Baidu, Inc. (NASDAQ:BIDU)
Q2 2012 Earnings Conference Call
July 23, 2012, 20:00 p.m. ET
Robin Li - Chairman and CEO
Jennifer Li - CFO
Victor Tseng - Director, IR
Dick Wei - JP Morgan
Jiong Shao - Macquarie Research
Alex Yao - Deutsche Bank
Alicia Yap - Barclays Capital
Jin Yoon - Nomura
Yu Jin - CICC
Catherine Leung - Goldman Sachs
Ravi Sarathy - Citi Investment Research
Eddie Leung - Merrill Lynch
Cynthia Meng - Jefferies
Richard Ji - Morgan Stanley
Andy Yeung - Oppenheimer
Elinor Leung - CLSA
Hello and thank you for standing by for Baidu’s Second Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
I’d now like to turn the meeting over to your host for today’s conference, Victor Tseng, Baidu's Investor Relations Director. Please go ahead.
Hello, everyone, and welcome to Baidu’s second quarter 2012 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 Chairman and 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 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 statement, except as required under applicable law.
Our earnings press release in this call include discussions of certain unaudited non-GAAP financial measures. Our press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures, and is available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Baidu’s IR website.
I will now turn the call over to Baidu’s CEO, Robin Li.
Hello everyone and thanks for joining today’s call. I’m pleased to report a strong set of results for the second quarter in spite of uncertain macroeconomic environment and some tough comps with the blockbuster quarter a year ago. This is a testament to our unrivalled ability to understand the needs of our customers and users and to design and execute winning programs to meet those needs.
One of the real highlights this quarter is our success in growing our customer base. This has been an important priority for Baidu and we are making solid progress here. In top tier market, we have taken a number of debts to optimize our sales process, including establishing call centers, improving our CRM systems and implementing better incentive systems for our sales staff. These efforts are driving clear results.
We are also building strong momentum with small and medium sized enterprises in lower tier markets. In the second quarter, we rolled out our annual nationwide search engine marketing campaign. This was by far the most ambitious annual campaign yet, with over 200 events in 190 cities around China.
We are also now partnering the local government in 14 regions around China on educational programs that encourage SMEs to embrace online marketing. And we are now offering a number of new SME friendly services; for example, this quarter we launched a new tool that helps SMEs transform their desktops website into mobile friendly format. This is a free easy to use service that allows SMEs to create mobile and tablet ready websites in as little as 10 minutes. Already, thousands of small businesses have made use of it.
On the large account front, the macroeconomic slowdown in China has put some pressure on our large customer spending and sentiment. As a result we are not seeing any stand out factors this year that would be comparable to e-commerce in 2011.
Following last year’s e-commerce bubble, the sector is now consolidated, but we are optimistic about the future of e-commerce. And due to the performance based nature of Baidu’s marketing platform, large successful e-commerce players spending on Baidu remains very strong.
To counter the macro headwind, we are also proactively developing new traditional industry categories like food and beverage. The traditional advertisers have large potential and have started to adopt Baidu’s platform in marketing campaigns.
On the monetization front, we made solid progress this quarter, and I’m pleased to note that contextual ad performed particularly well. New improvements to our contextual ad technology allow customers to target their ads towards more focused micro market based on user demographics and behavior. So, customers now can target their particular interest groups, such as people who frequently travel overseas or pet owner.
In the past quarter we also upgraded (inaudible) this upgrade leverages our vast cache of user data to allow customers to reach broader, more targeted audience in more sophisticated ways. The system is now better at integrating data such as customer’s location, limitations and key word with the use of its search query and IP address.
Just recently we also introduced the biggest upgrading pioneer to our Brand-Link product, traditionally brand advertisers have used this area to display basic information like logos and links to their corporate website. After this major event of Brand-Link, advertisers can turn this area into a specially customize mini-site for their brand. They can embed pictures and videos, micro blog account and even advanced functions like user registration area and dynamic data. For example, a company like Louis Vuitton can now use this area to deflate branded video ads and interactive information, the search result paging.
