Baidu's CEO Discusses 4Q2011 Results - Earnings Call Transcript

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


Hello and thank you for standing by for Baidu’s fourth quarter and full-year 2011 earnings conference call.

(Operator Instructions). Today’s question 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.

Victor Tseng

Hello, everyone, and welcome to Baidu’s fourth quarter and full-year 2011 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 in this call includes discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu’s IR website.

I will now turn the call over to Baidu’s CEO, Robin Li.

Robin Li

Hello, everyone, and welcome to today’s call. In the final quarter of 2011, we delivered strong financial results, driven by our relentless execution and ability to capitalize on exceptional market opportunities. Overall, 2011 was an extraordinary year for Baidu with strong financials and encouraging progress.

Today I’d like to take you through some of the achievements for the quarter and the year and discuss our strategy going into 2012. I’ll begin by looking at some of the advances we’ve made on the user front in Q4.

We made great strides in mobile strategy over the quarter. The mobile internet is growing at an astonishing pace in China, and Baidu has kept abreast of that growth. We devoted significant resources to enhancing user experience for our products and optimizing them for mobile. I'm pleased to say that all of our mobile products are growing very well and we expect to see strong growth momentum carrying into 2012.

Search query for mobile devices already represent more than 15% of our total search query volume. Smartphone shipments in China surpassed results in the US last quarter, and Baidu has positioned itself to capture this opportunity. Baidu is already the default search engine on 80% of branded Android handsets sold in China.

In addition, we developed a mobile phone platform called Baidu Yi to integrate our services, including web search, music, maps and LBS to ensure that users get the premium internet experience right on their mobile devices. Currently we have a partnership with Dell and we are looking forward to working with more vendors and to introducing Yi to many more users this year.

Building on our success in the desktop maps market where we have an 85% market share, we are moving ahead [full throttle] with [Mobile Maps 2]. The number of daily users using Baidu maps on mobile devices grew by more than 10 times in 2011. In Q4 we introduced a range of new services, including interior maps of shopping malls, airports and other large facilities, as well as satellite maps of major Chinese cities, in addition to 3D map services we were already offering. Meanwhile, we continue to deepen our partnerships with leading content providers and to more tightly integrate Baidu products like Symbian to offer Baidu maps users greater and more useful content.

Like cloud 2011, we made important progress on the user front. As a key part of our efforts to increase user engagement in September, we introduced Baidu’s a new personalized homepage feature. Using past search behavior and intelligent recommendation technology, the new homepage allows users to access much of the data content, services and apps they most want with just one click. Our landing page strategy helps to ensure that users enjoy an optimal experience even after they leave the Baidu site. We made great progress here by partnering with a large number of leading sites in important verticals like online video, travel, music, automotive, real estate and finance.

In the booming travel space, we signed a landmark deal to acquire a majority stake in the leading travel search provider Qunar. Qunar continues to grow well, and we have integrated its comprehensive travel database into our product lines.

In music, we launched the Baidu Ting music social network and signed a major agreement with a leading global record label to enable Baidu users to discover and share millions of licensed Chinese and international sounds on our platform.

In the online video, our iQiyi joint venture has been growing solidly and now ranks amongst the top three in China by [time spend]. In Q4, iQiyi’s unique monthly users reached 198 million.

And of course, we continue to make strides on box computing, the innovative paradigm that represents our ambition for the future of search. I'm pleased to tell you that over 70% of our search queries now return dynamic interactive results. Everyday users click 20 million times on results returned through the open application platform. With tens of thousands of third-party developers already participating, we are confident that the Baidu search box will increasingly become Chinese users’ primary point of entry onto the internet.

This commitment to providing the best possible user experience has helped us to build Baidu’s leading market position, and we continue to gain market share. China’s internet population is now at about 513 million and it continues to grow. We expect to capture the overwhelming majority of new user growth and to increase engagement with both existing and new users.

In 2012 Baidu will continue to push forward on the product front with continuous improvements to virtual search products to our maps services as well as to our popular social products. Also look for new initiatives in the mobile internet space and for new [client] software offerings. We also continue to explore long-term international opportunities.

Let’s now look at our progress in improving customer experience and enhancing monetization. In the fourth quarter we delivered solid revenue growth of 83% year on year. We saw increased spending by customers in traditional industries such as automotive and cosmetics.

