Baidu.com, Inc. (ADR) (BIDU)
Q2 2013 Earnings Conference Call
July 24, 2013 8:00 PM ET
Victor Tseng – Investor Relations Director
Robin Li – Chief Executive Officer
Jennifer Li – Chief Financial Officer
Haofei Chen - CICC
Eddie Leung - Bank of America Merrill Lynch
Alan Hellawell - Deutsche Bank
Jiong Shao - Macquarie
Jin Yoon - Nomura
Philip Wan - Morgan Stanley
Cynthia Meng - Jeffries
Chi Tsang - HSBC
Alicia Yap – Barclays Capital
Thomas Chong - BOCI
Andy Yeung - Oppenheimer
Alex Yao - JPMorgan
Piyush Mubayi - Goldman Sachs
Ming Zhao - 86Research
Muzhi Li - Citigroup
Fawne Jiang - Brean Capital
Scott Kessler - S&P Capital IQ
Gina Chen - T.H. Capital
Wendy Huang - Standard Chartered Bank
Wanting Yu - CICC
Hello and thank you for standing by for Baidu's Second Quarter 2013 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, Victor Tseng, Baidu's Investor Relations Director.
Hello everyone and welcome to Baidu's second quarter 2013 earnings conference call. Baidu's earnings release was distributed earlier today and you can find a copy on our website as well as on Newswire services.
Today you will hear from Robin Li, Baidu's Chief Executive Officer and Jennifer Li, Baidu's Chief Financial Officer. After their prepared remarks, Robin and Jennifer will answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC, including our annual report on Form 20-F.
Baidu does not undertake any obligation to update any forward looking statement except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website.
I will now turn the call over to Baidu's CEO, Robin Li.
Hello everyone and thank you for joining today's call. We are pleased with the headway we made in the second quarter. We delivered a solid financial performance and customer acquisition around the Baidu platform was stronger than ever as we added a record of 58,000 active online marketing customers.
Adoption of our mobile platform gained a tremendous momentum, driven in part by the launch of our integrated PC and mobile bidding platform and for the first time mobile revenue accounted for over 10% of our total revenue.
As we have said before, we are in this for the long term. We've made great progress. We will continue to invest and execute on our roadmap to enhance Baidu's position as the center of China's internet.
Before we go into a more detailed discussion, I want to quickly mention the announcement we made last week regarding our planned acquisition of 91 Wireless, a leading mobile app distribution platform. We look forward to providing more information once we sign a definitive agreement. However won’t be able to answer questions on this subject on today's call.
This quarter we rolled the new format out in selected verticals, giving users a better search experience and giving customers more effective ways to engage with users. We do this through better integration of structured information using data provided by our partners and customers. For example, in online gaming, if users search for a specific web game or even just the generic term fun games, they will be presented with categories to help them further refine their search images of game titles that can be played through a single click and suggestions for related games. We have already heard great feedback and plan a further rollout into additional verticals in the current quarter.
We also did a lot of work to reinforce Baidu's position as a trusted brand that provides a safe search experience. There are a couple of developments we focused on to achieve this. One is the introduction of verified customer accounts whereby prescreened verified customers now appear with the letter V on their results page. The majority of our customers now have the plus V verification. We also introduced our netizen rights protection initiative which allows users to submit a claim if they feel they have been defrauded or harmed in some way through a sponsored link on the Baidu platform. After going through a straightforward complaints process, if a user's claim can be substantiated, we compensate them up to a certain amount. We’ve received great feedback from users and customers and we are proud that these efforts are contributing to a safer, fairer online environment.
On the customer front, as I've mentioned, we added a total of 58,000 online active customers in Q2. This is the most we've ever added in a single quarter. It's a real sign of the progress we've made in demonstrating the value of Baidu platform. A part of this was a nationwide search engine marketing campaign we launched in the quarter, during which we really highlighted mobile. This was our biggest push to date with close to 400 events in over 250 cities.
During the quarter we also took a big step in rolling out an integrated PC and mobile bidding system. Customers are still getting accustomed to the upgraded system, but the feedback so far has been positive. Today, nearly all of our customers are using the new platform. Our efforts to educate customers and drive adoption of mobile advertising channels are paying off, as demonstrated by the milestone we reached with mobile revenue. Increasingly customers are coming to realize the compelling opportunities inherent in Baidu's mobile channel. Mobile search offers advantages like new app inventory, new forms of engaging users like “click to call” and “click to chat,” and better app targeting and higher click through rates. We expect further progress in the coming quarters as we push through with technological improvements in areas like geo-targeting and click through rate prediction.
