, bandwidth costs was below 25% sequentially, was it due to iQiyi as well? And then lastly, Jennifer mentioned about this 1% impact in operating margin. Was it on a one month basis or was it more on the three months on a annual ongoing basis? Thank you.

Jennifer Li

Hi, Dick. As I just stated in the Q4 of 2012, we completed the iQiyi transaction. And ITEs financial beginning on December 1 was consolidated. So the full fourth quarter financial reflects one month consolidation of the results of iQiyi. Specifically to your question, iQiyi’s revenue contribution to the top line in comparison to the large scale of our business is very small. However in terms of category it does have two categories, one is most of the revenue is online marketing revenue as would be included in our general category of online marketing revenue. There is also our other revenue that you would see in this Q4 P&L this is basically related to some of the copy write that is allowed to redistribute some of the content into other players. And this is now categorized as online marketing revenue, and you would get a glimpse of the quality of basically the categories of the revenues from iQiyi. Overall the contribution is very small.

Bandwidth cost, to your question thus impacts the overall sequential increase for Q4. If you look at our bandwidth sequential increases over the past few quarter that give you the idea of the magnitude of Baidu’s own business, how bad has been migrating and there has been additional increase because of the iQiyi consolidation. Having said that, I would say majority of the sequential bandwidth increase is because of Baidu’s own business, not iQiyi.

Bandwidth as a single item for iQiyi of course as you can appreciate for online video business is a meaningful item and going forward as we look at bandwidth, as I said, we will continue to invest in infrastructure and with bigger, some reforms and more traffic that needs to be handled, you should to continue to expect bandwidth to increase over 2013 and on top of that would be the impact of iQiyi as well. So I hope that give you a glimpse of the bandwidth in itself. The 1% I mentioned about the impact for Q4 is a one month impact of iQiyi. So if you want to refer that to get the fuller glimpse of the whole quarter, I think you can do the math on your own and that would be indicative of iQiyi’s overall margin impacted to the Baidu whole book.


Okay. And your next question comes from Alicia Yap. Please ask your question.

Alicia Yap – Barclays Capital

Hi, good morning Robin, Jennifer, and Victor. Thanks for taking my questions. My question is regarding the ARPU, so can you explain or clarify the reasons why the ARPU for the quarter experienced a slight sequential decline? Was that mainly due to challenging economic environment or was that related to available of a new alternative player? And how should we estimate this trend going forward. Whether the high single digit growth of ARPU is more reasonable going forward, instead of the double digit previously? Thank you.

Jennifer Li

Hi Alicia. As you would have observed the trend over the past few quarters, we have been very successful in adding the number of customers to our platform. Most of the addition was developed in the SME business, the Small Medium size businesses and our sales force has been very effective in executing that focus for our work force this year. Many of the additions, because they are small businesses and particularly developed in second or third tier cities, their spending power is not as it used to be. If you recall in 2011, we did benefit significantly from tremendous growth in the large customer’s account. And so the year-on-year ARPU number would be somewhat affected by that.

Having said that, you are also aware that the whole industry including our customers are migrating over to or seeing the transition to mobile, and so our sales force are focused in 2013 is to ensure that we provide a wide service and supports to our customers, current customers to continue to help them get the kind of desired ROI they’re looking for and also educate them above the benefit of mobile platform going forward. So that is basically the driver for the ARPU trend and we will continue to be very focused on delivering high-quality service to these SME customers.

Alicia Yap – Barclays Capital

Okay. So can I follow up on that so with more focus on the sales force driving to the mobile platform, would that also kind of indicate a little bit lower ARPU, given mobile maybe a little bit lower conversion?

Jennifer Li

As I said, the ARPU is based on the combination of data absorption and Mobile Search, so I would not think that the mobile would necessarily negatively impacted the ARPU. Overall, it should be incremental to the customers’ spending.

Alicia Yap – Barclays Capital

Okay, great. Thank you, I’ll get back to the queue.


And your next question comes from Chi Tsang. Please ask you question.

Chi Tsang – HSBC

Thank you for taking my question. Just a couple of things; I’m wondering now with, if you source has firmly achieved firmly in control. I’m wondering if you can talk about your strategy going forward whether it’s sort of increased monetization potential or sort of increased your library?