During the quarter our penetration in brand advertising deepened. Customers who typically advertise offline continue to increase their spending with us. These customers include some of the biggest brand advertisers like P&G and many luxury brands like Louis Vuitton. The fact that they are turning to Baidu for brand-building marketing is a demonstration of the effectiveness of our platform.

E-commerce remains an important revenue driver for us, but we did see some cooling off in the more heated segments such as classified websites and group buying. We believe that it’s healthy in the long term for this sector to stabilize marketing spending at more sustainable levels.

We recorded ARPU growth of 62% year on year while our customer base grew 13% year on year. This demonstrates the success of our efforts to reach not just the quantity of customers but also the quality of customer spending. In particular, our large customers allocated a bigger percentage of their marketing budget to Baidu, and this was an important driver of growth in revenue and ARPU in Q4.

2011 was another remarkable year for top line growth. We benefited from growth in the e-commerce industry and succeeded in gaining more traction with traditional customers. We made important improvements to our online marketing platform and monetization [algorithms] to improve customer ROI. We also pushed out new targeting options like advanced (inaudible) match and a series of customer-friendly campaign management programs that proved popular with customers. As a result, we successfully accelerated revenue growth in 2011 over the previous year. Revenue increased by 83% for the year, up from 78% in 2010.

Even with such strong growth, our long-term market opportunity in China is still enormous. In 2012 we will remain focused on exploiting this opportunity through better understanding of customer needs and stronger customer targeting. To do this, we are forming market research teams to help drive more penetration into promising sectors like food and beverage, cosmetics, automotive and services. We are also recruiting specialists in traditional marketing who will work with our larger customers to develop new format and services for online marketing that will help them drive results.

We are also looking at how to better serve our SME customers. This includes enhancing the Phoenix Next interface and making improvements to our CRM systems and customer service offerings. In addition, we’re now working closely with government agencies on a nationwide project aimed at educating SME owners about how the internet can help their business.

As our social products continue to thrive, we think it’s increasingly important to consider Baidu -- to consider how Baidu can better help our customers harness the power of the social web. Given that most of our social products such as Post Bar, Baidu Knows, Baidu Encyclopedia, are organized both around people and topics. We can more naturally offer advertisers that highly desire combination of reach, relevance, social context and engagement on our platform. Our social products have a much larger user base than peers’ offerings. In 2012 we will continue to explore better monetization mechanisms for social media.

2011 was an amazing year but there’s a lot more to come in 2012. The addressable market for Baidu is enormous, and with our clear strategy and the pipeline full of exciting initiatives, we have only scratched the surface of our success in China.

With that, I’ll now turn the call over to Jennifer for a discussion of financials.

Jennifer Li

Thank you, Robin.

I'm pleased that we’re capping off a remarkable and productive year for Baidu with a strong set of results for the fourth quarter. That outstanding pace of top line growth enabled us to enjoy great margins as we sustained a very aggressive pace of the investment in talent, infrastructure and marketing.

Headcount for the year increased by 5,200, bringing total staff to more than 16,000 at yearend. CapEx was RMB1.8 billion in 2011. And we funded strong marketing efforts towards SEM market development and building ecosystems for the Baidu Open Data and Open Application platforms.

In 2012 we aim to continue a robust pace of investment to build a solid foundation for long-term growth while maintaining our disciplined approach to spending. We have a very clear vision of how we intend to grow our business. This entails continued investment in R&D talent and infrastructure.

To support this expansion in talent, we will add new office space. This includes the recently announced Baidu International Building in Shenzhen in Southern China which we expect to be completed in 2015. We will also add more network infrastructure such as data centers and servers.

As part of our landing page strategy in 2011, we invested in key vertical areas such as online video and online travel. In 2012, we will continue to support the growth of these invested entities while also focusing on key strategic initiatives to finance as appropriate. We’re confident about the long-term opportunity in China’s internet industry and we will invest to develop and capture future growth of our business.

With that, let me run through some of the key financial indicators for the fourth quarter and the full year. All amounts mentioned are in RMB unless otherwise noted.

For the fourth quarter, total revenue were RMB4.5 billion, representing an 83% increase year over year. Total revenues for the full-year 2011 were RMB14.5 billion, an increase of approximately 83% from 2010.