On the user front, mobile continue to grow very well and we are really charging ahead to build a truly frictionless experience for mobile users. Our cell phone allows users to efficiently access the underlying information, content, app and services they want through many mobile operating environment as possible.
One of our most innovative new initiatives here is our powerful new voice search experience. This is defined to enable smartphone users to search the web, activate apps and even get local information just by speaking into their phone. The accuracy of our voice search technology is unmatched and we have already rolled out some fore functions based on it. For example, if a user says I’m at the Baidu campus, the system will instantly text them on Baidu campus and provide a map of the neighborhood. If the user says, I want to call Mom, the program will instantly start the call. Users can even use voice to search native apps and of course search the web.
I’m also very pleased to say that user will search the web on their mobile either through voice technology or through traditional way are now being served result by our box computing technology. We are optimizing our open data and open application platform for the mobile platform and we can now serve our huge amount of dynamic information, app and other services to mobile home. Likewise, our personalized homepage is now completely iOS friendly and has been optimized for users on the go.
We are working hard to make sure we provide users with the best tool for their mobile experience, to that end in Q2 we rolled out an updated addition of our mobile browser. It's already being rated a top performer for speed and functionality versus competing browsers, particularly for handling HTML file based content. We are confident that the Baidu browser is one of the best on the market. And we continue to build important partnership that ensure Baidu is the gateway of choice for mobile Internet users just as it is for desktop users. As you have heard users will be able to choose Baidu as the default search on Apple’s iOS 6.
Naturally users are increasing relying on their smartphone search for local information. We estimate that last quarter 20% of our mobile searches from high end smartphones were related to local information which is far higher than the rate we have seen on desktops. To meet our users need for local info, we have been working hard to build out new location based offerings than Baidu Map. For example, we rolled out a new GPS navigational service and we operated the real time traffic function which is now much more accurate and has a more user-friendly display format.
And of the back end we are working to build out our database of local information by partnering with more app providers and vertical sites, we are also extracting local information from the web. I’m confident that we have more location-based information than any other net provider in the market.
The Baidu Map API is also ultimate to other websites who have such a need, over on desktop and on mobile. We are working with lots of variables on our website here in sectors like travel, [mobile], real estate information and so on.
One reason that Baidu stands head and shoulders about every other company in the mobile space is unparallel to cloud computing infrastructure. Our personal cloud storage service or PCS for short which we launched last quarter is one of the pillars of this strategy. Over the last few months we have been working hard to integrate into more of our applications and services and to promote this to our users.
Our Netdisk service has installed million of times while still in beta testing. And Baidu users can now also leverage PCS to access, via PhotoWonder images, from anywhere and any device. The ability to sync up with Baidu album through PCS is a great starting point for PhotoWonder.
User numbers for the mobile app have more than doubled from 9 million in Q1 to 20 million by the end of June. And we are working on building PCS integration into many third-party developers’ apps and our own product such as Baidu music.
We are now partnering with more than 10,000 third-party developers to integrate the PCS functionality into their apps and we are working with major handset producers to offer 40 integrated cloud storage to their phone users.
I also like to quickly highlight that ITE continues to strive and our strong support is clearly driving results. As been now, online video is a very competitive space but the high quality of ITEs content is a key differentiator over competitors. User numbers shows encouraging roles in the product with 250 million monthly unique users at the end of June. The total time spend on the platform on a monthly basis is demonstrating good growth trajectory. According to both iResearch and ComScore, iQiyi ranks second in China in the important metric.
Overall, the second quarter demonstrated how our aggressive investment in deepening customer engagement is enabling us to attract more customers to Baidu and to increase more of our customer’s budget on Baidu. Going forward, we will maintain our focus on working closely with customers to understand their need and leveraging our unrivalled user rate to create the best powerful results.
Finally, I’m excited to tell you about our 7th Annual Baidu World forum which will be held on September 3, in Beijing. This is an opportunity for Baidu to bring together some of the best internet work, industry experts and our developer partners to share our strategic initiative and discuss China internet’s plan. I look forward to seeing many of you there.
