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Baidu, Inc. (NASDAQ:BIDU)

Q1 2014 Earnings Conference Call

April 24, 2014 8:00 PM ET

Executives

Sharon Ng - Senior Manager of IR

Robin Li - Chairman and CEO

Jennifer Li - CFO

Analysts

Philip Wan - Morgan Stanley

Eddie Leung - Merrill Lynch

Alan Hellawell - Deutsche Bank

Dick Wei - Credit Suisse

Jiong Shao – Macquaire

Alicia Yap - Barclays Capital

Wendy Huang - Standard Chartered Bank

Eric Wen - China Renaissance

Cynthia Meng - Jefferies

Ella Ji - Oppenheimer

Piyush Mubay - Goldman Sachs

Thomas Chong - Bank of China

Alex Yao - JPMorgan

Chi Tsang - HSBC

Ming Zhao – 86Research

Chao Wang – Nomura

Tian Hou - TH Capital

John Choi - Daiwa

Operator

Hello and thank you for standing by for Baidu's first quarter 2014 earnings conference call. (Operator Instructions). Today's conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Sharon Ng, Baidu's Senior Manager of Investor Relations.

Sharon Ng

Hello everyone and welcome to Baidu's first quarter 2014 earnings conference call. Baidu's earnings release was distributed earlier today and you can find a copy on our website as well as on newswire services. Today you will hear from Robin Li, Baidu's Chief Executive Officer, and Jennifer Li, Baidu's Chief Financial Officer. After their prepared remarks Robin and Jennifer will answer your questions.

Before we continue please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC, including our annual report on Form 20-F. Baidu does not undertake any obligation to update any forward-looking statements except as required under applicable law.

Our earnings release and this call include discussions of certain unaudited, non-GAAP financial measures. Our press release contains a reconciliation of the unaudited, non-GAAP measures to the unaudited most directly comparable GAAP measures, and is available on our IR website, at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website. I will now turn the call over to Baidu's CEO, Robin Li.

Robin Li

Hello everyone and thanks for joining today's call. We had a great start to the year, delivering accelerated year-over-year revenue growth for the third consecutive quarter. This strong performance was driven mainly by our core search business, with mobile revenue maintaining strong momentum.

This year we continue to invest heavily to take Baidu's business to the next level. As we outlined last quarter, we think of our opportunity in terms of five strategic areas: search, mobile and cloud, location-based services, consumer products, and international. In addition, we have invested entities in important growth sectors - most notably Qunarand iQiyi - that are already recognized leaders. These investments will pay off over different time horizons; in each case we believe the long-term opportunity is huge.

For a while now we've been witnessing the Internet taking a bigger slice of the traditional economy and broadening its role across a multitude of sectors, like media, retail, travel, financial and local services. In China, with its young market economy and less entrenched, less competitive traditional industries, this is happening at much greater speed than in the more developed economies. In parallel the Internet is playing a bigger role in people's daily lives, with mobile enabling users to stay connected anytime, anywhere.

For Baidu, this is an incredible opportunity to fully realize the potential of our broad ecosystem, spanning media, social, online tools and all kinds of verticals. As a leading cross-platform information gateway with a core of world-class technology, more than ever before we are connecting intent to action and taking users all the way from search query to physical or virtual fulfillment.

With that, let's take a closer look at some of the recent key developments, starting with our core search offering. We are encouraged to see both PC and mobile search traffic maintaining solid growth, with our combined share of PC and mobile search page views standing at 73%, according to Analysys International. In Q1 mobile search was again the main driver of page view growth and we expect it to surpass PC as the biggest source of search traffic later this year.

The overall search market in PC as well as in mobile still has much more room to expand. In mobile search we are the clear market leader and continue to gain share. In Q1 we reached 160 million daily active mobile search users, up from 130 million two quarters ago, as we continue to improve our offering and to strengthen channel distribution. On the product end we generated faster load speeds and further optimized ad formats on search page, making click-to-call, click-to-download buttons, as well as location extensions, more prominent. We also brought to the mobile channel customized vertical results for healthcare, ecommerce and education, previously available only on PC.