During the fourth quarter, Baidu had approximately 311,000 active online marketing customers, a 13% increase from the corresponding period in 2010 and a 2% increase from the previous quarter. Revenue per online marketing customer for the fourth quarter was approximately RMB14,400, a 62% increase from the corresponding period in 2010 and an increase of 5% from the previous quarter. For the full-year 2011, active online marketing customers increased by 18%, a revenue -- and revenue per online marketing customer increased by 55% over the full-year 2010 figures.

Traffic acquisition costs as a composition of cost of revenue in Q4 was RMB354 million or 7.9% of total revenues, as compared to 8.1% in the corresponding period in 2010 and 8% in the third quarter of 2011. Full-year 2011 tag as a percent of revenue was 8%, down from 9.6% for 2010, which primarily reflects the continued impact of our traffic optimization efforts from previous years.

As we noted before, we expect tax as a percent of revenue to gradually increase over the long term given that we need to manage our partnership networks dynamically, and we will also offer incentives, especially a higher payout ratio for new and important products such as contextual ads.

Bandwidth costs and depreciation costs as a percent of revenues in Q4 were 4.3% and 4.8% respectively, compared to 4% and 4% in the corresponding period in 2010. In 2011, bandwidth and depreciation costs as a percent of revenue increased to 4.3% and 4.5% respectively, compared to 3.9% and 4.2%. The increase was mainly due to an increase in network infrastructure capacity. We expect to recognize more bandwidth and depreciation costs in 2012, in line with the company’s sustained investment in network infrastructure.

Selling, general and administrative expenses in Q4 were RMB522 million, an increase of 67% year on year. Total SG&A expenses for 2011 were RMB1.7 billion, a 55% increase from 2010, mainly due to increased personnel costs and marketing expenses.

R&D expenses in Q4 were RMB414 million, an increase of 78% over the corresponding period in 2010, primarily due to increased headcount. Total R&D expenses for 2011 were RMB1.3 billion, an 86% increase from 2010, reflecting our continued emphasis on investing in top-notch R&D talents.

Share-based compensation expenses which were allocated to related operating costs and expense line items increased in aggregate to RMB47 million in the fourth quarter from RMB28 million in the corresponding period in 2010. SBC for 2011 increased 62% over the 2010 level.

Operating profit for Q4 was RMB2.3 billion, an increase of 80% over Q4 2010. Operating profit for the full-year 2011 increased 91% from 2010.

Loss from equity method accounting was RMB8 million in Q4 2011 and RMB171 million in 2011 versus RMB7 million in Q4 of 2010 and RMB9 million in the whole year of 2010. The year-on-year increase was mainly due to Baidu’s cash investment in ITE.

Total headcount as of December 31, 2011 was about 16,100, an increase of 5,200 over the end of 2010. Of this total headcount, around 1,100 is attributable to Qunar, with the remaining primarily attributable to headcount increases in R&D and sales. In the fourth quarter, headcount increased roughly 1,400. In 2012 we will continue to increase headcount with more emphasis on R&D expansion.

Income tax expenses was RMB404 million for the fourth quarter. The effective tax rate for the fourth quarter was 16.5% compared to 12.1% in Q4 of 2010. For the full year, our effective tax rate was 15.2% compared to 13.2% in 2010. The increase was mainly due to expiration of preferential tax treatment for some of Baidu’s PRC subsidiaries. Also we have recognized a higher effective tax rate for the full-year 2011 because we’re in the process of applying for the high-end new technology tax enterprise status for one of our entities. Until we receive the status, we [have quoted] the income tax at a higher non-preferential tax rate. We expect we will be granted the HNTE status and to reverse this over-accrual in [2002] when we receive the status. For [2002] we expect our effective tax rate to be around mid-teens.

Net income attributable to Baidu for Q4 was RMB2.1 billion, a 77% increase from the corresponding period in 2010. Basic and diluted earnings attributable to Baidu per ADS for the fourth quarter of 2011 amounted to RMB5.88 and RMB5.87 respectively. Net income attributable to Baidu for the full year increased by 88%.

Net income attributable to Baidu excluding share-based compensation expenses, a non-GAAP measure, for Q4 was RMB2.1 billion, a 77% increase year over year. Basic and diluted earnings attributable to Baidu per ADS excluding share-based compensation expenses, both non-GAAP measures, were RMB6.02 and RMB6.01 respectively.