And secondly, clearly you guys are focused more on M&A this year, following the debt deal, the first thing you did was consolidated to control of GE. I was wondering if you can give us a better idea of sort of transactions make sense for you this year, as it relates to mobile, client software, things of that nature. Thank you.

Robin Li

Yeah. for the DD, we obviously think that it’s important to us and it’s also growing very quickly in terms of consumer time spend with the video. And we think we need to have a better control on that. So we will – for one thing we will continue to aggressively invest in the video space to make sure that’s iQiyi well continued to be successful.

In terms of strategic areas, I basically covered a lot of them during the prepared remarks. Yeah, vertical is that way, we like a lot, video is one and travel is another. We also looking at others or all kinds of verticals and continue to evaluate what this sector will make sense for us to gain more strategic hold. But overall for the company, I think for 2013, mobile is probably the most important strategic area for us.

Chi Tsang – HSBC

Thank you.


And your next question comes from Jiong Shao. Please ask your question. Jiong Shao, do you have any question? If there is no response from that line, Cynthia Meng, please ask your question.

Cynthia Meng – Jefferies & Co.

Thank you. I have a question on mobile. Can management give more color on the percentage of revenue coming from mobile for right now, and also any guidance of what we should expect for 2013? And is mobile PPC lower than PC side? What is the percentage of mobile PPC as a percent of PC cost per click? Thank you.

Jennifer Li

We have also mentioned in the past that the whole industry is going through a transition to mobile. It’s a very exciting time for us all. But having said that, the user’s habits and even our customers are continuing in the pace of migration, there hasn’t been meaningful revenue that contributor from – on the mobile. We will even efforts our side, and I think today a lot of the efforts is on the user side.

And going forward, I think mobile affords tremendous opportunity, because it does affords more accurate information for search engine, and it allows our customers to target their potential customers more effectively and accurately. But today it’s too early to comment on the CPC trend or even the money paid (inaudible) power is very exciting and very promising. But as we said, the whole transition will take a couple of years to close the gap.


And your next question comes from Alex Yao. Please ask your question.

Alex Yao – Deutsche Bank

Hello, hi good morning everyone and thank you very much for taking my question. My question is about the mobile Internet development in 2013, what are the key goals or target you would like to achieve in 2013, and what are the resources that are necessary to achieve these targets? Thank you.

Robin Li

There are basically two goals for our mobile strategy; the first and foremost is obviously mobile search. We want to make sure that users have the best experience in mobile search on Baidu, so we have been aggressively investing in this area to make sure the mobile search flow continue to be the main gateway to Internet for multi-set users going forward.

It’s in the very early stage of development, so we are adding a lot of new features to our mobile search, almost on a weekly basis, if not on a daily basis. When I said early, I can give you an example; mobile search this year is pretty much like 1999 for desktop search. On average, it took more than two second to return the search results for desktop search at that time, today the same for mobile search.

Even for this kind of slow power is fast speed consumers are moving quickly to the mobile device to get information so we are very encouraged and excited, and we feel we need to invest to make sure we have the best search experience for our users.

In addition to search, we are also investing in mobile ecosystem, we are viewing all kinds of tools, and service capabilities for all kinds of app developers so that they can quickly build app functionalities and serve the targeted customers. We believe by fostering a healthy and large and fast growing mobile community, more content, when more content more information, more data, and more services become available on the mobile Internet. People will become increasingly dependent on Baidu services. So we are investing in that front too.


And your next question comes from Jiong Shao [Macquarie Securities]. Please ask your question.

Unidentified Analyst

Good morning, thank you taking my question. I have a couple quick ones, just for your iQiyi revenue contribution for your Q1, I was wondering do you have a number you can give to us, how much of revenue from actually you have embedded factoring for your Q1 revenue guidance. And just for the on Robin’s comments, on mobile just a minute ago, would you be able to share with us now, some of the roughly what kind of traffic contribution from mobile or sort of the year-over-year or quarter-over-quarter revenue growth in Mobile Search query? Thank you.