Since the end of last year our flagship search app has been the largest and fastest-growing source of mobile search traffic and daily active users. We've now made the experience richer and more personalized. Users can now add cards, hot trending topics, video and other content to the search home page, all of which is constantly refreshed. And as part of our Light App initiative, the search app now integrates functions like Baidu Wallet, helping to bring users further into the Baidu ecosystem.

On the monetization front, Baidu remains the best platform to obtain cross-channel leads. Paid clicks, clicks-through rates and CPM all grew nicely year on year in Q1 driven by our investments in advanced technologies, like deep learning and natural language processing. This quarter we introduced an exciting new feature to our bidding system. Customers can now target users in specific cities as opposed to just at the provincial level. More targeted adds help drive higher ROI for customers and better experience for users.

Mobile gives us key information, like user location and context, which enables us to target ads more efficiently and we continue to receive great feedback from customers who are seeing strong ROI from the mobile channel. Key metrics, such as the percentage of customers with mobile optimized landing pages, percentage of revenue from mobile landing pages and landing page quality, are all trending higher.

We are pleased with the progress we have made on mobile monetization so far. But we are just getting started. As the mobile ecosystem continues to mature and our customers see stronger and stronger ROI from mobile, we expect that the CPC gap between PC and mobile will continue to narrow.

On the trust and safety front, our Plus V verification program is now fully rolled out. And now only customers that have Plus-V verification can advertise on our search page. We expect customer growth to resume in Q1.

By the end of 2013 Baidu had already become the leader in app distribution in China. In Q1 we extended our lead, surpassing 100 million app downloads on a daily basis. Just two quarters into our integration with 91 Wireless, Baidu's app distribution capability has made huge steps forward. As the integration continues, we expect to realize significant value in this important space.

Our personal cloud storage product, which provides a seamless user experience across devices, has also demonstrated strong momentum. In Q1 it had 160 million registered users, which is a 60% increase from just two quarters, from just two quarters ago. Over the same period the total number of files uploaded more than quadrupled as users trusted Baidu Cloud with their files across a wide range of formats, from music play lists and videos to photos and documents.

LBS and online-to-offline represents a huge opportunity for Baidu. For our existing customer base of large to small-and-medium-sized enterprises, and new potential customers such as local merchants, Baidu's capability to connect query to fulfillment is an extremely powerful value proposition.

In Q1 Baidu's LBS offering continued to make impressive progress, with our mobile maps extending its lead by gaining market share. Monthly active users on Baidu Maps for mobile grew to nearly 190 million, a 30% increase from the previous quarter. The number of transactions on our map platform, including hotel bookings, movie ticket purchases, group buying and taxi hailing grew by over 80% quarter on quarter. And we are constantly expanding our point of interest database -- already the largest in the industry -- and adding ever richer content.

In the first quarter we merged our Baidu group buying platform with Nuomi, rebranding the platform as Baidu-Nuomi, and we have seen solid growth throughout the integration process. Baidu will continue to leverage our vast traffic resources and extensive sales force infrastructure to help Nuomi scale up quickly. We are confident that Baidu-Nuomi is in a great position to lead China's growing group buying market.

In consumer products this quarter we consolidated our online games operations, combining DuoKu and 91 Wireless. Our gaming business is growing quickly and we expect its contribution to grow more meaningful in quarters ahead. This quarter we also added more high-quality content to our online literature operations, integrating Zongheng, one of China's largest online literature sites, on to the platform.

Now to update you on our online video operations…iQiyi's Q1 performance was very impressive, with the hit show iPartment 4, and the Korean drama, You Came from the Stars, helping to make it China's market leader. iQiyi is now number one in PC monthly and daily unique visitors, and number one in both PC and mobile by monthly time spent, according to iResearch. The long-term prospects for online video and iQiyi are very attractive, and we remain supportive of the platform.

To sum up, the year has gotten off to a strong start and everything we've seen keeps us excited about Baidu's prospects for continuous growth. We've seen terrific returns on the investment we've made: they’ve enabled us to tap into rich seams of opportunity and we will keep investing in key areas to fully exploit those vast opportunities. Meanwhile, we continue to lengthen our lead as the dominant cross-channel information gateway. Our core strength in technology powers a platform that's truly indispensable to China's Internet users, an integral part of their digital life -- and becoming ever more integral as Baidu brings users further into our ecosystem.

With that, I'll turn the call over to Jennifer for a rundown of our financial performance in Q1.