As of December 31, 2011, the company had cash, cash equivalents and short-term investments of RMB14.2 billion. Net operating cash inflow and capital expenditure for the fourth quarter of 2011 were RMB3.4 billion and RMB502 million respectively. Full-year net operating cash inflow and operating expenditure were RMB8.2 billion and RMB1.8 billion respectively. In 2012 we plan to aggressively expand our network infrastructure and office capacity.

Now let me provide you with our top-line guidance for the first quarter 2012. We currently expect total revenues for the first quarter of 2012 to be between RMB4.195 billion and RMB4.33 billion, which would represent a 72.2% to 77.7% year-on-year increase. I do wish to emphasize that 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.

Question-and-Answer Session


The question-and-answer session of this conference will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. (Operator Instructions).

Your first question will come from the line of Alex Yao of Deutsche Bank. Please go ahead.

Alex Yao – Deutsche Bank

Hi, good morning, Robin and Jennifer and Victor. Thank you very much for taking my question.

So, can you talk about 2012 revenue growth outlook? Specifically, how do you expect the larger and smaller advertisers react to the current macro environment? Thank you.

Jennifer Li

Alex, thank you for your question. As we provided in the Q1 guidance, are projecting our revenue growth at this point on a year-over-year basis for the quarter between 72% to close to 78%. We provide you this Q1 outlook based on our best understanding and insight into our business. And that’s the consistent approach we provide in terms of revenue guidance.

We do not offer the full-year outlook. However, I think the two things I want to emphasize is, on one hand the internet and search engine marketing market has tremendous opportunities. At this point we’re very focused on the matters that we have control over, and the efforts that we put in is based on the initiative that we have put forward and the things that we have control over. So this, I mean, I would say, we do not read too much into the macro environment.

In terms of large customers’ contribution to our revenue growth, that will continue to be a very strong driver. This has been the case for the past few years, and as you -- we have outlined in our -- the script, the business that we’re growing in the large accounts has been building very solid base. More and more traditional players are allocating more of their ad budgets with us and the brand players are spending to put emphasis into search, into our platforms. So we’ll continue to see there is a lot of growth momentum within the large clients business.


Next question will come from Dick Wei of JPMorgan. Please go ahead.

Dick Wei – JPMorgan

Hi. Thanks for taking my questions. My question is on the cost side. It looks like bandwidth and depreciation up a bit in terms of percentage of revenue in Q4. I wonder if it is just a normal volatility or should we be expecting more of the, at least in the medium term, that the spending would be higher compared with the revenue growth? Thank you.

Jennifer Li

I think over the past couple of quarters, Dick, you would have noticed the -- we used to have these cost components as a percent of revenue at a decreasing rate. But that momentum has changed. This is reflective of our continued investment in the infrastructure as we put on more servers, we handle more products, there’s more traffic that we offer -- that we service our users. The bandwidth and depreciation cost natural goes up. And you should continue to expect this trend going forward. This is not one-time special activities going on.


Next question will come from Alicia Yap of Barclays Capital. Please go ahead.

Alicia Yap – Barclays Capital

Good morning, Robin, Jennifer and Victor. Thanks for taking my questions.

My question is relating to your mobile strategy. So, can you -- I think, Robin, you mentioned substantially on some of the mobile initiatives, and then can you share with us the current revenue contribution or maybe how much do you expect mobile to contribute in 2012. Thank you.

Robin Li

Okay. Over the past conference calls I’ve repeatedly said that we do think mobile would become a very important channel to distribute our products. And that has increasingly become true over the past quarters and we think during the coming year mobile will represent an ever-larger percentage of our total traffic.

In the past we basically did not spend any resources on monetizing the mobile traffic. But starting from this year, we will do something to figure out how to better serve our customers on the mobile platform. That being said, I think probably over the next three to five years, our resource and our emphasis on mobile will continue to be on the user front instead of the monetization mechanisms. Right now mobile represents a very small percentage of our total revenue.


Next question will come from Jin Yoon of Nomura. Please go ahead.

[Yin Wong] – Nomura

Hi. It’s [Yin Wong] from Nomura. I'm asking questions on behalf of Jin Yoon. Thanks for taking my question.

So my question is about the [Hal 1 2 3]. So, given your guidance for the Q1 ’12, have you seen any potential slowdown in [Hal 1 2 3]? And how much impact have you seen from group buying and e-commerce to [Hal 1 2 3]? Thanks.