Jennifer Li

In terms of the iQiyi revenue contribution, as said, with the backdrop of the overall Baidu’s platform business, iQiyi business is really very material in comparison. You do know that we do have the iQiyi and we also have the Qunar entities, companies we now separated goals because of the materiality test is on that. So that give you an idea, I mean they’re not that much different per se in terms of revenue contribution, and therefore, the overall guidance that you’re seeing predominantly is Baidu’s main business, driven mainly by that.

Robin Li

For the mobile traffic, it’s obviously growing at a much faster rate than the overall search market, so Mobile Search will represent an ever larger percentage of our total search traffic, but I figured, it probably does not make sense for us to report this number quarter-by-quarter, the strategical direction is quite obvious. I think I will update you when the Mobile Search traffic overtake Data Research one day, and I think that will happen sooner rather than later. we just think that there is a lot of room for improvement for the Mobile Search technology, as for the overall mobile infrastructure, speed, cost of the bandwidth, all kinds of supporting technology, router technology, operating system technology, all these kind of things will become better and better well. So customers or users will search more on their mobile device, and also there are other form of products or services that is closely related to mobile search for instance the voice assistant product, I talked about, although a lot of the request are not really search, but there will be a very large percentage of the voice assistant traffic based on search, so consumers will have a lot more way to look for information or to search for information on the mobile, we will actually consolidate all kinds of the traffic, and make that overall search experience better and hopefully we can better money value that in the future.


And your next question comes from Jin Yoon. Please ask your question.

Jin Yoon – Nomura Securities

Yes, good morning, just a couple of things, did you talk about your traffic acquisition cost in the quarter, we saw a pretty significant fledge or increase, first of all how much of that is do to one-time cost of seasonality versus what's occurring. Second of all, with the traffic acquisition cost, how much of that really coming from the like of competition or from the like of mobile. Now that's my first question. My second question has to do with comments that Robin made earlier, I think that mobile is not – I think you said that mobile is not (inaudible) ARPU, can you clarify that given the fact that mobile have lower DTP, why wouldn’t that have an impact on us. Thank you.

Jennifer Li

Hi Jin, on the traffic acquisition cost, you did observe that in Q4 the tag as a percent of revenue has stepped up.

As I said earlier, the sequentially increase is mainly due to contribution of contractual ad business as well as promotion for our products such as hao123. This is not seasonal, this in intended. As said for a few quarters now that we are leveraging this union network to grow new business such as contextual business at the same time to also dynamically managing the partner relationship to promote our own product such as hao123 and Baidu Browser.

So this is only really just a starting. We are stepping up our tag as I indicated before. You should continue to expect that the tag rate is managed dynamically, and we are very ready to take advantage of this network to promote our product as well as grow new business. A very little of the tag is related to mobile as we said earlier, mobile monetization is really in its very early stage, and therefore the tag number that you are seeing has very little to do with mobile business.

Robin Li

Jin, just to give you more information on data mobile impact on ARPU, I think ARPU is decided by a number of factors including our customers budget, our inventory or traffic, fixed rate, and CTC. Budget is not negatively impacted by mobile obviously, probably positively impacted. Although it’s not obvious right now, but it should become obvious going forward. In terms of the inventory or traffic, I think that mobile traffic is incremental to Desktop Search Traffic or it actually has more inventories for our search traffic. The CPC is lower. Right now it’s roughly half of the data search CPC. But taxable rate is not necessary lower. So if you combine all this kind of informations obviously ARPU is not necessary going to be negatively impacted by mobile.


And your next question comes from Andy Yeung. Please ask your question.

Andy Yeung – Oppenheimer & Co. Inc.

Hi, good morning. Thank you for taking my question. My question is about your investment in M&A strategy, given your strength, your financial strength and your cloud ecosystem. Can you give us some color on your organic growth and M&A strategy? How do you manage the division of labor using this two strategy?

Jennifer Li

As I said before, M&A is important element to complement our organic growth. We have the leading market position in search technology and that is our core competency. As the whole industry is looking into mobile, I think it’s great to have the resources and ability and see the kind of innovative efforts in the industry that if I do can invest in.

