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Executives

Cynthia He, Investor Relations Manager

Robin Li Chief Executive Officer

Shawn Wang Chief Financial Officer

Robin Li Chief Executive Officer

Analysts

Anthony Noto, Goldman Sachs

Wallace Cheung, CSFB

Safa Rashtchy, Piper Jaffray

Dick Wei, JP Morgan

Jason Bruesche, Citigroup

Lea Howell, Thomas Weisel Partners

Andrew Collier, New York Global

Victor Anthony

Ming Zhao, Susquehanna Financial Group

Richard Ji, Morgan Stanley

Here’s the entire text of the prepared remarks from Baidu’s (ticker: BIDU) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Operator

Good evening and thank you for standing by for www.baidu.com. Third Quarter 2005 Earnings Conference Call. At this time, all participants are in a listen only mode. After the call, we will conduct a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Cynthia He, Baidu's Investor Relations Manager.

[Cynthia He, Investor Relations Manager]

Hello, everyone. I am pleased to welcome you to Baidu's Third Quarter 2005 Earnings Conference Call. I am Cynthia He, Baidu's IR Manager. We announced our third quarter results after market close in the US today and you may find the press release on our Web site at www.ir.baidu.com as well as on the wire services.

Today, you will hear from Robin Li, our Chief Executive Officer, and Shawn Wang, our Chief Financial Officer. After their prepared remarks, Robin and Shawn will be available to answer your questions. But, 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 involve inherent risks and uncertainties. As such, our results may be materially different from the results discussed today.

A number of potential risks and uncertainties are online in our public filings with the SEC. Baidu does not undertake any obligation to update any forward-looking statement except as required under applicable law.

As a reminder, this conference is being recorded. In addition, a Webcast of this conference call will be available on Baidu's corporate Web site at www.ir.baidu.com and all right, at this time, I would like to welcome Mr. Robin Li to give you an overview on our third quarter developments.

[Robin Li Chief Executive Officer]

Thank you, Cynthia. Good evening or good morning to you, as the case may be, and thank you for joining our first earnings conference call as a publicly traded company. Today, less than three months away from our successful IPO, we are very pleased to report that during the third quarter, our growth momentum and financial performance have exceeded our original expectations.

We believe that the stronger than expected performance is attributable to robust traffic expansion, strong grinding effect of our successful IPO and the progress that we made in refining our pay-for-performance platform. We are delighted to share with you that our user traffic enjoys the most significant expansion among the leading Chinese Internet Web sites and Baidu.com became the number one Web site in China according to Alexa user traffic statistics.

At the same time, our active online marketing customer base extended to over 53,000 or by 29% from the previous quarter. For Q3, the growth in user traffic and our customer base translated into sequential revenue growth of 28% from the second quarter and 174% year-over-year. Total revenues were RMB 89 million and this result is a continuation of Baidu's strong growth momentum since 2004.

At the same time, we also focused on making investments in areas that we believe are important for long-term growth. For example, we continued to build on our R&D capabilities by hiring top engineering talent and maintaining our focus on developing innovative products and world-class technology. Secondly, we established a new data center in Beijing during Q3 and increased our bandwidth to prepare for future traffic growth.

We also strengthened our sales and distribution network to further improve effectiveness in both customer acquisition and service. During the third quarter, we opened our direct sales office in and we have been encouraged by its initial performance. We also strengthened our ties with distributors through customer service enhancement training and channel marketing initiatives. The results of this effort are evident in our top line growth and customer base expansion.

We believe our success is due to our understanding of China's user needs and our ability to offer them innovative search products and services. In order to better understand that unique characteristics of the Chinese Internet search users, we joined forces with Peking University to establish a Chinese Search Behavioral Study Center during the quarter. Findings of the Study Center will be applied to our product innovation.

During Q3, we also launched three new products, Baidu Map, Baidu Greetings by which users can leave tailored messages for one another on their chosen key words, and Baidu Currency, which is used on an experimental basis within the Baidu Web site for various paid features for consumers.

