Hello and thank you for standing by for Baidu's third quarter 2010 earnings conference call. (Operator Instructions)
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 third quarter 2010 earnings conference call. We distributed Baidu's third quarter 2010 earnings release earlier today. You can find a copy of the press release on the company's 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 be joined by Haoyu Shen, Senior Vice President of Business Operations, to answer your questions.
Before we carry on, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.
Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC, including our annual report on Form 20-F. Baidu does not undertake any obligation to update any forward-looking statements except as required under applicable law.
Our earnings press release on 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 ir.baidu.com.
As a reminder, this conference call is being recorded. In addition, a webcast of this conference call will be available on Baidu's corporate website.
I will now turn the call over to Baidu's CEO, Robin Li.
Hello, everyone, and welcome to today's call. The team worked hard and delivered another outstanding quarter of results.
During the third quarter, both ARPU and customer base increased healthily, which directly contributed to the robust top-line increase.
With our Phoenix Nest platform fully implemented, we continue to improve monetization and provide new value-added tools to help customers optimize account management and improve ROI. As we focus on building out our sales force and engaging with customers more deeply and comprehensively, both larger companies and SMEs are becoming more sophisticated online marketers and spending more with us.
By driving awareness and further enhancing functionality of Phoenix Nest platform, we are confident in seeing further growth and improvements here.
During the quarter, we also made significant progress on a number of box computing related initiatives; in particular, in September at baidu.org we introduced the Baidu open application platform. This idea grew out of our recognition that over 30% of user queries were for applications and not just information.
On this platform, we can intelligently embed not only useful information, but also a wide range of applications such as web-based games, ebooks and popular software that are directly and dynamically accessible in our search results. We are the first search engine company to integrate these functions. We are already seeing strong developer interest and have amassed hundreds of apps, including virus protection software, photo editors, games, and more.
Box computing is technology-intensive, involving Natural Language Processing, machine learning, high performance computing and smart ranking of premium content and the applications. Our box computing initiative, currently including both Baidu open data platform, also known as Aladdin, and Baidu open application platform are the cornerstones of our vision to revolutionize user experience. We believe this will further solidify Baidu's position as the center of China's internet.
Beyond improving our overall user experience and core marketing platform, we are pushing forward on several other fronts. We are putting increasing emphasis on our contextual ads. In this quarter, we rolled out an updated version to promote better relevance and targeting. We are hopeful this area can become a meaningful growth contributor in the future.
On the mobile front, we are seeing strong momentum in mobile carrier growth, and we have many initiatives underway that will leverage our leadership into this increasingly important and growing market. Baidu has been a key enabler and beneficiary of China's e-commerce industry.
In Q3, the number of online retail companies advertising this ad more than doubled year-over-year representing one of our highest growth areas. Our joint venture with Rakuten is one of the many initiatives underway to foster growth of the e-commerce ecosystem in China.
Looking to the Union business, our new revenue sharing policy has been effective in enhancing unit traffic quality and controlling traffic acquisition costs. We are encouraged by the faster growth in our organic traffic versus union. In the near term, we expect to see TAC stabilizing with moderate fluctuations caused by market conditions and union partner mix.
Clearly, the opportunities ahead of us to build on our core search leadership and take the lead in strategic emerging benefits are enormous. One of the keys to this is hiring and retaining great talent. We've been very successful in the past quarter adding 200 sales staff and 700 engineers. We have continued to compete fiercely for top talent wherever it may be.
As our bins continue to scale up as we attract and retain top talent. And as we encounter challenges before anyone else, we are going to be making more and more innovations that create value for our users and customers.
With that, let me turn the call over to Jennifer for financial highlights.
Thank you, Robin; hello, everyone. Inline with Robin's point, we're very excited about the opportunities that lie ahead and we're committed in investing aggressively for the long term growth. In the third quarter, delivered strong revenue growth and maintained healthy margins despite upward investment, marketing, headcount, technology and CapEx. The rest of the year, we will maintain our investment focus on building our sales and marketing and R&D team as well as purchasing necessary network equipment.