So Robin mentioned earlier, our key strategic focus for 2013 is mobile. So if we are launching our M&A efforts that would follow our overall strategy. We have also in the past invested in key verticals and so you can see that our M&A strategy is really to enhance our core competency to capture the main verticals to help with the ecosystem buildup as well to invest in innovative companies, which helps us position ourselves in the new industry evolvement, so that is basically how we manage our M&A initiatives.

Andy Yeung – Oppenheimer & Co. Inc.

I just want to emphasize that acquisition is not our main growth strategy. We have a lot of growth, room for growth for our organic, I think our products and we are also aggressively investing and building new products and technologies. Mobile will kind of – I mean acquisition will complement this kind of efforts, but it’s not going to be the main growth driver.


And your next question comes from Piyush Mubayi. Please ask your question.

Piyush Mubayi – Goldman Sachs

Good morning. Could you just talk about desktop Search trends both from a revenue perspective as well as actual search perspective? Thank you.

Robin Li

Desktop search has been soft during the past quarter and we expect that trend will continue for the coming year. You may know that the new PC shipment last year actually had a decrease over 2011 and we are not so optimistic about the new PC shipment this year. So desktop search will continued to be a very important way for people to find information, but the real growth side on mobile.

Jennifer Li

I think it’s important to note that ultimately we’re providing search and information services regardless of the end-user devices that’s coming from. We do see coming from a wide range of new devices and that continues to fill the overall usage of the Internet and people taking advantage of search engine services.


And your next question comes from Eddie Leung. Please ask your question.

Eddie Leung – Bank of America Merrill Lynch

Good morning. Thank you for taking my questions. My question is more on iQiyi, could you comment on the content investment trends in 2013 as we have heard different stories about the content call strength in the industry. So I just want to get an idea on the investment amount as far as the coming cost trend in the industry? Thanks.

Jennifer Li

Hi, Eddie, with the consolidation of iQiyi we separated the content cost of line items. It is the important cost complement for the online video business. And I think for some of the publicly misstate the companies, they provide a indicative trend in terms of content, and I think the market do have – does have an expectation on how that looks like.

Then for us I think the content I think, historically that has been mixed together with the operational cost to line item. And I think if we look at those two line items together as you look at into 2013, Q4 levels will probably give you indicative line level going into 2013. So specifically what I was saying is, operational cost line item and the content cost line item if you look at that together, the Q4 level should be indicative. Not necessarily meaningful to think how the content cost line item, because Baidu’s overall cost base is so huge.


Next question comes from Vey-Sern Ling. Please ask your question.

Vey-Sern Ling – UBS Securities Asia

On the GE’s content cost I see that in Q4 the content cost is $120 million, is that just for one month, if I would think that the extrapolating, how do I think about the $21.5 million that is spent over the whole of 2012?

Jennifer Li

The $120 million, the majority of that is iQiyi related. You would see that before the iQiyi, consolidation, we do have some content of cost, and this is related to some of the data, music, and stuff like that that, we do acquire. I think that is a one-month impact, but the $120 million is not all because of GE.

Vey-Sern Ling – UBS Securities Asia

That’s all I have.


And your next question comes from Muzhi Li. Please ask your question.

Muzhi Li – Citigroup

Hi, thank you for taking my question. I would like to ask the management to give some guidance for the margin trends going into 2013, and how should we model those marketing and R&D expenses into the future? Thank you.

Jennifer Li

All right, okay. As you know, we have been investing, and I've indicated that very clearly earlier that in 2013, we have many great products that we look to aggressively promote to the different kind of channels. The SG&A expense as a percent of revenue in Q4 you would have already seen some of the efforts taking in shape and historically you have seen SG&A expenses scaled with the fast growth of our business. In 2013, as we aggressively promote our readily greater product, I would not expect the SG&A line to further scale and that’s on the SG&A expenses.

Our R&D as I said earlier, that has been our focus in terms of investment and that focus will continue to carry, we do plan some headcount increases and if we look at 2013, predominantly that kind of human resources investment would be focused on R&D. And the Q4 R&D expense as a percent of revenue should be relative largely indicative for you as you look into the years out.


And your next question comes from (inaudible).