Jennifer Li

Thank you Robin. Hello everyone. We're excited to have started 2014 with a strong set of results, with growth from our core business driving robust top-line growth. Integration of our acquired businesses, 91 Wireless and Nuomi, progresses smoothly and those businesses, along with our invested entities, are contributing to the overall picture.

The Baidu ecosystem today is broader than ever. While we continue to invest in improvements to our technology, it remains equally important to drive awareness and adoption of our existing services. As such, spending on sales and marketing, R&D and TAC increased in the first quarter, and we stepped up our marketing efforts around the Chinese New Year period to promote our mobile products. These sorts of investments are absolutely necessary and directly contribute to the growth of our business. To support our growth momentum we remain prepared to deploy cash aggressively where needed.

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

For the first quarter total revenues were RMB9.5 billion, representing a 59% increase, year over year. During the first quarter Baidu had approximately 446,000 active online marketing customers, a 9% from the corresponding period in 2013 and a 1% decrease from the previous quarter. Revenue per online marketing customer for the first quarter was 20,900, a 44% increase from the corresponding period in 2013 and flat from the previous quarter.

Traffic acquisition cost as a component of cost of revenue in Q1 was RMB1.2 billion or 12.4% of total revenue compared to 10.2% in the corresponding period in 2013. The increase was mainly due to increased contextual ads contribution and Hao123 promotions through our network.

Bandwidth and depreciation cost as a percent of revenues in Q1 was 6.8% and 4.5% respectively compared to 6.8% and 5.6% in the corresponding period in 2013.

Content costs as a component of cost of revenues were RMB394 million, representing 4.1% of total revenue, compared to 1.6% in the corresponding period in 2013. This increase was mainly due to iQiyi's increased content cost.

Selling, general and administrative expenses in Q1 were RMB2 billion, an increase of 137% year over year. The increase was mainly due to an increase in promotional spend, especially for mobile products. R&D expenses in Q1 were RMB1.3 billion, an increase of 57% over the corresponding period last year. The increase was mainly due to an increase in the number of R&D personnel.

Share-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to RMB169 million in the first quarter, from RMB111 million in the corresponding period last year. SBC increased due to more shares being granted to Baidu employees.

Operating profit in Q1 was RMB2.4 billion, an increase of 7% over Q1 2013. Total headcount on a consolidated basis, including invested entities, was about 34,600 as of the end of Q1. This represents an increase of 9% as compared to the end of last quarter. Income tax expense was RMB430 million for the first quarter. The effective tax rate for the first quarter was 15.1% compared to 16.2% in Q1 of 2013.

Net income attributable to Baidu for Q1 was RMB2.5 billion, a 24% increase from the corresponding period in 2013. Basic and diluted earnings attributable to Baidu per ADS for the first quarter amounted to RMB7.24 and RMB7.21 respectively. Net income attributable to Baidu excluding share-based compensation expenses, a non-GAAP measure, for Q1 was RMB2.7 billion, a 26% increase year over year. Basic and diluted earnings attributable to Baidu per ADS excluding share-based compensation expenses, both non-GAAP measures, were RMB7.72 and RMB7.69 respectively.

As of Q1 the Company had cash, cash equivalents and short-term investments of RMB39.7 billion. Net operating cash inflow and capital expenditures for the first quarter were RMB3.6 billion and RMB1 billion respectively.

Now let me provide you with our top-line guidance for the second quarter of 2014. We currently expect total revenues for the second quarter to be between RMB11.82 billion and RMB12.11 billion, representing a 56.3% to 60.2% year-over-year increase. Please note this forecast reflects Baidu's current and preliminary view, and is subject to change.

I will now open the call to questions. This concludes our prepared remarks. Operator, please go ahead. Operator, please go ahead with questions.

Question-and-Answer Session

Operator

(Operator Instructions). Philip Wan, Morgan Stanley.

Philip Wan - Morgan Stanley

Hi. Good morning. Thank you for taking my question. My question is about looking at your average revenue per customer, which has been expanding pretty strongly over the past couple quarters. I wonder if you could give us more color about this, the drivers behind. In particular, what has been the trend for your PC search monetization? Thank you.