Jennifer Li

Thank you for your question. [Hal 1 2 3] has been around for a number of years and it is an integral part of our services both to the users as well as to our customers. We do not have the Q1 guidance specifically to address the [Hal 1 2 3] contribution, but [Hal 1 2 3], as I mentioned, has been around for a number of years and it does generate some level of monetization for us but not materially large.

It remains to be an integral part of our service to the users and we continue to deepen the product’s offerings to add additional features and also to help users navigate popular verticals, etc., group buying, lottery and many other verticals. We did say that in Q4 we see some cooling off in vertical areas like group buying or classified ads, and naturally these players also do a little bit of business on the [Hal 1 2 3] site. But, however, as I said, [Hal 1 2 3] is not a materially huge component of our overall revenue picture and it doesn’t make sense for us to single that out for Q1 forecast.


Next question will come from Jiong Shao of Macquarie Group. Please go ahead.

Jiong Shao – Macquarie Group

Thank you very much for taking my question. Could you please comment a bit on the user activity or engagement, trends in areas such as the click-through rate, the query growth and the time spent, etc., etc. and how that relate to your -- how that contribute to your revenue growth? Thank you.

Robin Li

I think there has not been a material change in the user activity in either the query -- the nature of the queries or the click-through rates. Chinese internet users continue to rely on Baidu as their main information source. So, whatever they are looking for, [they’re tagging] the related keyword into our search box, we haven’t seen anything different from that.

Of course we continue to fine-tune our monetization mechanisms, including the clicking price, click-through rates, and where do we show the promotional messages, and how they are displayed. That will be an ongoing effort. But over the past quarter, I think probably for the next quarter or two, there shouldn’t be any material change.


Next question will come from Eddie Leung of Merrill Lynch. Please go ahead.

Eddie Leung – Merrill Lynch

Good morning. Thank you for taking my question.

My question is more about the Brand Zone. Could you give us the proportion of advertisers which have a Brand Zone? And then, how much the revenue contribution from Brand Zone? Is that a material part of your business?

Jennifer Li

Brand Zone is a very popular feature among our product offerings and many customers do select to conduct our business using this product. It’s been growing very fast. It’s one of the core products we offer as an overall package to our overall -- to the customer base. We do not, I think, Eddie, just in terms of whole scheme of things, I think you’ll understand we haven’t really broken out the large client group business, and this is only one product for that group of business.

It is one of the main features that we offer to the customers, but we, you know, it has been growing very, very nicely, but we don’t single out the revenue contribution just for one product.

Robin Li

For the Brand Zone product, it’s primarily designed for the large customers for brand-building purposes. We have seen very good results from that. That’s why during the prepared remarks I said that the large customers who traditionally advertise offline are allocating more and more budget on Baidu. Brand Zone does give them a lot of flexibility to promote their brands. They’ve got a lot of ways to display the promotional message. We deepen -- allow certain interactive activities on our search results with Brand Zone. So we are very bullish on the future of this product.


Next question will come from Yu Jin with CICC. Please go ahead.

Yu Jin – CICC

Yeah, thank you for taking my question. Good morning, Robin, Jennifer and Victor.

So I have a broad question, possibly for Robin. So, traditionally I think that people agree search is the standard of the internet industry. However, (inaudible) some people said the competitive landscape will changein the future, possibly driven by [ISI’s] open platform, and sometimes mobile internet is also different from the PC internet. So this side of the internet industry might be divided into different ecosystems which are built around several leading players. The trend is (inaudible) different ecosystems, they may not open to each other (inaudible) ecosystem less connected than before.

So my question is how the management view the general trend of the China internet industry. Do you agree whether the multi -- agree with idea of a multi-ecosystem? And if so, where and how the potential change of the competitive landscape will affect [search position amongs] the internet industry and what kind of strategy or initiative Baidu may take to cope with the changes? So that’s my question. I will stop here. Thank you.

Robin Li

Okay. We firmly believe that search will be the center of the internet ecosystem for information purposes. Of course, the market, the internet market keeps changing and keeps evolving, there are all kinds of innovations, new products and the new user behaviors. What we have seen there is that in other areas, for example, e-commerce, there are a lot of user activities going on and user behavior have changed a lot. Also on the (inaudible) side, user activities keep increasing and a lot of people are used to communicate through social network services. But those are things that are different in nature from information.