Now let's look at the financial highlights for the quarter. all amounts mentioned are in RMB unless otherwise noted.
Online marketing revenue for the third quarter of 2010 were RMB2.26 billion, a 76% increase year-over-year. Baidu had around 272,000 active online marketing customers in the third quarter of 2010, a 26% increase from the corresponding period in 2009. And a 7% increase from the previous quarter. Revenue for online marketing customers in the third quarter reached approximately 8,300; a 41% increase from the corresponding period from the previous quarter.
The increase in ARPU is attributable to our customers appreciation for search engine marketing and our improved marketing platform. Traffic acquisition cost as a component of cost of revenue was RMB202 million or 8.9% of total revenue as compared to 15.3% in the corresponding period in '09 and 9.7% in the second quarter of 2010. The sequential decrease in TAC as a percent of total revenues is attributable to strong organic traffic growth. We expect TAC to remain at approximately this level for this year with moderate fluctuation.
As a component of cost of revenue were RMB85 million representing about 4% of total revenue compared to 4% in the corresponding period in 2009. Depreciation cost as component of cost of revenues were RMB34 million representing 4% of total revenues compared to 5% in the corresponding period in 2009. We expect bandwidth and depreciation cost to grow as we're left in more network equipment.
Selling, general and administrative expenses in Q3 were RMB296 million, a increase of 50% year-on-year primarily due to increase in sales headcount and marketing spend. Research and development expense were RMB205 million, a 75% increase from the year ago period primarily due to increased cost associated with R&D headcount.
Share based compensation expenses which were allocated to related operating cost and expense line items increased in aggregate to RMB24 million in the third quarter of 2010 from RMB21 million in the corresponding period in 2009. Operating profit was RMB1.18 billion, a 127% increase year-over-year.
Total headcount as of September 30, 2010, was about 10,000, roughly 1,000 more than the previous quarter. The increase in headcount comes mainly from R&D and sales. In the coming quarters, we will remain focused on investing heavily in R&D and sales to drive growth in our business.
Income tax expense was RMB165 million for the third quarter. The effective tax rate for the third quarter was 13.6% as compared to 9.1% for the corresponding period in 2009.
Net income was RMB1.05 billion, a 112% increase from the corresponding period in 2009. Basic and diluted earnings per ADS for the third quarter of 2010 amounted to RMB3.01 and RMB3 respectively. Net income, excluding share-based compensation expenses, a non-GAAP measure, was RMB1.07 billion, a 108% increase from the corresponding period in 2009. Basic and diluted earnings per ADS, excluding share-based compensation expenses, both non-GAAP measures, were RMB3.08 and RMB3.07 respectively.
As of September 30, 2010, the company had cash, cash equivalent and short-term investment of RMB6.9 billion. Net operating cash flow and capital expenditure for the third quarter of 2010 were RMB1.26 billion and RMB246 million respectively. As we mentioned earlier, we plan to keep aggressively investing in infrastructure and equipment.
Now, let me give you our topline guidance for the fourth quarter of 2010. We currently expect total revenues for the fourth quarter of 2010 to be between RMB2.37 billion and RMB2.44 billion, which would represent 88% to 93.5% year-over-year growth. This forecast reflects Baidu's current and preliminary view which is subject to change.
I will now open the call to questions. Operator, please go ahead.
(Operator Instructions) And your first question comes from the line of James Mitchell with Goldman Sachs.
James Mitchell - Goldman Sachs
Now that you have digested the first batch of Phoenix Nest changes, I assume that your engineers can work on the next batch of monetization initiative. For example, I think you've shifted a lot of your revenue generation from the main panel on the left-hand side of your results page to the (alpha) panel. Could you now look at doing more with the right-hand side panel, which I think is historically underutilized?
The Phoenix Nest, as we manage all the areas where we display ads on the search result page, that includes the right-hand side, although the right-hand side as you said at this point doesn't provide a big percentage of our revenue. So we're continuing to work on that part of the property, if you will.