Baidu has also taken the lead in providing customers with free tools such as site app to assist them with building out their mobile landing pages. The number of customers with optimized mobile landing pages has grown exponentially from last quarter. This is good progress as our customers clearly see value in investing in mobile. Today over half of our mobile search revenues come from customers with mobile optimized websites, further demonstrating the progress we have made and the potential still ahead.
The strides we made in the quarter in terms of increasing mobile adoption and giving customers more ways to engage users drove clear improvement in both desktop and the mobile monetization. Our improvements in semantic intelligence, deep learning technology and bidding systems optimization are driving meaningful improvements in ad relevancy, click through rates and CPM all the time. So we are optimistic we can maintain this trajectory.
On the user side, over the last quarter our flagship mobile search offering continued to grow in popularity. It is now firmly established as one of the most actively used mobile services in China. Encouragingly our own native mobile search app and mobile browser are now the biggest drivers of growth raising overall mobile search traffic.
We also continued to build out our market leading alternative input methods, namely voice and image recognition and we launched a cutting edge general image search feature stu.baidu.com whereby users can input any picture to search for similar ones on the Internet. This technology is based on our proprietary deep learning models and the accuracy is unmatched in the world. This technology combined with our market leading facial recognition database is the key to our hugely popular celebrity face match function in PhotoWonder, our top brand photo app.
Mobile Map is the key gateway to mobile Internet and we've been really encouraged by the continued traction of our offering in this area. According to CNNIC we have the most popular Mobile Map with over 40% of the users surveyed choosing Baidu's mobile app, putting Baidu far ahead of the next provider which is around 23%.
We have the largest most comprehensive point of interest database on the market and we are continuously building out value added features such as hotel booking, movie ticket booking and social features like Share My Location and Find Friends.
Baidu is also an important gateway for app distribution, both through search and through our app store. This quarter app distributions through the Baidu platform increased more than fivefold year-on-year and we expect momentum to build going forward.
Also in Q2 we completed the acquisition of online video unit of PPS which will continue to operate as a sub-brand of iQiyi. Following the successful merger with iQiyi we now have the largest online video platform by number of mobile users and video viewing time. PPS is very complementary to iQiyi due to its differentiated user base, distribution channel and clear leadership in mobile. The scale of the combined platform positions iQiyi well in this strategically important vertical.
Overall Q2 was a great quarter especially in terms of our progress in mobile. The investments we've been making are driving growth in the area so that will matter the most going forward, whether it's search, LBS, app distribution or online video. With our market leading technology and the strides we are making in segments where we expect long term growth, we are confident Baidu will be at the core of China's Internet for a long time to come.
Before handing over to Jennifer for a closer look at the financials, I would like to remind everyone that Baidu World 2013 will be held on August 22 in Beijing. As always, we'll be debuting some exciting new products and initiatives. I hope to see many of you there. Over to you Jennifer.
Thanks Robin. Hello everyone. We were pleased to maintain strong growth on the top line this quarter as we pushed forward with our aggressive investment strategy. Our investment in mobile are already beginning to bear fruit and as Robin mentioned, mobile revenue for the first time accounted for over 10% of total revenue.
In Q2 we increased our focus on promotional efforts to drive user adoption of our mobile products. We conducted our largest ever search marketing campaign and continued our aggressive investment in R&D. We will continue to invest and position ourselves for the opportunities ahead to drive long term value for our shareholders. Our investment focus remains on infrastructure and R&D as well as marketing and promotional efforts to drive product adoption, particularly in mobile. Alongside this, we'll continue to pursue suitable M&A opportunities to complement organic growth.
Now moving on to the financials. All monetary amounts are in RMB unless otherwise noted. For the second quarter total revenues were RMB7.6 billion representing an increase of 39% year-over-year. During the second quarter Baidu had approximately 468,000 active online marketing customers, a 33% increase from the corresponding period in 2012 and a 14% increase from the previous quarter. Revenue per online marketing customer for the second quarter was approximately RMB16,100 a 4% increase from the corresponding period in 2012 and an increase of 11% from the previous quarter.