Jennifer Li

Overall, the number of customer, the base, the customer base and ARPU contributes to the top-line growth. And over the past few quarters, as you know, that we have been strengthening the quality of our customer base with the Plus V initiative. And with the higher quality of customers and really good ROIs that's really the true merit of the platform, the ARPU continues to grow strongly. The customers really adopt -- the customers' adoption of the mobile bidding, the mobile search product is really terrific, and the mobile revenue growth is really the stronger and the fastest growth factor.

Overall the PC monetization capability continues to improve and stepping up. And both the PC front and the mobile front, the monetization capability has enhanced over the quarters. And the PC, I would say the PC monetization progress is also very impressive.

Operator

Eddie Leung, Merrill Lynch.

Eddie Leung - Merrill Lynch

Hi. Good morning Robin, Jennifer and Sharon. I have a question about your mobile pre-installation program. Wondering if you can give us some more color on the long-term effectiveness of your pre-installation program. To be more specific, do you think pre-installations will always be needed given users changing their handsets quite frequently or is there any evidence that you have seen suggesting that pre-installations and then the follow-up user experience could actually increase the so-called repeat customer rate? So any color would be helpful on that front. Thanks.

Robin Li

Yes, Eddie, I think the mobile market and mobile industry continue to evolve very quickly. In the past couple of years most of the users, when they switch phones, they switch from consumption from features phones to smartphones. During those kind of process, pre-installation is very essential. We need to get users to have a chance to try our apps, our services.

Going forward more of the users will switch phones from one smartphone to the next smartphone. They already, many of them already are familiar with services for apps we offer so our brand is going to play a bigger role in their future decisions to use all kind of apps and services. So, yes, I think going forward pre-installation may not be as important as it was before, but branding, quality of services will be increasingly more important to us.

Eddie Leung - Merrill Lynch

Thank you. That was very helpful.

Operator

Alan Hellawell, Deutsche Bank.

Alan Hellawell - Deutsche Bank

Thank you. I hope you can hear me. I've got a weak connection on my side. You mentioned earlier the sheer range of demand for these transactions that have emerged, such as hotel bookings, group buying etc. Can you talk about the GMV that has occurred on Baidu Maps in the first quarter and what we can expect for full year 2014? Thank you.

Robin Li

Yes, Alan, you were breaking up but I got the question. Like I said during the prepared remarks, the transaction volume on the Baidu LBS platform has grown very significantly, roughly 80% quarter on quarter. So we are very happy about the progress. We choose not to disclose the GMV at this point because it's relatively early. We believe we are roughly number three in the group buying market right now, but quickly catching up.

We have a very strong platform. Lots of users come to Baidu through Baidu Search, Baidu Maps and many other apps and services. They search for local-related information and we have the -- we need to build the capability to satisfy those kind of needs, not just in terms of information, but also services. So Baidu-Nuomi and the overall LBS-related services is trying to meet those kind of needs. Right now we have lots of room for improvement in terms of operation efficiency and going forward that will be the focus too. We will continue to give you updates on the status and when appropriate we will disclose the GMV.

Alan Hellawell - Deutsche Bank

Thank you.

Operator

Dick Wei, Credit Suisse.

Dick Wei - Credit Suisse

Thank you for taking my questions. I have questions on the PC and mobile traffic. Wonder if you can share that, with some of the new mobile installation, what kind of organic traffic versus inorganic traffic, if you would, the traffic contributions on the mobile front as well as maybe on the PC side with the expanded, the affiliate, the contextual search program. Thank you.

Robin Li

Yes, I think on PC organic represents a super majority of the overall traffic. On mobile, because the early-stage nature of the market, we have a lot of pre-installations and we also rely on third-party channels, like third-party browsers, to drive traffic. It's a little bit mixed, but the largest traffic source on mobile, search traffic source on mobile also comes from the Baidu search app, which is part of the organic traffic. We also have organic traffic from other channels, including browsers. Users may explicitly choose Baidu.com as their search tool of choice.

So we are quite happy with the progress we have made for mobile search. We believe the organic part will continue to grow at a faster pace.

Dick Wei - Credit Suisse

Great. Just a quick follow up. I wonder if you can share the mobile search traffic ratio out of the total traffic.

Robin Li

It is growing quite quickly. It is not larger than the PC traffic yet, but we do expect mobile will surpass PC sometime this year.