I'd like to report another piece of good news. Just a few days ago, we welcomed Mr. William Decker as a new Independent Director and also, the Chairman of the Audit Committee of the Board. Prior to his retirement in July 2005, Mr. Decker was the senior partner in charge of Price Waterhouse Cooper's global capital market group and has more than 20 years of experience in advising companies on issues relating to US capital markets. Mr. Decker brings unparalleled financial expertise to our board. We are pleased that his arrival will further facilitate our efforts toward strong corporate governance.

As I report to you our Q3 results, I'd like to emphasize our commitment to invest aggressively for the long-term growth in Chinese language search. Internet adoption is still in its infancy stage in China with only an estimated 8% of the population online compared to almost 70 for the US. I urge everyone to look forward, to look beyond today and try to envision the capacity of this market 10 to 15 years from now. The growth potential of China's Internet industry is greater than that of any other region in the world. And as the leader in this market, we are well positioned to capitalize on this ongoing growth.

I'll now turn the call over to Shawn, who will highlight some of the important financial aspects of the quarter.

[Shawn Wang Chief Financial Officer]

Thank you, Robin. Hello, everyone. I'd like to join for Robin's remarks by drawing your attention to the two most important themes for Baidu, top line growths and investments for long-term opportunities. We completed our third quarter with total revenues of RMB 89 million, representing approximately 28% increase from the previous quarter and 174% increase from Q3 of '04.

Online marketing revenue for this quarter were RMB86 million, representing a 29% sequential increase from Q2 and 189% increase from Q3 of '04. Revenue growth was driven by a solid increase in the number of active online marketing customers, which increased to over 53,000, reflecting a 29% increase over Q2 of this year.

Average revenue per active online marketing customer remained steady from last quarter at around RMB1,600. We're very pleased with the pace of customer expansion, which we believe will continue to provide strong support for future revenue growth. We significantly increased our investments in several areas during the quarter. We recruited, increased the number of engineering talents, invested in servers and equipment, expanded spending on branding and on our sales and distribution infrastructure. Overall, we increased our headcount to over 1,000 from over 700 at end of Q2.

Capital expenditures totaled RMB39 million for the quarter, representing 149% increase from the previous quarter. Related to capital expenditures, depreciation expenses of servers and network equipment were RMB8 million, representing a 64% increase from the previous quarter and a 319% increase from Q3 of '04.

A cost item related to capacity expansion is bandwidth. Our bandwidth cost for the quarter amounted to RMB7 million, reflecting a 66% sequential increase from Q2 or a 334% increase from Q3 of '04. R&D expenses for the quarter were RMB11 million, a 59% sequential increase from Q2 and 224% increase from Q3 of '04. Our R&D expenses were generally headcount related.

Despite the significantly increased investments and spending for future growth, we still managed to produce solid bottom line operating results. Net income on a GAAP basis was RMB9 million, a 189% increase from the corresponding period in 2004. And that is a 29% decrease sequentially from Q2 of '05.

If we look at the non-GAAP measures, net income, excluding share-based compensation, was RMB19 million. That is a 6% increase from the previous quarter and 148% increase from Q3 of '04. Operating cash flow for the quarter was approximately RMB53, representing a 66% sequential increase and a 205% increase from Q3 of '04. Adjusted EBITDA, a non-GAAP measure defined here as Earnings Before Interest Taxes Depreciation, Amortization and Other Non Operating Income and Share-Based Compensation, adjusted EBITDA was RMB28 million for the quarter, representing a 12% increase from the previous quarter and a 177% increase from Q3 '04.

Lastly, I will quickly comment on our balance sheet. As of September 30, 2005, our total cash and cash equivalence balance was RMB966 million, up from RMB211 million at the end of Q2. This increase is mostly attributable to our IPO proceeds.

I will now turn the call back to Robin Li for his closing remarks.

[Robin Li Chief Executive Officer]

Thank you, Shawn. By all measures, this is an exciting time for Baidu. As the leader in China's Internet search base, we are benefiting from the explosive, yet long-lasting growth of Internet adoption from both the user front and the customer front. Although Baidu has made a good start with our high profile IPO, we firmly believe that the success lies many years ahead of us.

Let me once again thank you for participating in our first investor conference call. And for those of you on this call who on Baidu share, I speak for all of us here in welcoming you as our shareholders. We look forward to being in contact with you in the quarters and years ahead.

Now, we will be happy to take your questions.

Question-and-Answer Session

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