So speaking of other monetization efforts, as Robin just mentioned in his prepared remarks, we are working very hard on contextual and putting a lot of engineer resources behind that product right now. It's a small percentage of revenue right now, but we fully expect it to grow to more meaningful part of our business.
James Mitchell - Goldman Sachs
Is there anything beyond contextual that you're focused on, or is contextual the main focus for your engineers?
I would say the main focus is still Phoenix Nest. There are still a lot of areas that we can improve, not only in the fundamental infrastructure of this system, but also those kind of value-added features, how to help our customers to manage their account and how to educate them to better take advantage of the Phoenix Nest system. There are lots of things that we can do in this existing Phoenix Nest system.
And your next question comes from the line of Andrey Glukhov with Brean Murray.
Andrey Glukhov - Brean Murray
If you guys think about the dynamic of this quarter when we've had an unusually long holiday in sort of late September, early October, what did you see towards the end of the quarter in new customer acquisitions? Were there any perhaps delays and kind of push-outs in the decision making towards mid-October when that pent-up demand opens up?
The long holiday towards the end of the quarter has the (inaudible) and also the national holiday does impact our business as any other holiday does. So the business is a bit slow. That probably impacts the speed of our acquisition, customer acquisition as well. But it's not like Chinese New Year. So I don't think you will see meaningful pent-up demand from that period.
And your next question comes from the line of Dick Wei with JPMorgan.
Dick Wei - JPMorgan
Robin, you mentioned earlier that e-commerce product is quite strong. I wonder what is the revenue of queries contribution from e-commerce related queries? In addition, what are the initial tips for Baidu to drive more of the e-commerce traffic and also the integration strategy with Rakuten?
I don't have the numbers. What I said during the prepared remarks is that a number of online retail companies advertising with us are more than double year-over-year. We definitely have seen a faster increase both in terms of e-commerce related queries and e-commerce related companies or customers.
What's happening here in China is that lots of companies, especially those established companies, offline, start to realize that they need a presence online, that they need to set up an online e-commerce site. And once they start doing that, they will almost immediately start to advertise on Baidu, because we are pretty much the single largest traffic source for any website including the e-commerce sites.
And because there are a lot of good e-commerce websites, they actually have a lot of keywords to buy. So e-commerce companies generally can spend a lot with us. That's why we're seeing a very healthy increase in the e-commerce revenue and traffic.
Dick Wei - JPMorgan
What about any more integration with Rakuten with the main Baidu site?
Rakuten is a site that just went live a few days ago, and now they're over 2,000 registered sellers and merchants. Not all of them are live yet I think. Just about 1,000 are live now. And we are just starting to look at how we can help Rakuten to drive traffic and to promote a site to the extent they provide the highest-quality content relevant results. But it's still very early.
And your next question comes from the line of Alicia Yap with Citigroup.
Alicia Yap - Citigroup
My question is on your new e-commerce JV with Rakuten. Could you actually share with us expectation from this JV? What are some of your differentiations or advantages to attract the merchants as well as the user traffic to your platform versus other platforms in the market? And how much you expect the JV to contribute by yearend or maybe next year?
We don't want to talk about what specific internal targets we are setting. But as far as the advantage that this joint venture has in getting to e-commerce in China are on two fronts.
From Baidu perspective, there are a lot of users searching for shopping related queries everyday on Baidu. So that's the advantage we have. From Rakuten side, they're very, very successful in Japan. They have lot of expertise in how to manage a B2C mall, how to come up with loyalty programs, how to make sure that the buyer has got the best experience. And we hope a lot of that expertise can be exported to China.
So by combining our advantages and their expertise from Japan, we think they can be a very viable contestant in the e-commerce landscape in China.
Alicia Yap - Citigroup
Who actually will be in charge of the main operations? Would that be Rakuten site?
Rakuten in Japan has the controlling interest, and their founder and CEO is very, very determined to make this a success.
(Operator Instructions) And your next question comes from the line of Jin Yoon with Nomura.