Now let me turn the call to Jennifer.
Thank you, Robin, hello everyone. We were pleased to sustain our robust phase of top and bottom line growth from last quarter as we continued our aggressive investment strategy. We devoted a lot of resources this quarter to strengthening our core infrastructure, building our customer base and investing in key areas like mobile. This is a transformative time for the internet in China and our robust investment strategy will be key to achieve a long-term sustainable growth and strengthening Baidu’s tradition as a heart of China’s internet ecosystem.
Now I’d like to go to our financial results for the quarter with you. All amounts are in RMB unless otherwise noted.
For the second quarter, total revenues were 5.5 billion representing a 59.8% increase year-over-year. During the second quarter, Baidu had approximately 252,000 active online marketing customers, an 18% increase from the corresponding period in 2011, and a 9.7% increase from the previous quarter.
Revenue for online marketing customers for the second quarter were approximately 15,500 a 34.8% increase from the corresponding period in 2011 and an increase of 16.5% from the previous quarter.
Traffic acquisition cost, as a component of cost of revenue in Q2, with 454 million or 8.3% of total revenue compared to 7.9% in the corresponding period in 2011 and 7.8% in the previous quarter. The increase mainly reflect improvement in contextual ad performance.
The Baidu union network is important for us, we have more than 600,000 union partners now, making this the largest publishing network in China. We managed these relationships dynamically and will continue to drive contextual ad business growth. We are benefiting from these partnerships, our union partners are benefiting too and we see tremendous room to grow this relationship further. To drive incremental revenue from contextual ad business, we expect a TAC as a percent of revenue to gradually increase over the long-term as stated before.
Bandwidth and depreciation cost as a percent of revenue in Q2 were 4.4% and 4.6%, respectively, compared to 4.3% and 4.2% in the corresponding period of 2011. The increase was mainly due to increase in network infrastructure capacity.
Selling, general and administrative expenses in Q2 were 588 million, an increase of 55.6% year-on-year, primarily due to an increase in personnel and marketing related expenses. For the coming quarter, as Robin has mentioned, we have a lot of exciting new product and features that we will look to invest in resources to promote.
R&D expenses in Q2 were 546 million, an increase of 82.7% over the corresponding period in 2011, primarily due to increased headcount, reflecting our continued strategic investment in R&D talent.
Share based compensation expenses which were allocated to related operating cost and expense line items aggregated 54 million. For the second quarter (inaudible).
Operating profit for Q2 were 2.8 billion, an increase of 51.5% over 2011.
Total headcount as of June 30, 2012 was about 17,400 roughly 900 more than the previous quarter. Income tax expense were 235 million for the second quarter, effective tax rate for the second quarter was 7.9% compared to 13.5% in Q2 2011.
As you will recall, we record income tax for one of our subsidiaries at a non-corporation tax rate in 2011, this basically has obtained a high and a new technology enterprise tax license this quarter, accordingly we reverse that the permissions both in 2011.
Net income attributable to Baidu for Q2 were 2.8 billion a 69.8% increase from the corresponding period in 2011. Basic and diluted earnings attributable to Baidu for ADS for the second quarter of 2012 amounted to 7.87 and 7.86, respectively. Net income attributable to Baidu excluding share-based compensation expenses a non-GAAP measure for Q2 was 2.8 billion a 69.3% increase.
Basic and diluted earnings attributable to Baidu ADS excluding share based compensation expenses both non-GAAP measures were 8.02 and 8.01, respectively. As of June 30, 2012, the company had cash, cash equivalent and short-term investments of 18.3 billion.
Net operating cash flow for the second quarter of 2012 was 3 billion. Capital expenditures this quarter was 722 million.
Now let me provide you with our top line guidance for the third quarter of 2012. We currently expect total revenue for the third quarter of 2012 to be between RMB6.245 billion and RMB6.410 billion, represent a 49.6 to 53.5% year-on-year increase.
I do wish to emphasize that this forecast is like Baidu’s current and primarily view which is subject to change.