Traffic acquisition cost as a component of cost of revenues in Q2 was RMB880 million or 11.6% of total revenues, as compared to 8.3% in the corresponding period in 2012 and 10.2% in the first quarter. The increase mainly reflects increased contextual ads contribution and hao123 promotion through our network.
Bandwidth and depreciation cost as a percent of revenues in Q2 were 6% and 4.7% respectively compared to 4.4% and 4.5% in the corresponding period of 2012. The increase was mainly due to an increase in network infrastructure capacity.
Content cost as a component of cost of revenues were RMB151 million representing 2% of total revenues compared to 0.6% in corresponding period in 2012 and 1.6% in the previous quarter. This increase was mainly due to the inclusion of iQiyi's content cost. New content is important for iQiyi's business and we continue to invest in this area.
SG&A expenses in Q2 were RMB1.1 billion an increase of 83% year-over-year, mainly due to promotional expenses for our mobile products. Mobile promotional expenses include pre-installation and downloads of Baidu apps in mobile devices. Also as some of you may have already seen in the city of Beijing, we're conducting offline marketing to promote our Mobile Map product. The campaign was launched at the end of Q2 and will mainly be carried out in Q3. We'll continue to invest in marketing spend in Q3 and this line item should step up next quarter. These expenses are necessary and will be monitored closely for effectiveness. R&D expenses in Q2 were RMB942 million, an increase of 73% over the corresponding period in 2012 primarily due to increase in the number of R&D personnel.
Search-based expenses which were allocated to related operating costs and expense line items increased in aggregate to RMB83 million in the second quarter from RMB54 million in the corresponding period in 2012. The increase was a result of more shares being granted to employees.
Operating profit for Q2 was $2.9 billion, an increase of 3% over Q2 2012. Total head count as of 30 June 2013 was about 24,000, a sequential increase of about 2100 employees of which 800 were due to our acquisition of PPS.
Income tax expense was RMB513 million for the second quarter. The effective tax rate for the second quarter was 16.3% compared to 7.9% in the corresponding period of 2012. We've benefitted from a one-off low tax rate in Q2 2012, due to tax provision adjusted for one of our subsidiaries.
Net income attributable to Baidu for Q2 was RMB2.6 billion, a 5% increase from the corresponding period in 2012. Basic and diluted earnings attributable to Baidu per ADS for the second quarter of 2013 amounted to RMB7.52 and RMB7.52 respectively. Net income attributable to Baidu excluding share based compensation expenses, a non-GAAP measure for Q2 was RMB2.7 billion, a 3% decrease year-over-year. Basic and diluted earnings attributable to Baidu per ADS excluding share based compensation expenses both non-GAAP measures was RMB7.76 and RMB7.75 respectively. As of 30 June 2013, the Company had cash, cash equivalent and short term investments of RMB34.1 billion. Net operating cash inflow for the second quarter of 2013 was RMB3.2 billion. Capital expenditure for Q2 were RMB548 million.
Now let me provide you with our top line guidance for Q3 of 2013. We currently expect total revenues for the third quarter to be between RMB8.73 billion and RMB8.96 billion, representing a 39.7% to 43.3% year-on-year increase. Please note, this forecast reflects Baidu's current and preliminary view which is subject to change. I now open the call to questions. Operator please go ahead.
(Operator Instructions). Your first question comes from the line of Haofei Chen of CICC. Please go ahead.
Haofei Chen - CICC
Thank you very much, thank you Robin and Jen for the introduction. My question is I want to know the revenue and the net adds of online active customers, if we exclude acquisitions and exclude the traffic brought from Baidu [alliance] [ph]. And I want to know the mobile business margin versus the PC business margin. Thank you.
Excuse us. Didn't quite understand the first part of your question. Do you mind repeat?
Haofei Chen - CICC
Sure, I want to know -- now the revenue growth is like 38%, right. What if we exclude the acquisitions and the revenues from like Baidu [alliance] [ph]? If we exclude that how much revenue growth we would have? And I know the 58,000 net adds for the online customers is a historic high. What if we exclude the acquisitions, how much net adds do we have?