Dick Wei - Credit Suisse

Great. Thanks a lot Robin and congrats on a good quarter and guidance.

Robin Li

Thank you Dick.

Operator

Jiong Shao, Macquarie.

Jiong Shao – Macquaire

Good morning. Thank you for taking my question. My question is on your margins and congrats on a very strong results, first, for Q1. The margins for Q1 was actually better, much better than what we forecasted and I was just wondering whether or not you still maintain flat/positive growth for this year. If that's the case, it looks like expenses investment will accelerate for the rest of the year. What are some of the areas you are looking to accelerate the investments? Thank you.

Jennifer Li

Yes, hi Jiong. We provided some comments last quarter giving you some ideas as to the margin levels or the profit levels last quarter and that kind of commentary is still stay. As I mentioned, this is a critical year and it's an important year for investments. We have identified the five strategic focus areas and we're making terrific growth on each front.

And the Q1 obviously is seasonal. There is also variations for sales and marketing spend when it relates to events, activities or campaigns that we carry out. And so for Q1 it is just all the activities that we thought were meaningful for us we conducted throughout the year, we'll be having more efforts focusing on branding as well as making our products available to the end users, all kinds of products, particularly with the mobile focus.

And these kinds of products really stem from not only mobile search, but like our mobile assistant, our mobile guardian, our map, our group buy products and some of our consumer products. So it's a wider spectrum of products that we offer at the same time we are building branding. So some of the variations throughout the year as you look at operating expenses, the main drivers will be sales and marketing.

And the patterns that you have seen in last year, it does vary quarter over quarter. So even though Q1 might be seasonally, from a revenue standpoint and margin standpoint, a low quarter in history, it may not be true this year. So for the full year the comment still stands.

Jiong Shao - Macquaire

Okay. Great. Thanks for the helpful comments.

Operator

Alicia Yap, Barclays Capital.

Alicia Yap - Barclays Capital

Hi. Thank you. Good morning Robin, Jennifer and Sharon. Congratulations on the good results. I think my question is as we continue to penetrate into the O2O business expansion, is there any complementary business that Baidu would like to strengthen in the area? For example, is there any need to getting into the classified vertical side?

And, similar to that, given there were recently some reported news on, whether it's true or not, Baidu potential interest in investing or partnering with Ctrip and any possibility of the combinations of Ctrip and Qunar, appreciate any comment or clarity from the management. Thank you.

Robin Li

Alicia, our O2O mainly right now are focused on maps in terms of user products and group buying in terms of commercial products. We think there are still lots of things we could do in these two important areas. Of course we always try to provide all kinds of location-based needs for our users, be it takeout or movie tickets or whatever so we will continue to add features to our map and other existing services to serve our users better, but our focus in terms of commercial activities will be on group buying.

Regarding to the Ctrip/Qunar thing, as you would expect, we do not comment on rumors, but I can tell you that travel is an important strategic area for Baidu. We will continue to support Qunar to serve the users on Baidu on Qunar better.

Alicia Yap - Barclays Capital

Thank you.

Operator

Wendy Huang, Standard Chartered Bank.

Wendy Huang - Standard Chartered Bank

Thank you. I wonder if you can comment on the loss magnitude of your non-search business and when shall we start to see the loss contribution from those non-search business such as video and also Qunar to narrow down. Thank you.

Jennifer Li

I think, Wendy, some of the entities like you mentioned, video and even travel, these are important strategic verticals and we have already established a pretty good leading position in the marketplace and will continue to support these entities. These are important strategic focus areas for our overall value proposition and the platform. And they are making great progress. We're pleased with the progress and, given time, they have a business model and given time, as they emerge to be market leader and continue to scale in profitability, will improve. But at this point that is not really the focus area.

And for other specific important areas, such as LBS, such as consumer products, these are important long-term initiatives and it's early for us to expect a profitability. But I think on the products front and the user accumulation front, all these fronts are making terrific progress and over time they will starting to play bigger important role in the overall revenue contribution.

Wendy Huang - Standard Chartered Bank

Thanks Jennifer. I will go back to the queue.

Operator

Eric Wen, China Renaissance.