I will now open the call to question. Operator, please go ahead.
(Operator Instructions) And our first question in queue comes from the line of Dick Wei calling from JP Morgan. Please ask your question.
Dick Wei - JP Morgan
My first question is on mobile what is the management view in terms of its mobile traffic or is it cannibalizing most of 3G traffic. And in addition maybe if management can comment on some of the monetization (inaudible).
Mobile traffic is largely incremental to desktop search traffic. If you think about the search activity, the information need for users are really very short life. If they have mobile phone on hand they will do the search, if they don’t have a mobile phone, they will have probably forgotten the information need before they reach to a desktop computer. Also we think the mobile traffic is largely incremental to the current desktop traffic. But I said that, I have to say that mobile Internet is at very early stage. They allow us navigate, mobile Internet now and the desktop Internet many, many years ago when we didn’t have enough amount of information or application available for users to search. So, we would exact the mobile traffic will have many, many years of high growth going forward. And speaking of monetization, again we think that this early stage of mobile Internet. We are in no hurry to aggressively monetize our mobile traffic. We are indeed exploring a lot of different mechanisms on the mobile advertising front including picture call, and we will report to you back when this kind of activity were material to our marketing platform.
And the next question in queue comes from the line of Jiong Shao calling from Macquarie. Please ask your question.
Jiong Shao - Macquarie Research
My question is on the VIE as you know it probably has resurfaced, recently I was wondering if you could provide a little bit of color on some of the VIE structures you have and most of the plans you may have going forward to continue t strengthen your VIE structure in terms of providing the protection of securities for the shareholders.
The VIE structure has been along for over a decade and as you know most overseas listed Chinese company operate under a similar structures has enabled them to list aboard. Baidu mainly utilize VIE structure hold this license to operate in China, we ensure that we got as much of our economic value resides with [WFE] entity as possible. We have contractual agreement as setup and over site provided to these VIE entities and other controller power actually decides with the (inaudible). And the economic interest is mostly allocated to almost all of the interest of the VIE allocated to mostly. Operating cash flows are all at the holding company level and large majority of our asset, cash position and all of that are at the holding company level. So, we have intended them and daily operations to ensure that there is minimum exposure to VIE. If you read our 20F, we provide sufficient disclosure and much coverage on the VIE and hopefully the attribute they believe are kind of comfort. We do have consistently operated with a very transparent and good corporate governance practice and we have a number of independent board members to ensure that minority interest are perfected. We ensure that the relationship we have with our holding company between the holding company and the VIE structured in a way that they got the investors interest and the long-term future of the company. And fundamentally we don’t see there is any particular government policy change per se in the near-term, but this has been a structure that has begin place and is working and is doing everything to protect for the shareholder interest and hope that our government our track record are disclosures that we have provided at the investor comfort.
And the next question comes from the line of Alex Yao coming from Deutsche Bank. Please ask your question.
Alex Yao - Deutsche Bank
Few questions, number one is, can you comment on the growth rate, we are seeing number of page versus the CTC, and how would you envision the growing mobile search for your broadcasting of the operating metric. And then number two is, can you give us some comment on the revenue growth momentum between large accounts and SMEs in the quarter in given month.
I’ll take the first and third one. For Q2 we had pretty solid revenue growth and as Robin highlighted in his statement, there are a numerous thing that we are doing to counter this macro environment headwinds. Some of the things we implemented related to monetization improvement and for monetization it delivers twice as well as some monetizing in the system. For Q2 what we have experienced is those metrics (inaudible) has said helped on the revenue growth. These both metrics are moving in a very healthy and there are much more work that we will continue to do to make sure that we deliver the right to our customers at the same time there is a healthy level of pricing in the system.
In terms of large and small business growth, we highlight this quarter for the Q2 in particular, we have seen strong momentum on the SME side. There is a lot of good work that we have put in to the system starting last year including improving sales process, developing tools to help the customers have better experience using our platform all that good things. And we carried out the national marketing campaign this quarter and that was bearing very good fruit. So, our SME business is growing robustly and I think one of the benefit we have a very diversified customer base. So, Baidu platform is much more resilient in this environment and of course our sales force execution efforts did great contribution to the performance.