So I think for Baidu, we continue to be the most comprehensive place for people to get information. And for other type of activities, be it e-commerce or social communication, we have ways of making money. And they may choose to be a closed system and they may choose to be open to us, but because we continue to have the most comprehensive information, I think most of the users will rely on Baidu as their primary information source.


Next question will come from Catherine Leung of Goldman Sachs. Please go ahead.

Catherine Leung – Goldman Sachs

Hi, good morning. I was wondering if you could discuss in more detail how much of your bandwidth and server cost growth is related to traffic growth from your core search versus non-search products? And also how much impact does the rapid growth in mobile internet or mobile search traffic have? Thank you.

Jennifer Li

Both our core search, web search business in terms of traffic as well as our non-search products in terms of traffic have grown very, very healthily and very nicely. The servers that we put out not only will handle traffic, it also handles a lot of the backend technology, things like our open data platform, open application platform, the computing capabilities to constantly improve our search results to generate high-quality search results to the users a dynamic search result, and also servers to use for our monetization efforts.

So it’s, you know, you do see bandwidth costs and depreciation costs increase. This is, overall, handles not only backend technology but also the traffic that we are very happy to see that is growing very nicely.

As I mentioned earlier, we will continue to aggressively invest in infrastructure to support these core -- our core business as well to support future initiatives such as mobile. So we’ll continue the pace of the investment on the server and the infrastructure side. And in that, you will continue to see the bandwidth cost and depreciation add up going forward.


Next question will come from Cynthia Meng of Jefferies. Please go ahead.

Cynthia Meng – Jefferies & Co.

Thank you. Thank you, management. My question is on Robin’s comments about monetization -- exploring ways to monetize for social media. Can management give a little bit more color on how Baidu plans to do this? And also any outlook for equity gain or loss for [ITE] going forward for this year? Thank you.

Robin Li

For the social media monetization, I have mentioned many of our social offerings organized both around people and topics. When customers want to advertise social media, I think we have an end-goal of topics that can group people together with similar interests. So we can better target and have more impressions for our customers. That’s why I think we have an advantage over (inaudible) whose main focus is to communicate with each other instead of seeking information.

The social offerings of ours have been growing very nicely, faster than the web search traffic. And we are actively exploring all kinds of monetization opportunities on these products. But it’s still at the early stage. We will report back to the progress when there is anything worth mentioning.


Next question will come from Ming Zhao of SIG. Please go ahead.

Ming Zhao – SIG

Hi. Thank you for taking my question. Just a question on Qiyi, Jennifer, I think you said that in the fourth quarter you will have another RMB23 million equity loss picked up from Qiyi, but it didn’t happen this quarter. And you also mentioned that there might be some strategy change on Qiyi. So my question is really, is there any change to your strategy there? And why there’s no equity loss for this quarter, should we expect that to happen in the next quarter? Thank you.

Jennifer Li

Yup. Okay. Thank you, Ming. As you know, the background that you're all familiar with, Baidu and our partners have joint control over iQiyi, and the investment that we have under -- for this entity is recorded under equity accounting method. We have in the past supported the business in kind and so there has been minimal financial impact to date.

In Q3 we made a cash contribution to Qiyi, and the cash investment was put against our share of iQiyi’s cumulative results. In Q4, as planned, we made another cash contribution to Qiyi of RMB22 million but we did not need to repeat the one-time pickup to reflect the cumulative nature of Qiyi’s financial performance. This cash investment, this new cash investment that we did in Q4 on a going forward basis will keep up -- will pick up along the way our share of the results on an ongoing basis up to that cash contribution amount.

For Qiyi, our investment strategy doesn’t change. Qiyi is an important initiative for us and we will continue to support Qiyi very strongly. We will regularly review what is the optimal strategy for us to support it and on a going forward basis.


Next question will come from Eric Wen at Mirae Asset Management. Please go ahead.

Eric Wen – Mirae Asset Management

Good morning. Thanks very much for taking my questions. I have a question on the percentage of traffic and the revenue outlook for vertical search. What I mean by vertical search is it seems like map, travel, video and online shopping, I think plus image and the music search in the past, right now it’s about -- around 15% of the search queries and the revenue much less. How does Baidu see those vertical searches growing in traffic share and the revenue share terms going forward? Some of that, if it’s not -- just the -- some of the important ones that you think it’s going to grow in the future. Thanks.