Eric Wen - China Renaissance

Thanks very much for taking my questions and congratulations on a great quarter and guidance. I have a question regarding the hardware space. I noticed that there have been a lot of activities from companies like Xiaomi in terms of rolling out home routers as well as other earlier hardware. I noticed that Baidu has also recently been undertaking a lot of activities in launching individual hardware products. What is the overall strategy for Baidu in the hardware space?

Robin Li

Eric, we think there will be a lot of opportunities in intelligent hardware, smart hardware, Baidu is pretty much a software and platform company. So we try to come up with necessary software and systems so that we can partner with those hardware manufacturers and foster healthier and stronger ecosystem around our platform. So we do not try to get into this area in any significant way directly but we should benefit from the growth of the hardware industry.

Eric Wen - China Renaissance

Okay. Thanks.

Operator

Cynthia Meng, Jefferies.

Cynthia Meng - Jefferies

Good morning. Thank you, Jennifer, Robin and Sharon for giving me the chance. I have a question on the Internet finance. What is Baidu's strategy on finance, on Internet finance and how do you see the potential regulatory risks there? We understand that Baidu is in progress of applying for financial licenses. Thank you.

Robin Li

Yes, we think that Internet finance represents another future opportunity for China and since we have a large user base we are evaluating to tap into this area. I think the most fundamental thing is that we need to have a payment method, which we launched in Q1, Baidu Wallet. This will help to make a closed loop between the user query and service fulfillment. So we recently integrated Baidu Wallet into the Baidu search app so that users, when they search they can also pay for services there.

But I don't count that as Internet finance. It's more of a way to help our users to pay for services. We are still evaluating and exploring all kinds of true finance-related services when there is more solid progress, but I can't give you more details.

Cynthia Meng - Jefferies

Thank you.

Operator

Ella Ji, Oppenheimer.

Ella Ji – Oppenheimer

Good morning, Robin, Jennifer and Sharon. My question is regarding Baidu Wallet, which you just launched. Can you share with us some initial signs, like number of merchants signed up for your services and also the user activities?

And also some companies would love to use marketing strategies such as sending out hongbao to attract the users quickly. Will you consider that? And, if so, I wonder if you have factored in any budget in your sales and marketing? Thank you.

Robin Li

Baidu Wallet was just integrated into the Baidu search app a couple of weeks ago. We are going to do some marketing events to help users to get familiar with the way Baidu Wallet works and how convenient it is when it's integrated into the Baidu search app. But we think payment is very much scenario-driven, context-driven. We have no plans to come up with a game-like marketing event to promote this product. We try to facilitate users' real needs by identifying when and where the users really need a payment system.

Operator

Piyush Mubayi, Goldman Sachs.

Piyush Mubay - Goldman Sachs

Thank you. Thank you Robin. Thank you Jennifer and congratulations on a great set of numbers. Could you help us think about how we can break SG&A down between the percentage that is being used to change user behavior, such as pre-installs, and could potentially go away, and the rest of the SG&A part? Thank you.

Jennifer Li

All of the --- if you see the set-up in SG&A, that, predominantly that is because of increased promotional expenses. And a majority of the increase of promotional expenses are for installation and we are -- we have been over the past few quarters still in the stage of making sure our products are available in front of the users and they get in the habit of using it.

At the same time we started to kick-in branding efforts, branding efforts like over the past Chinese New Year to increase awareness for and brand awareness for Baidu search products, mobile guardian, products like that. And, as Robin mentioned earlier, I think at this stage the pre-installation is still pretty key and over time the branding effort will be the more focal point for sales and marketing expenses.

It's early to say that the overall sales and marketing expenses would decrease this year. As you would see the guidance comments we provided, we will still be very strong and aggressive in pushing for sales and marketing, both on the installation front and the brand awareness front, and over time we think the brand awareness front will be the more focal spending area.

Piyush Mubay - Goldman Sachs

Would it be a right conclusion from your comments that pre-installs are necessary in round one and when users switch to a second smartphone then they're already used to a Baidu app and they will automatically download it? Would that be the right thinking?

Jennifer Li

I would say that would be our hope and expectation.

Piyush Mubay - Goldman Sachs

Thank you very much.

Operator

Thomas Chong, Bank of China.

Thomas Chong - Bank of China

Hi. Good morning and thanks for taking my questions. I have two questions. My first question is about your landing page strategy Robin commented about. Apart from travel, which other verticals do you think are very important in future?