Jin Yoon -Nomura
Just a couple of questions regarding Phoenix Nest. Now that we are fully transitioned over and it's up and running, what percentage of your revenues on search is actually coming from B2B related searches versus B2C or C2C now that we have fully transitioned over compared to a year ago this time?
And outside to Rakuten joint venture, what percentage of actual search revenues on Baidu is actually coming from e-commerce?
So the split between B2B and B2C, I think what we mentioned a few times in previous calls was we see a faster growth as B2C customer spending from B2B customers. We don't really have any C2C customers per se. So I think Phoenix Nest probably even helped this trend, just because to see kind of customers probably benefited more from Phoenix Nest just because they have more keywords to choose from. They tend to be more sophisticated pay search users.
As far as the percentage of e-commerce customers spending on Baidu, we can't disclose that number. But as Robin mentioned, it's growing very fast, and we expect to be as a percentage of total revenue will grow to a much bigger percentage than today.
It's very hard to distinguish e-commerce related queries from the rest part of the queries. For example, when people search for flowers or search for travel, is that considered e-commerce? We are a comprehensive search engine and people users are used to rely on us to find any information they may want. It's probably easier to classify customers into different industries or categories. It's harder to classify queries.
And your next question comes from the line of Gene Munster with Piper Jaffray.
Gene Munster - Piper Jaffray
Congratulations. This has been unprecedented growth in the past year. A couple of quick questions. Next year, what the major levers are in terms of growth? You mentioned contextual. But also, maybe you could talk a little about maybe the video opportunity or other areas? I know Japan was an area a while back that has been kicked around. Maybe those two in particular, how you see video playing out, maybe the opportunity in Japan?
I would say that next year there is a main growth driver to the Phoenix Nest related to that business, although there might be some smaller areas that have faster growth rate. Contextual should be one, and video should be another. But video is probably going to be even smaller. The video win actually, I suppose you mean (inaudible), which is relatively independent entity and controlled by (inaudible). Their main goal at this stage is to really accumulate users and provide the best user experience.
Revenue should come later on. I don't expect a significant contribution on the revenue front from this venture. But like I mentioned, there are lots of improvement we can make on the main Phoenix Nest system going forward.
Japan, I think we need more patience in Japan. It's a mature market. It takes time. The cost is under control and we have seen some encouraging signs off some of our Japan-related products. But the revenue we don't expect any meaningful contribution for next year yet.
I wanted to add to what Robin said about Phoenix Nest. I don't want people to have the notion that it's gone, it's over. The Phoenix Nest provides a much more flexible platform for us to improve our ads more efficiently and more effectively. So we'll continue to benefit from this new platform going into next year, although the CPM or monetization growth trajectory you saw especially in Q1 and Q2, they are probably largely behind us. But improvement will be steady, will be gradual.
And your next question comes from the line of Richard Ji with Morgan Stanley.
Richard Ji - Morgan Stanley
I have a question regarding your 4Q outlook. Obviously, you guided for revenue acceleration for the 4Q, and that is quite a pleasant surprise. Can you help us understand a little better what are the drivers for the accelerating growth, other than further monetization of Phoenix Nest? I mean, should we expect any other medium term revenue contributor from other area your services?
First off, I think when you look at the fourth quarter of last year we had the flip over from this legendary system to Phoenix Nest. So the growth rate for that quarter was impacted negatively. If you do a year-over-year comparison, naturally the growth rate should be higher than last quarter.
More importantly, I think once Phoenix Nest set a good foundation, there are a lot of things we can do. Like we mentioned a couple of times on this call, there are lots of gradual improvements we can do. So overall, we're quite pleased that as we can guide you on a very high growth rate for the fourth quarter.
And your next question comes from the line of Eddie Leung with Bank of America-Merrill Lynch.
Eddie Leung - Bank of America-Merrill Lynch
Could you give us an update of your advertising mix? What are the top five categories? Could you also talk a little bit about their relative growth?
Eddie, our top five vendors largely remain the same those ones that you're familiar with, namely, medical, machinery, equipment, education, travel, franchising etcetera. And we have seen increasing performance from our gaming software business services.