Yes, I think his question is if we don't count the acquisitions, will be how many customers less, how much revenue would be left in the current -- and what's the growth rate on an apple to apple comparison basis.
I see. Obviously one of the highlights for the quarter was the phenomenal growth in new customer additions. As you can understand, the platforms that we offer and the revenues that we earn, most of the customers are small, medium sized enterprises. When you think about the acquisitions, you know whether it's video or, you know, it's our travel vertical search, these are largely larger customers. So predominantly the net add of customers are coming from the Baidu main business, so that is the fundamental driver basically for the outstanding performance on Q2.
Your next question comes from the line of Eddie Leung of Merrill Lynch. Please go ahead.
Eddie Leung – Bank of America Merrill Lynch
Hey, good morning guys, thank you for taking my question. I'm actually more curious on your third quarter guidance. We see the revenue growth was pretty impressive. I guess you're partly of that probably because of a full consolidation of PPS, and as far as the growth of contextual advertising so I'm wondering Jennifer, if you could give us some color on how should we look at the margin? Because I suspect some of these growth drivers could have lower margins than the core search pieces. And then, another quick question is, could you remind us what in other services are revenue? Thank you.
Yes. Yes and in Q3 I think the whole guidance would reflect the consolidated picture that includes the PPS acquisition. From a margin standpoint, we have provided indications over the last quarter, as we reported on Q1. If you look at the year over year change in terms of operating margins, the levels and the magnitude in the line items, it is pretty much predictive and indicative, you know for the current outlook as you look at our business going forward. Specifically last quarter you see a 12 point change in operating margin and this quarter you're looking at a 13%. So ballpark, I think that gives you a pretty good indicative level.
Yes, as we've been talking about the two year transition period, we have been aggressively investing in the core business as well as the new growth drivers like video, LBS and some of the verticals. During the investment period the margins would be lower. But we do expect that the high growth potential will more than pay off in the future.
Your next question comes from the line of Alan Hellawell of Deutsche Bank. Please go ahead.
Alan Hellawell – Deutsche Bank
Yes, hi guys. Question's just about TAC if you don't mind. Jennifer mentioned that contextual ads and Hao123 promotion evidently drove TAC growth in the second quarter. If I could just ask a simple question, if I'm simply a Baidu Union search partner, am I generally receiving the same revenue share as I would have same time last year, or in the first quarter for that matter? And then, also, second part of the TAC question, we generally were thinking about a 50 to 100 basis point per quarter lift in TAC throughout the year, and if I'm not mistaken last quarter alone it was may be 120 to 140 basis points quarter-on-quarter. What does that say for the formula that we would have used for the rest of the year? Thank you.
Yes, as you can tell from the TAC as a percentage of total revenue, it is higher than a year ago and in terms of revenue sharing ratio, it is slightly higher than a year ago but not very material.
And Alan, to your question on you know if a Union partner that received this kind of a revenue share from us, it really depends on the mix of the kind of contribution it brings to our platform. Majority of the TAC spend and the TAC increases are due to contextual business. And contextual business generally is incremental revenue for us, and we share a part of that with our Union partners. And as I mentioned also, Hao123 promotion is a driver for the increase of TAC and that has been going on since the last quarter as well. So overall as Robin mentioned, the arrangement hasn't really changed per se. The initiatives are driving specifically are mainly in contextual ads and Hao123. As you look into the future for the rest of the year, I think looking at TAC, obviously it's dynamic and it depends on the mix for the different sources of revenue our union partners help us bring in. And I think for 2012, the quarterly relationships of the Q2 to Q4 timeframe give you a reference of how you might be able to think about the TAC going forward.
Your next question comes from the line of Jiong Shao of Macquarie. Please go ahead.
Jiong Shao – Macquarie
Thank you very much for taking my question, and congrats on a good result and guidance. Before I ask my question I have a clarification. I think Robin and Jennifer mentioned that Q2 margin, operating margin, would be indicative for the future. Should we interpret that as the margin going forward to be sort of flattish from Q2 level?
To that question, I would say the year-over-year change -- as we mentioned, you know we're in a very aggressive investment mode. We have been investing consistently in infrastructure and R&D, and this year in particular sales and marketing is a main focus to drive our products. And so if you look at the year-over-year change in terms of operating margin levels, that's what I'm referring to as indicative, not the absolute level itself.