Large advertisers as we were saying, so this particular quarter the sentiment because of the macro environment, we do feel the sentiment of conservatism among the large customers, and their spending is somewhat campaigned compared to the robust startup performance that we saw last year. Having said that we are doing numerous things to counter this situation. We want to service our customers with more richer product offerings and services and at the same time our new industries, new customers that we try to develop and as Robin mentioned some new sectors such as food and beverage were seeing good progress and traction. So, obviously large customer’s growth this year is no comparison to last year, but it still remains very solid and we are doing many things to continue to grow this faster.
The mobile is something it has to do with mobile, Alex.
Alex Yao - Deutsche Bank
The money valuation is ability for mobile is not good as desktop search at this time, so the CTC understandably is lower on the mobile platform, but like I mentioned before, we think the mobile internet continues from early stage, there is not just not enough amount of application to our overall data or content is available for users to search. So, users are not (inaudible) on how search our mobile at the desktop yet. So, going forward when the users are increasingly rely on their mobile phone to get information, we think the monetization will follow.
And the next question comes from the line of Alicia Yap from Barclays Capital. Please ask your question.
Alicia Yap - Barclays Capital
It's finally good to see the contextual ads picking up more meaningfully this quarter. So, can management share your view that how China contextual ads market to grow in the next few years, and what are some of the industries that are more receptive to the contextual ads currently.
I think I mentioned this for some time now, contextual ad business is a focus for us and the team has been doing good work over the past year or more. We started from a very small base and it has been consistently taking traction and in the past I think because of the (inaudible) you wouldn’t see that 2.5% of revenue. As the business is being in momentum, the team continues to rollout new tools to product, technology and services to our customer. It is going very nicely and we are very encouraged by this sector growth.
In terms of customer adoption, there is a wide range of customer that can adopt this. Large customer like this because it serves their brand need and our SMEs are small and medium sized businesses also like the contextual ad because of the improved product feature to better target and give them better ROIs. So, we are seeing good adoption of our customers, both on the large customer side as well as the SME. Because as you just noted, we are only starting. I think there is still a lot of room for us to continue to develop the contractual business. It is only, really the beginning, and even from our end, we see much continued improvement that we can implement to improve the product. And it’s virtual protocol, you know our product et cetera, customers’ acceptance is better. And there is more feed, better information that is made available to us. And we can continue to improve on that. So I think there is a lot of room for us to continue to develop this sector of business.
And the next question comes from the line of Jin Yoon calling from Nomura. Please ask your question.
Jin Yoon - Nomura
A couple of more questions regarding the mobile. I know the market share measurement on your mobile is quite different than how people measure PC market share versus search. If you look at it on a pure cost-per-click product revenue basis, do you know what your market share is in search? Because I know right now the amount of business being done on a bits per second which is not exactly comparing apples to apples here. And second of all, when you look at the demand environment for mobile, are your customers coming to you and saying they want to just advertise just purely on mobile and looking for a different pricing structure trend or different TAC structure just for the mobile. Or are we too early in the process to even think that way?
The answer to your first question is, we don’t know. We don’t know the exact market share for us and for the competition. It’s like the data search and here you don’t really have any reliable data on the market share distribution amount of the search players. But what we know is that our mobile traffic continued to grow at the very speed, as say triple-digit growth. And we believe that it’s more important to look internally on this metric in the early stage of mobile Internet. Regardless of our relative market share we think it’s important for us to help form a user behavior that is so much dependent on search, on the mobile path on FB. Try to do search for everything they need, then we will become a winner. If they don’t do that, even if we have like 90% of the market share that doesn’t mean much to us.