So these businesses are growing strongly, and the orders haven't really changed much. There is a little seasonality nature in some of the sectors like travel and education, but all-in-all they are growing pretty much in pace with the general growth you're seeing.
And your next question comes from the line of Ming Zhao with SIG.
Ming Zhao - SIG
I have a question on your box computing. On this open apps platform, can you give us a little bit more color there, such as how users accept these new search results imbedded in the apps? Do they spend more time on your pages? How do customers like it? And how do you want to monetize that?
I think users like the kind of embedded apps very much. They are definitely spending a lot more time on this new search engine with our page. We've seen very high interest from the developer community and our users apparently also like that. Going forward, I think that first priority for the open application platform is to better satisfy our users' needs, whether its information needs or needs related to applications.
So we basically open up a whole new area for our users, and the goal is to let our users be more dependent upon Baidu services or the Baidu Search Box. That's why our ambition is the box computing. As for business opportunities or revenue opportunities, I think in the near term there should be no direct revenue benefit or revenue generation from these embedded applications. If there are opportunities to charge the user or anything that generates revenue, we would very much like to share that kind of revenues with our developers.
For Baidu, I think the true benefit we're getting is that users are increasingly dependent on (the one box) provided by Baidu for any need they have. So indirectly we should get a lot of benefit from this kind of initiative.
And your next question comes from the line of Aaron Kessler with ThinkEquity.
Aaron Kessler - ThinkEquity
There are a couple of questions. First, can you give us an indication of how the C2C pricing was on a sequential basis? And also just what's your outlook for maybe sales and marketing and continued R&D investments over the next few quarters?
I'll take the C2C question. We never disclosed detailed information about C2C growth. But what I can tell you is, it's been growing in the past few years at a pretty steady rate, and it didn't really accelerate or decelerate for that matter after Phoenix Nest. So we're comfortable with how fast C2C is growing at this point.
And in terms of sales and marketing and R&D expenses and headcount increases, if you look at what we have done in this year between Q1 to Q3, we have added over 2,000 people. In Q2 in particular we added 1,100, and this quarter we added about 10,000. The mix is about 200 in sales and about 700 plus in R&D. Going forward, that pattern will continue in the near term. And so we'll continue to invest heavily in the R&D talent, as well as building up sales force.
And your next question comes from the line of Eric Wen with Mirae Asset.
Eric Wen - Mirae Asset
Jennifer, you mentioned that Baidu is getting on to a CapEx cycle, and I did notice that for the quarter, CapEx as a percentage of revenue did go up two percentage points. Can you comment on how are we at the cycle of this CapEx spending? Do you expect that almost over by this quarter or continue, and you will be upgrading your servers by the next two or three quarters?
We are at the early stage of the CapEx investment. You did see, we stepped up CapEx spending between Q1 and up to Q3. The step-up will continue and probably more aggressive in the near term. CapEx does come in very (large), but I would say this is far from the end of it.
And your next question comes from the line of Stephen Ju with RBC Capital Markets.
Stephen Ju - RBC Capital Markets
I think you've said in the past that only 40% or so of your total traffic is for search. So what kind of monetization vehicles are you putting in place for the remaining 60%? And can you give us an update on your initiatives for display advertising?
The majority of our traffic is actually non-web search, where we have Baidu Knows, Baidu Post Bar and things like that. We do monetize that traffic by putting on contextual ads, also by putting on display ads for brand advertisers. And these revenues are a small percentage of our total revenue at this point. So it does have some potential to further grow.
And as far as display, we have display on our proprietary non-web search traffic as I just mentioned. We also, on our contextual front, we also are increasing the size of display versus text as we've been doing that this year and going to next year as we keep working on our contextual products, we will expect our display as on a pda size roll on will continue to go up.
And your next question comes from the line of Wendy Huang with Royal Bank of Scotland.
Wendy Huang - Royal Bank of Scotland
Just wonder if you can share your thoughts on the general search engine and how the general search engine Baidu, to differentiate from other vertical search engine which may not have massive traffic as Baidu, but they are specializing in certain areas.