And my second question is, if we look at your second quarter guidance, you still have a very strong year-on-year growth, can management provide some color about if we exclude some of the acquisitions, 91 Wireless, iQiyi, how should we think about the core organic business growth in second quarter? Thanks.

Robin Li

In terms of landing page strategy we already have travel and video, and I mentioned that iQiyi is leading in many of the most critical metrics for online video. There are many, many other verticals that have a lot of potential and synergy with Baidu. Some of the areas we will try to develop by ourselves. Some of the areas we may be able to buy from the market. The important ones I would think would include healthcare, education, finance and many others. So I wouldn't just limit us into these areas we mentioned. We will constantly evaluate and review all kinds of vertical opportunities.

Jennifer Li

And with regards to your second question, the guidance we provided for Q2 we believe is our best guess and it is a strong guidance. It is predominantly very much driven by the core business. Our core business, as you can imagine, on the mobile front is growing very fast and that's really the whole core business is accelerating, and that's the underlying driver for the overall acceleration of our revenue growth.

Some of the invested entities, like iQiyi, were already fully consolidated last year. So on a year-over-year basis it is comparable. Some of the new acquisitions, like 91 Wireless, in some the level, as you would have from publicly accessible information, is relatively really small. So that in itself is not going to move the needle for Q2 guidance on a year-over-year basis that much. And so I would say the strong guidance that was provided for Q2 is very much driven by the core business.

Operator

Alex Yao, JPMorgan.

Alex Yao - JPMorgan

Hi. Good morning everyone and congrats on a very strong quarter. Can you comment on the significance and importance of your Union business on mobile versus PC? Is the Union business structurally difficult to do on mobile because of smaller screen or because of the app-centric user behavior at this stage, or have you been able to identify a mobile unique way to do the Union business on mobile? Thank you.

Jennifer Li

The Union network continues to be a very important part of our overall strategy and we continue to leverage Union network to promote our products.

On the PC front, yes, we have established a pretty massive Union network and through the network I think predominantly, as you see TAC as a percent of the increase, we drive incremental revenue, like contextual ads, and we also use the network to promote products like Hao123. On the mobile front some of the TAC expenses would relate to certain business that comes from some browser partners and there will be a little bit of a revenue split related to that, and that would drive the TAC ratio potentially. That hasn't been the main driver.

And I would say overall the Union network is important, not only because of those browser type of Union partners; there are also many Union potential partners that we could be friend with and we could launch contextual ads business in other mobile partners, like in-app advertising, for example. In those we do have the best technology, the biggest advertiser base, and we can target those kinds of businesses through our network of partners and that can drive incremental revenue for us.

So I would say overall the Union network continues to be very important and equally for mobile, that carries incremental opportunities for us. And if contributions from the Union partners on the mobile front also increased, that would be happy spend for us.

Operator

Chi Tsang, HSBC.

Chi Tsang - HSBC

Good morning. Thanks for taking my question. I have two quick questions. Firstly, I'm wondering, given the 160 million DAU in mobile search, I was wondering if you could give us maybe a split between what's coming from your app and what is coming from your own browser, and also third-party browser.

And secondly, I was wondering in terms of can you give us a rough sense of how many apps were preinstalled in the first quarter? And also cumulatively, given the spending on pre-installation, how many apps have you actually preinstalled cumulatively? Thank you.

Robin Li

On the DAU distribution I already mentioned that our own search app, Baidu search, represents the largest portion among all the search traffic and it is also the fastest growing one. We also have other types of you know, organic traffic from channels like third-party browsers. People will type in Baidu.com to the search. Especially on the iOS platform, I think that those users are more sophisticated. They understand the brand, the quality of this search. Whereas we also partner with other different channels to drive search traffic to us but, like I said, none of them represented the largest part of our total traffic.

I do not have the numbers for apps installed during the past quarter. It's a tricky metric because there will be phones being replaced. Users have all kinds of behaviors. Some of them would use the channel they prefer to a third-party browser or to a Baidu search app, or many other ways. We also have our own browser, Baidu Browser. A lot of users come through the Baidu Browser to search too.

Operator

Ming Zhao, 86Research.