Jiong Shao – Macquarie
Okay then if that's the case, could you please comment on the absolute level?
I think this is in comparison really based off the 2012 level. I think that's simple math.
Jiong Shao – Macquarie
Your next question comes from the line of Jin Yoon of Nomura. Please go ahead.
Jin Yoon – Nomura
In your prepared remarks you mentioned that you're bundling mobile queries or mobile search with the PC side. Does that mean that you're mandating your PC search customers to also buy inventory on the mobile side? And if so what percentage of your total customer base is actually buying inventory on the mobile side? Thanks I'll stop there. Thanks.
All of our customers have the option to use either PC or mobile or both. They have full flexibility to decide how much percent of their budget will be spent on mobile or on the PC platform. It's the integrated platform that makes placing ads or sponsored links on both desktop and mobile easier and the experience is better and plus we provide a lot of automization tools for mobile ad campaigns. I think customers are increasingly adopting the mobile platform. But they do have the option to opt out.
But there's no mandate in terms of allowing customers to, or requiring customers, to put X amount percentage of their inflow revenue on the mobile side?
There's no mandate, but there is all kinds of suggestions and customers can change the percentage to whatever they like. [Corrected by company after call] (Customers are required to purchase inventory on both the mobile and pc platforms, but have the flexibility to make separate bids for mobile and PC inventory.)
Your next question comes from the line of Philip Wan of Morgan Stanley. Please go ahead.
Philip Wan - Morgan Stanley
Hi Robin and Jennifer, and thanks for taking my question and congratulations on a solid quarter. Could you please help us understand more about Mobile sales for this quarter? I wonder how much of them are coming from the [inaudible] bidding process and also what percentage is from other Mobile services, such as other advertising or Mobile video. Thank you.
I didn't quite get -- how much of the revenue are coming from…?
Predominantly, the Mobile revenue we're generating are through the integrated bidding system that help our customers run their ad campaigns across the different device. So the main Mobile revenue is really coming from the search business model and the bidding for targeted performance for our customers. Other ancillary Mobile products generate minimum revenue.
Philip Wan - Morgan Stanley
Your next question comes from the line of Cynthia Meng of Jeffries. Please go ahead.
Cynthia Meng – Jefferies
Thank you Jennifer and Robin for giving us the opportunity and congratulations for the good quarter and guidance. My question is on the acquisition of 91 Wireless can management give more color on the strategy behind that? Also the strategy to integrate that business with Baidu's own application store, and what is your outlook for the revenue potential from this acquisition. Thank you.
Hi Cynthia. Thank you for your question. We mentioned at the beginning of the call that everybody is aware that we signed the MOU on acquisition of 91. But you know we're still in the process to reach a definitive agreement. So once we do have the agreement signed and the picture is much clearer, we will be obviously sharing more details with you.
Your next question comes from the line of Chi Tsang of HSBC. Please go ahead
Chi Tsang - HSBC
Thank you very much for taking my question. I was interested sort of in your earlier comments about improving monetization in both Mobile as well as Desktop. I was wondering, a specific question relates to the Desktop business where improving monetization might suggest in terms of both CPC growth as well paid clicks. I think a lot of investors are very concerned about what's happening on the Desktop side. If you can give us a little bit more color about that, that would be very helpful. Thank you.
Our monetization improvement really has been solid and strong on both the PC front as well as Mobile front. In the PC front in particular this quarter we see strong CPM improvements and the CPM improvements are really delivered by the number of clicks that we drive rather than CPC. So we see that as a pretty positive development that continues to be driving higher ROI and really more desired results for our customer spend. So that basically is the main driver, is the number of clicks.
Your next question comes from the line of Alicia Yap of Barclays. Please go ahead.
Alicia Yap – Barclays Capital
Hi. Good morning Robin and Jennifer and Victor. Thanks for taking my questions and congratulations on a solid results and guidance. My question is regarding your 3Q guidance so is the re-accelerations of the growth mainly come from the continued faster growth of Mobile revenue and could you share with us among the advertisers which verticals or industry actually have shown stronger adoptions to Mobile search right now? And if you can also share with us Mobile query traffic contribution to the total queries right now. Thank you.