For example, in (inaudible) area we have the (inaudible) and in the e-commerce we have the (inaudible) how can Baidu differentiate from them and what are the strengths and weaknesses that Baidu currently have?
Wendy, this is Robin. I've been in the search engine industry for quite a long time, probably over 15 years. And over the last 15 years I've seen a lot of choice in all kinds of virtual areas other people tried to provide vertical searches and none of them has been successful. And I guess the reason is that users, the majority of the users are lazy. They usually only want to rely on one search box to satisfy their information needs, all kinds of information needs.
So the vertical search flow is that they may have group of loyal users, but the entrance point may very well come from the Baidu search or without the links on the Baidu search without page. Other than that, I don't see significant build up in organic traffic from those vertical search services. So going forward, I still believe that the super majority of users in most cases that they will first come to Baidu to look for what they are looking for. And vertical searches are generally niche players.
And your next question comes from the line of Paul Wuh with Samsung Securities.
Paul Wuh - Samsung Securities
Just a quick question on box computing again. I know that you said that there is a lot of interest on developers. If you could give us some sense of when you think you might begin to monetize this. And I guess it will be kind of App Store like Apple had. If you could give us some idea about is that the model that you're thinking about and they might start impacting your P&L?
Application platform makes quite different from the App Store of Apple, meaning that the main purpose of this platform is to let users more dependent upon Baidu search box, not to drive more revenue opportunity. But in order to incentivize the developers, we do allow them to find ways to either charge the users for display advertisement.
We are also developing a revenue sharing mechanism so that those applications drawn on our search result page can benefit. For example, the revenue generated from those search result pages can be shared with the developers who submit their applications to our platform.
Going forward, there will be a number of very successful application developers for our platform. But for Baidu, we are not counting on this kind of revenue opportunities. What we are counting on is that people come to Baidu more often for whatever they need and they search more and generate more queries and can generate revenue for us.
And your next question comes from the line of (Gary Ming) with UBS.
In terms of ARPU that we see to date versus maybe before Phoenix Nest, how would you describe the distribution of ARPU? So is it more concentrated on the top end payers today versus maybe a year-and-a-half ago, or is that pretty much the same and everyone is actually increasing the money that they spend on Baidu?
I don't have exact numbers, but we do have 80-20 rule here as well. As much as it's a very long tail business, the high spending customers do spend disproportionately to contribute a high percentage to the revenue. I would think that Phoenix Nest would probably further reinforce this trend, but not so much. We hear good feedback from all kinds of customers, be it big or small.
And you have to remember it's not the Phoenix Nest. The query growth, the traffic growth is a very powerful driver of their spending.
So half the increase is across the board, big or small?
Your next question comes from the line of Alex Yao with Deutsche Bank.
Alex Yao - Deutsche Bank
I have a couple of questions on the box computing initiative. Firstly, what could be the potential impact on the overall internet ecosystem from this initiative? And secondly, I would like to understand a bit more about the costs associated to this initiative? How much of our R&D resource will be devoted to this initiative compared to the continuously refinement of Phoenix Nest?
On the potential impact of the internet ecosystem, I would say there are concerns in the internet industry that more traffic will be retained on the Baidu platform rather than directed to certain other sites. But we are not concerned about this, because at the end of the day, we need to provide whatever the users are looking for, whether it's on Baidu platform or off Baidu platform.
And in terms of monetization, the application developers can monetize on our platform or monetize on a third party or independent website. So as long as they can make money on this kind of application, I think that the ecosystem will be healthy.
On the cost side, we actually have two very independent R&d teams living on our company, roughly a 50-50 split in terms of resource allocation. And the one team is for pay search, for example, Phoenix Nest. The other team is for our Go search, all those non-paid content is the responsibility of the latter.
And for the latter team, part of their job is to develop this open application platform or any other initiatives in our box computing frame. There is still a lot of more fundamental relevancy work that what we are doing. So overall, the priority is set by what can improve the user experience better, then we will devote resources there for the latter team.