Ming Zhao – 86Research

Thanks for taking my question. My question is about the number of customers. So this quarter we saw some decline. Understanding there is quality improvement process going on and seasonality, but this quarterly number below 0.5m seems very small compared with the addressable market out there and we have always heard that. So my question is what measures is Baidu taking to grow the number to a big level? Are we going to see some significant reacceleration this year?

I think that you said in the prepared remarks that now advertisers can buy ads at city level instead of a province level. Is that going to help you penetrate the merchants in similar size to those on classified sites? Thank you.

Robin Li

Yes. I think the number of customers will resume growth starting from Q2. We did some housecleaning over the past few quarters. In terms of the absolute number of customers, I do agree that we still have lots of potential but our effort need to focus on the overall revenue opportunity instead of the pure number of customers.

And, you are right, when we allow customers to bid on the city level we actually are enlarging the potential customer pool, but that still is quite different from those classified advertisers. We think we are targeting different segments, different nature of businesses. When you go down one level down further, that will be the LBS business, which we are trying to tackle using the group buying business like Nuomi.

Operator

Chao Wang, Nomura.

Chao Wang – Nomura

Hi. Thank you for taking my question. Should we expect the recent anti-pornography activities taken by the government to have any impact on your video and literature business? Thank you.

Robin Li

There has been no impact on our business.

Operator

Tian Hou, TH Capital.

Tian Hou - TH Capital

Hi Robin, Jennifer and Sharon. Congratulations on a good quarter. So I have a question related to your online video business. So Q1 actually was a good quarter for your online video traffic. I guess a lot of traffic is really driven by the popular content like iPartment. So as what we see in the past, a lot of this traffic actually driven by those kinds of hit content. They can come on go depends on the content itself. So when you spend a lot of money, you get good content, you have traffic. However, one day when you buy less good content or you didn't buy a good content, the traffic will go. So it's not permanent; it's come and go and it's like hit-and-miss-driven.

So what is -- so that is also one of the reason you increase a lot of content cost. So I wonder what is the long and permanent strategy to really break this kind of cost spending cycle for the online video business to go towards profitability. What's the strategy for iQiyi or for Baidu.

Robin Li

Yes, Tian, I think you are right. The video business is kind of hit-and-miss. It's quite content-driven, at least in the past. But our strategy is really connecting user demand with this service fulfillment. We try to provide the best quality of service, including online video services. So that the iQiyi brand is very, the best-recognized brand in video and when people search for relevant content, we show them the highest quality of video service, they will be more satisfied. Although the business is pretty much content-driven, but the content could be available to multiple video service providers in a lot of cases.

So we do not expect iQiyi to win by unique content. We expect iQiyi to win by the strong quality of service, brand recognition and user traffic we can drive to them.

Operator

John Choi, Daiwa.

John Choi - Daiwa

Good morning. Thanks for taking my question. Could you perhaps comment on the recent mobile price -- mobile search pricing trend?

And also has it really, the CPC gap between mobile and PC, has narrowed down? Thank you.

Robin Li

Yes, I mentioned this in a prepared remark. The CPC gap between mobile and PC continue to narrow. All of the metrics we track for mobile monetization have been trending higher. So mobile traffic's growing very, very fast, but mobile monetization is growing even faster.

Operator

Wendy Huang, Standard Chartered Bank.

Wendy Huang - Standard Chartered Bank

Thank you for taking my follow-up questions. I think, Robin, you mentioned previously that when it comes to the M&A strategy you prefer to take the majority ownership of investees. I think given the evolution of China's Internet market and also the increasing competition for those valuable assets, are you still sticking to that technical approach?

And also in your M&A mapping what are the holes that you are looking to fill in the future? Thank you.

Robin Li

That strategy still holds. We do not try to be everything for everyone. We don't think that will work. When we look at possible targets in terms of M&A, we value synergies the most. Whenever we can find a strong synergy, we have a strong incentive to do a deal. When the synergy is not that strong we tend not to do the deal. And minority investments really do not give you that kind of opportunity to integrate services so we try to avoid that kind of deal.

In terms of our product map, there are a lot of things we try to fill. Many of them we rely on internal developments, but whenever there is an opportunity to buy we prefer to buy rather than build.

Operator

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.

Robin Li

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

Operator

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

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