And on the mobile advertising front, I mentioned before that there are not enough content and apps yet on the mobile platform that can make the user so dependent on (inaudible) yet. That also includes the advertisers’ mobile friendly website too. If they don’t have a mobile friendly website or a content or app, the ROI for them on the mobile platform will not be as good. And the different type of customers require or expect different kind of performance on the mobile platform. In most cases they need to their work to make their site more mobile friendly and get a better sense on how they measure the performance. And from our side there are a lot of things we can do and we are also trying very hard to help our customers to establish this kind of mobile friendly environment so that they can advertise the mobile more.
So it’s really the early stage and people are talking a lot of different things and we are just trying to form an environment that’s mobile friendly than the performance should be okay.
And the next question comes from the line of Yu Jin from CICC. Please ask your question.
Yu Jin - CICC
Good morning, Robin, Jennifer and Victor. So I have (inaudible) question. The question is about (inaudible). While the (inaudible) about Internet users, probably the users on Internet. So far calling is third party [result]. As mobile users run 80% of time (inaudible), only 20% perhaps browser based interface. So where is that comparing? And to (inaudible) what kind of drivers that will drive users to spend more time on browser. So the amount of time (inaudible). Secondly if the amount of time (inaudible) on the mobile side beside the (inaudible) most users. (inaudible). So that’s like a search query. So my question is, how the margin (inaudible) possible (inaudible) and also he has done also company (inaudible)?
Regarding to your first question. Yes, at this time users spent a lot of time on applications and probably less time on browser. Again, I think that due to the early stage nature of mobile Internet, that’s also like in the early stage of desktop Internet. We are only a few of the websites that the users frequently go but as the internet became larger and larger, more content and websites became more diversified then users spend a lot of time on the long term. I think that will be true for mobile internet too over time when there are more mobile friendly data or content available, users well become -- will spent more time on the browser or even applications. To me there are no fundamental difference between an application and a browser based content. So we are actually seeing much more, in fact more and more services become web-based apps, that the backend space like the content on the 12 side.
Even for all kinds of native applications, I think we can come up with better ways for users to search for apps. Right now the mainstream model for apps is app store. We are not really friendly or fair to those less used apps and therefore not good for this ecosystem. We are debating all kinds of technologies that allow our users to finding information or apps or services from one such path. So whatever they are looking for, either the content behind the browser or applications, we will be able to find that for our user. And I assume that our users will spent more time with us or more dependent on the gateway, we feel.
On your second question, I think mobile search will be different from desktop in the sense that we have more information about the user, about the location and a lot of contextual information that’s available. So not only we can be with a better clear base or [back] based search experience for or users, we can do more in the sense that in lot of cases before the user is even typing a query we already know what the user wants and we can deliver that too. If you remember last year when we rolled out the new personalized home page that was the main drive behind it. So for the mobile it’s the same thing. In a lot of cases we know what the user wants even before he or she is typing a query. And we, again we are devising all kinds of technologies to make that experience better and better for our users.
We will now move to the next question from the line of Catherine Leung calling from Goldman Sachs. Please ask your question.
Catherine Leung - Goldman Sachs
Hi, I was wondering whether we should interpret the deceleration in the average revenue per customer growth on an year-on-year basis as reflecting more the large customers spending less or more of the SMEs lowering the average spend. Thank you.
Catherine, I think the ARPU continues to grow at a healthy rate. This year, in particular, the SME has been a very strong driver in terms of revenue growth. That is different in 2011. So it is true that when it comes to SME doing promotional work with us, their ad budget is no comparison to be large advertisers. So you can say, none of these advertisers are spending less. They are all increasing their spending. It’s just that the SMEs are doing more of the work compared to the large customers, if we use 2011 as the base. So both are growing but SME is the main driver and SME’s has a smaller budget.
And the next question comes from the line of Ravi Sarathy calling from Citi Investment. Please ask your question.
Ravi Sarathy - Citi Investment Research
I have a question on mobile, if I may. I recall in the last call you mentioned that the mobile has its share of plenty search experiences. I was wondering if you had an update on that figure or some color on that. You also mentioned that you were pleased with the 8% rounded on Android handset, and I was wondering if you had an update on that as of the end of Q2. And the final question related to that the amount of revenues that you pay away to hardware recon or that preinstall. If you can give a color on what that number might be, if it’s 20%, 25% mobile Internet revenues. And how you account for the service acquisition cost or do you state revenue net of that number. Thank you very much.