Robin Li

Eric, the main purpose for vertical search product offerings was really to make our users more dependent on Baidu for any type of information needs. So over the past years, searches like video search, image search and maps have helped us to maintain and gain market share or traffic share on web search. We did not put into a lot of resources to monetize the vertical search traffic. Image search represents probably the largest portion of vertical search queries, but it’s not that easy to find -- get way to monetize this part of traffic.

Well, map is a little bit different. It’s central to the location-based services that allows people [have high hopes on]. As more and more people access internet services through mobile devices, we believe there could be good monetization opportunities on that related LBS services.


Next question will come from Aaron Kessler of Raymond James. Please go ahead.

Aaron Kessler – Raymond James

Yes, hi guys. A couple of questions. First, on the SG&A, that was up decently on a sequential basis whereas last year it’s relatively flat sequentially. Was there anything there? And is there any sense for the click volume for the year? I think you usually disclose that on the 10-K, I don’t know if you can give us advance preview of that. Thank you.

Jennifer Li

Let me address your first question first. I didn’t quite hear your second question. The marketing dollars increase sequentially, yes, we do have, not necessarily effect, pattern quarter over quarter. This past Q4 there are a number of marketing activities going on that contributed to the sequential increase. We celebrated our 10th year anniversary of Baidu’s commercial products and that was a bigger marketing event this year compared to probably prior quarters. There are also, as you can see, headcount increases related somewhat to marketing, and that contributed to the sequential increase as well.

As I mentioned in my script, marketing is a very important component of our overall expense structure. Not only we have a lot of market opportunities which as a search engine market leader, that we need to develop the market opportunities, particularly on the SME side. On the user front, we’re trying to build a healthier, very positive ecosystem with our open application and open data platform. And that in itself will also drive our marketing spending going forward.

So, quarter over quarter there’s always different events that we’re trying to drive our strategic focus.

Aaron Kessler – Raymond James

Great. And the second question is on click volume growth in 2011, I think you disclose it on your annual filing typically.

Jennifer Li

Click volume. Did you say click volume?

Robin Li

Yes, yes.

Jennifer Li

Okay. Yeah, we typically release that in our 20-F filing but not on the quarterly release.


Next question will come from Wallace Cheung of Credit Suisse. Please go ahead.

Wallace Cheung – Credit Suisse

Hi. Thanks for taking up my questions. I think after the Google fourth quarter results [announcement], a lot of clients have been quite interested to see how the search engine to improve on (inaudible) mobile search trend as the (inaudible) of like the form factor has some kind of limitation. So, when Baidu try to think about monetization of mobile search, probably this year, would you have the same sort of platform for both the PC and mobile search trend in order to have two different kind of [CVC]? Or would you think about other projects in order to improve the (inaudible) on the mobile side? Thank you.

Robin Li

Frankly, we just started to work on the monetization of mobile traffic. It’s very early for us to have any conviction on what the best way to monetize global traffic is. But right now the monetization system on mobile is the same as (inaudible) PC-based internet. So there shouldn’t be any change for the near future. It’s just the way we display promotional messages on mobile interface could be a little bit different. We may display phone numbers and users can click on the phone number and make phone calls. We may display less promotional message than PC interface, but we are working to optimize this kind of offerings, because it represents a very small percentage of our revenue, total revenue right now, we will not be able to get into more detail at this time. But going forward when we develop more product features for mobile monetization, we will give you more color on that.


Next question will come from Ravi Sarathy of Citigroup. Please go ahead.

Ravi Sarathy – Citigroup

Good morning, Robin, Jennifer and Victor, and thank you very much for taking my call. I have a question about your vision for the box computing platform and your broader web apps initiatives. Clearly the more immersive environment that you said there’s 70% of clicks result on your search page, both contextually relevant search results and information, but it also move you into entertainment and other services around that apps platform. Do you envisage an opportunity incrementally for monetization for Baidu beyond the paid search results into an economic share with an incremental share of apps that may monetize or charge users going forward?

Robin Li

I think at the end of the day, we make the same -- we get the same budget from the same group of customers. It could be marketing budget, it could be revenue-sharing or commission. Right now most of our [basket is consuming] results, not commercial results, but some of them do have commercial value, and we work with a number of partners to provide both high-quality information and good revenue contributions to our platform.