Just to put it this way, we don't separate out this cost, because box computing is part of our main business. We are in the search business. We constantly anticipate what are the search results that we need to produce to meet the users' demand and that's constantly evolving. So our main team's work is to surround these activities and do work related to that. So we don't separately identify the cost for box computing. That's our main business.
And your next question comes from the line of Jiong Shao with Macquarie.
Jiong Shao - Macquarie
I think some of your big competitors, not necessary in the search space, such as Alibaba and Tencent are making investment or developing their own search engine. So I was wondering what you think your market share may be over the next couple of years? Could you remind us what your market share is currently?
Related to that, Google's partnership with one of the largest portal sites in China expired a few months ago. I was wondering whether or not you guys are considering to expand your partnerships with some of these leading portal sites?
I think the traffic share for Baidu is about 80%. So it is a record high for our traffic share. And when you talk about competition, I guess you really mean in terms of search traffic, not really revenue, because revenue-wise besides Baidu and Google, probably the rest of the players are not meaningful at all.
When you look at the competition, Alibaba and Tencent, they have had search services for a long time. Both of them have had search services for years. We haven't seen any change in terms of trend in their traffic share. And we are very focused on improving the user experience for Baidu. And we believe that our service is the best and users will stay with us.
Regarding to the portal partnership, I think we are very open minded whenever it makes sense. We will strike deal with our potential partners. We have the union bins as you know, and we have our own schedule or PR issue for all kinds of different partners. But as a trend you can see that the TAC as a percentage has been decreasing over the past few quarters. And the traffic or the revenue opportunity any single partner can bring to us is less and less meaningful.
I think the key in general is when you look at the competitive environment, it's more meaningful to look at the slice of the pie rather that the relative market share. Where still the internet user is growing, traffic is growing, activity is growing, internet search engine marketing is only at the beginning. So as a market leader, we're more focused on developing the market and growing the pie than worry about the relative market share positions.
And you next question comes from the line of Jake Li with Guotai Junan.
Jake Li - Guotai Junan
A quick question regarding the ARPU. As you guys just now said, there are a lot of features for the Phoenix Nest and it means many features will be improved. And together with other mechanisms such as the (inaudible) and also the search engine optimization you launched few weeks ago. So I'm wondering whether the search engine optimization is helpful for the ARPU to decrease or something. So could you give me a guidance about ARPU growth in the fourth quarter. I know that revenue growth is very, very strong.
And the ARPU guidance in the next year?
I'm not sure I totally get your question. But search engine optimization has always been there, a little bit in SEOs, and there is nothing new there. We're seeing pretty strong growth in ARPU in the past few quarters being driven by growth of traffic and driven by the benefit we're getting from Phoenix Nest and that will definitely continue into the fourth quarter.
The fourth quarter guidance doesn't incorporate that. But going into next year, the number of customers and ARPU will both continue to be good (technical difficulty).
And your next question comes from the line of Dick Wei with JPMorgan.
Dick Wei - JPMorgan
My question is on the Baidu payment system. Given that with Box Computing and Rakuten there is probably more opportunity for the payment system. I wonder if that business is run with its own P&L? How does it sit within the Baidu corporate structure? And if you can share some of the policy or strategy for the payment system?
Maybe Jennifer can tell if it's run on its own P&L. But what it does is, is it came about together with Youa, our C2C transaction platform. So it continues to support Youa and supports a lot of other businesses that we have as well. For example, Rakuten, I think Rakuten payment is now going through Baifubao. We do have some apps that our partners will charge users. Baifubao can definitely be a payment vehicle. But right now, it's multi-functional; it's supporting a lot of businesses that we have.
And what's more important is that payment is no longer a hurdle for online activities. We're hearing in China, the payment infrastructure or whatever has grown very significantly over the past few years. And consumers now feel comfortable to pay online and there are lots of ways for them to pay.
We are now approaching the end of the conference call. I would now turn the call over to Baidu's Chief Executive Officer, Robin Li, for closing remarks.
Once again, thank you for joining us today. And 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. Have a good day.
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