Unidentified Analyst

Hi, thank you for taking my question. My question is on the mobile monetization. I understand that you’re testing mobile Phoenix Nest, so I am curious what are the main factors determining when you will officially launch the system and how would you expect advertisers to allocate budget after this is especially launched as they think about the proportion of traffic coming from mobile versus desktop? Thank you.

Robin Li

Mobile monetization is very early at this stage. We are experimenting all kinds of possibilities like how many ads or promotional links we show associated with our page and how do we display advertising information or even how do we track conversion? All of the same time moving pieces, it’s very early for us to give you any guidance on the trend. What we know is that mobile traffic continue to grow very quickly, we wanted to build the best user experience first and we will continue to help our customers to build up a mobile friendly website or apps, so that their conversion will improve. As our ROI improve for our customers, they will allocate more budget to the mobile advertising space.

Right now, our customers are given the choice whether they want their budget to be spend on mobile, and they were mostly mobile and desktop were only desktops, many of them chose to spend both mobile and desktops. It’s just not many people really understand how to promote their product and submit this to mobile search were smoother mobile site. So there is still a lot of work that we need to do to make that a better channel for our advertisers and customers.


The next question comes from Wendy Huang. Please ask your question.

Wendy Huang – CIMB

Hi, thank you. My question is mainly about desktop search. I think in the past one year, we have seen Facebook launched their Graph Search, Google launched Knowledge Search and also even Sina Weibo integrated (inaudible) to do the Social Search. I just want to – what effort will you make on the PC front to send your market share on the PC, that was not to ensure the user experience and trace the amortization further? Thank you.

Robin Li

Yeah. That’s a great question. We think Search is still young, there are a lot of ways we can improve the user experience and there is a lot of ways we can develop a new technology to make that Desktop Search experience better. let me give you a couple of examples for almost like 15, 20 years. Search now it looks like the same, you have a list of 10 links, title, summary, those kind of things. We figured I think a lot of verticals we can give, but we can serve the users’ needs better by giving them different kind of information or different kind of display of information that’s what allowing within for, but we figured a lot more user request, it can be matched with a more diversified or versatile way of displaying the kind of information including things like you just mentioned knowledge class when you search for a celebrity, new band or a popular phase that has a encyclopedia entry from Baidu. We can display those structured data in a more direct way to satisfy users needs. We are also verticals especially for those with commercial value such as travel or e-commerce, we have much better ways to display information for our users being set off just a title and summary. So we're doing a lot of that to the state and you will find the Baidu search result while look very different a year from now.


And your next question comes from Wallace Cheung. Please ask your question. And Wallace Cheung, did you have a question? There is no response. We'll move on to the next, Richard Ji. Please ask your question.

Richard Ji – Morgan Stanley

Thanks for taking my call. And can you comment on the revenue split between your large corporate customer, as well as SME, especially I'm also curious to know the different type of growth rates especially given the end market stock to stabilize. Should we expect a meaningful pickup from your large corporate customers and in terms of the data logic (inaudible).

Jennifer Li

Hi, Richard, historically we have not publicly disclosed the split between SME and large customers. But I can tell you predominantly majority of our business has been coming from SME and the split that we internally measure has been pretty consistent. There are a lot of efforts and initiatives that we can do on both the SME front, as well as the large customers. You do notice that over the 2012 year period, we continue to develop the SME market and that really just shows how tremendous the market potential is and how effective our sales force can be. At the same time, on the large customer side, yes, I think that the whole macro environment in 2012 was relatively depressed, but our sales force has been doing many different things with our large customers.

The initiative that we mentioned with customers such as Ping An is really to explore not only just web search, but also take advantage of the whole media platform value of Baidu and so there is vast potential that continues to be on our platform that’s yet to be exploited. So we are working with the large customers and they are very effective to the idea of doing online marketing and through the Baidu’s different kind of user products.

And with experiments like that, we can really get to more of the large customers at budget and so we do see on both the SME and large customer side, there is a lot of initiative and lot potentials for us to continue to grow our business.


And we are now approaching the end of the conference call. And I will now turn the call back to Robin Li, Baidu’s Chief Executive Officer for his closing remarks.

Robin Li

Once again thank you for joining us today. Please do not hesitate to contact us if you have any further questions.


Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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