They can benefit from the traffic in user we deliver. They can choose -- well, we can choose to be paid by marketing budget or from revenue-sharing. But at this time, because we think at the end of the day it’s the same budget, we’d like to stick with the same mechanism which is marketing budget instead of revenue-sharing. But I’ll agree with you, a lot of the entertainment-oriented applications could benefit from our box computing infrastructure very well.


Next question will come from Richard Ji of Morgan Stanley. Please go ahead.

Richard Ji – Morgan Stanley

Yeah. Hi. Thanks for taking my call. Can you comment on your plan for Baidu Union going forward, especially regarding potential traffic expansion and as well as revenue opportunities?

Jennifer Li

We have a longstanding of having the largest union network in the country and we and our partners together offer the kind of services that complement each other. Throughout the past two years, I think you have seen on the search side there has been improvement in terms of traffic quality, and our tax has been managed very well in that regard. However, this environment is dynamic. As I mentioned in the script, we will manage our partnership network dynamically, and that could have implications to the tax expenses going forward.

We’re also pushing new products and services through the Union network, products like contextual ads, like home media. And we hope that with our joint efforts we offer better services to our advertisers and at the same time everybody has a win-win situation. So in all, I think this is an important component of the overall ecosystem as well as our business, and we will manage the business dynamically.

Robin Li

In the early days, the main purpose of union was to distribute the Baidu search box as much as possible. Now that Baidu has become the de facto standard of web search, the strategic focus for union has shift a lot of it. We would like to partner with a lot of media properties and other distribution channels to display contextual ads and other form of display ads. So that’s why the nature of the tax will change a little bit going forward.


Next question will come from Wendy Huang of RBS. Please go ahead.

Wendy Huang – RBS

Thanks for taking my questions. I just wonder if you can give more color on your search traffic growth in 2012. And I think there are probably three different sectors impacting this. One, I think you mentioned that when you launched the personalized homepage last September, you said it potentially may cannibalize your traditional search traffic. So, so far, have you seen any cannibalization effect on your traditional search traffic?

And also I think number two factor here is that given that your market share by the search queries already exceeds 80% and you're sitting on a high base of the search traffic, so your search traffic growth decelerates dramatically in 2012. The number three factor will be I think given the emerging different standalone vertical search engines in market, are you seeing your search traffic being affected by those search engines? Thank you.

Robin Li

Okay. Our search traffic has been growing very predictably over the past few years and we think 2012 will be no exception. The new personalized like the homepage offered a lot of thickness to the heavy users of Baidu, but it’s not a huge percentage of our total user base yet. So that’s why we have seen material cannibalization on the search traffic because of that.

What we’re saying is that, like I mentioned before, mobile search traffic has been growing very, very fast, and this again I don’t think the overall effect is cannibalization, it’s actually increased the chance for internet users to use search more. So if you combine PC search and the mobile search together, I think net-net we are benefiting from users contributing more search traffic to Baidu.

We don’t believe any vertical search would have a major impact on us because consumers would like to depend on one single entry point for information.


Next question will come from Elinor Leung of CLSA. Please go ahead.

Elinor Leung – CLSA

Hi. Thank you for the call. Can you give us an update on your contextual ads business as well as your personalized homepage platform? I would like to know, what’s the contribution of contextual ads right now with the growth rate? Would it be huge next year -- in 2012?

And also for the personalized homepage, how many user, registered user you have right now and what is the growth rate on that at the moment?

Jennifer Li

Elinor, I’ll take your first question. Contextual ads, we’re pleased with the progress we made on contextual ads. We have gained a good traction, improved on the product quality, have higher customer reception to the product. And overall it’s performing as expected. And that will continue to be our focus going into [2002].

And this business, as you can understand, is not a one -- overnight kind of jump towards new platform. So it’s gradually -- it’s a gradual process. But today we’re pretty pleased with the progress we’re seeing.

Robin Li

Yeah. For the personalized homepage, the way it works is that whenever a user come to, if we choose to log into via account, we will see a personalized homepage. So far, very few of them opt it out on that. So what we are saying is that those are very loyal users of Baidu served by the personalized homepage and -- but the rest still gets the traditional homepage.

We are still investing very heavily in the personalization technology so that the layout of the content offerings on the personalized homepage will be more accurate and (inaudible) to our users.


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 talking with 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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