Regarding to the Mobile, what we have seen is that those verticals that heavily rely on Baidu platform, which is generally pretty much performance driven, have been adopting the mobile strategy or optimizing the landing page quite aggressively so you see that customers from the health care, from education they have been making the Mobile friendly website and we are very pleased that those large spenders, almost all, have a Mobile friendly website.
In terms of Mobile traffic and CPM growth, I think this is the very, very early stage of Mobile search and both traffic and monetization have a lot of potential going forward. Over the past quarter I think both metrics have grown very, very significantly and we do expect that kind of growth to continue. Does that answer your question?
Let's keep moving. Operator?
Your next question comes from the line of Thomas Chong of BOCI. Please go ahead.
Thomas Chong - BOCI
Hi, good morning Robin and Jennifer and Victor. Congratulations on a solid quarter. My question is about can you guys tell us about the number of daily active users for your Mobile web search in the second quarter? I remember it is about $100 million in the first quarter.
My second question is regarding the transition. I remember management has talked about the two year transitional period. Is there any change in your view that Mobile search monetization capabilities come faster than your expectation? Thanks. I will get back to the queue.
Regarding the daily active user we mentioned that it surpassed 100 million during the last quarter. I would say this quarter we also saw very significant growth in terms of daily active user. But I would rather not report this number quarter-after-quarter. We just see very significant growth in terms of Mobile traffic and Mobile monetization.
As for the transition period, two years is a rough estimate. It's actually how fast the monetization capability improves or how fast the page view will grow. It's both decided by the market condition and by our investment in these areas. We do not want to over-monetize the Mobile search traffic at this time so a priority is placed on improving user experience for our Mobile search to deliver faster more relevant results to our users and also to convert or help convert many of the PC friendly content into Mobile friendly content. That will be our priority.
I think part of the reason that Mobile revenue has grown very significantly during the last quarter is because our customers are increasingly having a really smart phone friendly Mobile website.
Your next question comes from the line of Andy Yeung of Oppenheimer. Please go ahead.
Andy Yeung - Oppenheimer
Hi, thank you for taking my question. I have two quick questions. One is in terms of your advertisers what's the percentage of customer have - beginning to advertise on your Mobile platform? And then a quick question just regarding PC query volumes. There's a lot of concern regarding PC query growth may decline, so can you give us some color on what's current-- the trend in the PC current volumes?
A super majority of our customers are advertising both on the Desktop platform and the Mobile platform. What's the second part of it?
On the PC query volume, overall, as you know, we look at our search service to the users on a holistic perspective. Overall, query volume has been having solid growth and ultimately is we're serving the users information needs through different devices. But ultimately, it's all supported it's a search need and is supported by our strong technology platform that offers the simple and comprehensive answers to the users.
So we haven't really segregated PC versus Mobile volume but as you can understand really the tremendous growth is on the Mobile side. PC is not obviously as exciting as Mobile. But overall, volume is very solid growth.
Your next question comes from the line of Alex Yao of JPMorgan. Please go ahead.
Alex Yao – JPMorgan
Hi, good morning everyone and thank very much for taking my question. My question is about the impact from your integrated Mobile bidding system, and your Mobile monetization key metrics, such as CPC and coverage, et cetera. Can you comment on this? Thank you.
Yes, the Mobile monetization has made very significant progress over the past quarter, which means that both coverage, CPC, click through rate are growing. In addition to that, like I mentioned, we are helping our customers to come up with better landing pages. We sometimes force them to place those click-to-call button or call back button, those kind of features to help the customer to get better ROI but as I said before, the priority here is to really improve the user experience. We believe that having those kind of call back buttons or click to call buttons really helps the user and when we have a very dominant position in Mobile information, search and we will be able to monetize the Mobile traffic better. Right now, the focus is still on the user experience side.
Your next question comes from the line of Piyush Mubayi of Goldman Sachs. Please go ahead.
Piyush Mubayi – Goldman Sachs
Thank you for taking my question. Could you help us add some-- or could you help add some color to your Mobile revenue number of 10% in terms of where you were a year ago, where you were a quarter ago and also, if possible, give us a sense of what percentage of search traffic is originating on Mobile? And might I clarify if tablets are included as Mobile or do you consider them PC? Thank you.
Mobile revenue including tablets roughly quadrupled over a year ago. So that will help you to understand the growth. I don't think we have those detailed numbers in hand.
Yes. The Mobile revenue in the last year wasn't really the focus. As you know, over the past year to two years the Mobile usage really started to take off and there has been constant improvement on our product side to improve on the search experience. I think only over this quarter that we reported we were very pleased to see Mobile now contributes more than 10% of our total revenue. Part of that also has to do with the bidding platform that we made it much simpler for our advertisers.
In terms of the Mobile traffic we have not made it a regularly reported item but Mobile traffic obviously is growing. The last time that we reported on that was 20% of our total traffic and it continues to grow.
And when we see Mobile revenue represents more than 10% that can mean including tablets or without tablets. So based on both criteria Mobile revenue exceeded 10% over the second quarter.
Your next question comes from the line of Ming Zhao of 86Research. Please go ahead.
Ming Zhao – 86Research
Thank you very much. So Jennifer, if I look at your TAC increase by almost RMB300 million quarter-over-quarter and marketing expense increase by about RMB200 million in the quarter-over-quarter. So what percentage of those would you attribute to the Mobile side? Should we expect any step-up on the Mobile spending within these two items? Thank you.
On TAC, yes, there has been sizeable step-up and, as I mentioned, predominantly it's related to contextual business as well as our hao123 promotion. I do see included in TAC the Mobile revenue related to TAC, it has increased also in proportion to the -- as a reflection of our Mobile revenue growth. But that's not the main driver quarter-over-quarter, as you see the Q2 TAC number.
For Sales and Marketing expenses the sequential increase I would say is mostly driven by promotional expenses and that's a split between the national marketing campaign as well as the promotional efforts that we made predominantly for our Mobile products.
The national marketing campaign, I would say, is partly to develop the customer, and these customers are of course contributing to both on the PC side as well as the Mobile side. But predominantly, a lot of the marketing efforts and spending is related to Mobile products. The main spenders would be our search box and the map products. We are also doing offline map promotion for users to really understand the full value propositions that can be currently made available on our map platform.
As I mentioned in the prepared remarks, I do expect the sales and marketing expense continue to edge up as a percent of total revenue.
Your next question comes from the line of Muzhi Li of Citigroup. Please go ahead.
Muzhi Li - Citigroup
Thank you for taking my questions. I would like to ask about the CPC trends over the past quarter and how does the CPC trend between Mobile and the PC split, like what percentage is differences between the two? Finally, will the Company disclose the Mobile revenue in the future? Thank you.
On the CPC, as I mentioned, overall monetization capabilities improved on both the PC and the Mobile side. Mobile CPC is not up to the PC CPC level but it continues to increase in comparison. As more customers are using the Mobile platforms, the bidding itself will get more engaged and drive partly the CPC higher. So that's really a reflection of customers' acceptance of the Mobile advertising platform.
So continued progress on CPC but also back to the earlier comment I made, that's not the main driver of the overall CPM improvements though.
Your next question comes from the line of Fawne Jiang of Brean Capital. Please go ahead.
Fawne Jiang - Brean Capital
Thank you for taking my questions. First one's actually regarding your 3Q guidance. I just wonder whether you could give us a little more color because it's very strong guidance, trying to get a sense how much of an impact does it comes from the consolidation of PPS? I also wonder whether you have factored in a partial consolidation of the likely -- the 91 Wireless acquisition?
In addition, you did really well in the second quarter on the Mobile side. I just wonder, what's the trend we should expect in 3Q and what's the potential Mobile revenue target by year end?
The PPS transaction was closed in Q2, and in the Q2 number there was about a one month inclusion of the PPS financial. Q3, sequentially it would of course have the full quarter's consolidation, including PPS. So sequentially, there is a small, I think, you know, a small increase of contribution from PPS.
But PPS overall, and together with iQiyi, is really a very small component of our total revenue contribution. So the main business continues to grow solidly and these investments we're making are also performing well.
On your question for Mobile revenue contribution, you know, we would report back when we have really meaningful material progress on this front. We will not likely make this a regularly reported item but we will update everybody of the progress we're making promptly.
Yes, right now we prefer to do this kind of more qualitative description about Mobile trend and Mobile revenue, because I think there's no widely accepted standard for what's Mobile search, does that that includes tablets, what about Android pad, and Mobile revenue from non-search products. There are lots of moving pieces, and as we form our strategy in Mobile and going forward, when we have a better definition and a better track record of Mobile related revenue, we will give you -- certainly give you more quantitative numbers.
Your next question comes from the line of Scott Kessler of S&P IQ. Please go ahead.
Scott Kessler – S&P Capital IQ
Thanks a lot. I was wondering if you could talk about your video monetization strategy, and I have a follow-up, thanks.
I think it's very straightforward. Video has a lot of users and the video viewing time, or media time, is very long and growing faster than the general internet usage. And the main monetization is through advertising, mostly those video commercials. It's a very easy to move the TV commercial content to the video platform, so I think the monetization method is quite straight forward.
Your next question comes from the line of Gina Chen of T.H. Capital. Please go ahead.
Gina Chen – T.H. Capital
Hi, good morning. This is Gina Chen on for Tian Hou. I was just wondering if you could just kind of give more color on what the percent of search traffic is from mobile. Thank you.
Yes, like I said before, we will not report the mobile traffic percentage at the quarter. When there's a significant change in terms of percentage, for example if one day the mobile traffic goes over 50%, we'll certainly let you know, but for those regular quarter-on-quarter changes we prefer not to report to the exact numbers.
Your next question comes from the line of Wendy Huang of Standard Chartered Bank. Please go ahead.
Wendy Huang - Standard Chartered Bank
Thank you for taking my questions and congratulations on the progress you made on the mobile side. So I have two questions. One is a follow up question on the CPC on mobile and PC; can you clarify whether you are still seeing the CPC increase on the PC side, and if so I noted that in some other countries the CPC of mobile and PC actually are already become quite similar. So do you expect in the long term in China markets the mobile CPC can reach the level of the PC level? And also my second question is regarding your mobile Internet blueprint, so you are promoting your mobile map starting from the second quarter, and also you're already the number one in the mobile search and you've just announced the MOU regarding the mobile app distribution platform. What are the other areas in the mobile footprint that you expect to strengthen in the next 12 months, and in particular, what will you do with your mobile browser, and more so, when will you launch maybe the in-app search? Thank you.
That's a lot of questions. The CPC on mobile is still lower than PC right now, but like I said, the monetization -- all of the monetization metrics for mobile have been growing very quickly. In terms of tablet, or iPads to be specific, the cost per click is higher than that of PC already for Baidu. Longer term, we are optimistic that the CPC on mobile could catch up to that of PC, because of the smaller screen and the users have better attention on the mobile sponsored links.
Regarding to the mobile Internet blueprint, the so-called blueprint, I kind of mentioned that there are four strategically important directions we are aggressively investing in. Search, of course, would be the first one, and mobile app distribution, map or LBS, and video are both growing very, very quickly, so we are aggressively investing in all of the four strategic areas.
Your next question comes from the line of Aden [ph] Yu of CICC. Please go ahead.
Wanting Yu - CICC
Good morning, thank you for taking my question. My question is in regard of the mobile advertising. Did you see or will you see any cannibalization between your PC search and your mobile search video system, and how will you see the landscape -- competitive landscape going forward as Tencent has already launched its mobile app [inaudible]?
Yes, regarding to mobile advertising, search is very unique in the sense that advertisers or customers can never buy enough amount of traffic. So it's not a budget allocation problem, it's more of a supply/demand problem. There are always not enough supply for search traffic, be it desktop or mobile, and that's why we pretty much focus on improving the user experience, get users what they want, or what they're looking for through our mobile search services, desktop search services, and other related services. So in this sense we are not much competing for customer budget. We are more competing on the user base and traffic growth.
Your next question comes from the line of Alicia Yap of Barclays. Please go ahead.
Alicia Yap – Barclays Capital
Hi, thanks for taking my follow up question. Just quickly regarding your mobile revenue, I just wonder whether you have any revenues come from your app distribution, currently in your app store, and any revenue shares come from some of the mobile games. Thank you.
Yes, there are already revenue coming from the app distribution, but very small. We also have mobile games through our mobile app distribution capabilities. We monetize the distribution capability mainly through mobile games, and that of course has been growing very, very fast over the past quarter.
We are now approaching the end of the conference call. I will now turn the call over to Baidu's Chief Executive Officer, Robin Li, for his closing remarks.
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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