I will answer the first two and Jennifer will answer the third question. For the mobile search advantage, I had mentioned before the mobile traffic, the mobile search traffic continued to grow at skyrocket rates. So as a percentage of the total search traffic, mobile continued to increase. But we are not going to disclose this number quarter-by-quarter. The overall trend does not change. If there is a change we will of course let you know. On the pre-installation of our search in app or search box, we think we have to find out all the major selling brands on the market in China to pre-install our search services. That’s why some of our other applications we have developed.
In terms of revenue share, it is the arrangement with these players, is a revenue sharing arrangement. So if we generate mobile revenue then we will share a little bit of that with our partners. For each partner, the contractual arrangements can be somewhat different. I won’t get into the detail but the nature of the work is, we do advertising work where we record the total revenue and we will treat the sharing part as TAC.
The next question comes from the line of Eddie Leung calling from Merrill Lynch. Please ask your question.
Eddie Leung - Merrill Lynch
Just quickly on two things. Is there any operating metrics you can share with us about the popularity of Baidu Maps. And then I would also like to get any guidance about the tax rate for this year given the lower tax rate in the current quarter. Thank you.
About Baidu Maps, we have dominant market share on the desktop and we continue to enhance the features. We think that LBS will become very important part of the mobile Internet life. So we have been aggressively pushing the Baidu Map service on the mobile. We have seen tremendous amount of growth on the mobile platform. And going forward, we will try to integrate more services to the Baidu map service. So we will really become an LBS service instead of just a map service. There are lot of things to be done on that front.
And Eddie on your tax question, yes, basically what happened in tax was we were accruing at a higher base last year. So if we were using the favorable tax rate last year’s income would be higher. And this Q2 just for conservative principal, once we get the license we will recognize the tax benefit. And there is kind of a catch-up of last year’s higher accrual and we will reverse that this quarter.
The overall tax rate for the year, I have provided a guidance earlier in the year. The whole year we are looking at close to mid-teens. That’s the tax rate that we expect.
And the next question comes from the line of [Ming Zhao] calling from [AC6 Research]. Please ask your question.
M&A or investment. So last year you acquired Qunar, this year we have heard a market speculation that you are going to buy [UCWeb] . So my question is how likely that is, any thoughts on that? And Jennifer if you could provide the full year CapEx that will be great. Thank you.
Well, Ming, we don’t comment on the kind of rumors so I will just let Jennifer answer the second part of your question.
Hi, Ming. For CapEx, I also provided a guidance earlier part in the year. This is a year of investment for us. We focused on investing in the infrastructure as well as office space to host more and more of the talent, particularly R&D. We do expect 2012 CapEx to step-up and if you refer to the 2009-2010-2011 change in terms of the year-on-year step up, that is the trajectory or the trend that you should be expecting for 2012.
And the next question comes from the line of Cynthia Meng calling from Jefferies. Please ask your question.
Cynthia Meng - Jefferies
I have one question. 2Q ’12 had a very good control of margins, very good control in cost and GP margin was up, OP margin was also up about four percentage points, sequentially. This is mainly due to lower bandwidth and server costs and also S&M expenses as a percent of sales was also lower. Are these sustainable going into second half? And is there a clear visibility to the second half economy compared to the first half. Any signs of picking up from your observation in the business. Thank you.
Yeah, as you noted I think we continued to deliver very strong and healthy margins. Sequentially, for seasonality reasons, Q2 is typically higher in terms of ops margin compared to Q1. So I think the way to look at our margins, if you are doing comparison is to look at the year-over-year trend. And in terms of year-over-year trend, I think that was very managed, that carried out very well as well. Last year we had extraordinary performance in terms of margins. We benefitted from the extraordinary growth in the e-commerce sector, the group-buying sector. You know, all of the things like that. And that helped on the margin. And we have made it clear that we are in very robust investment cycle, and particularly in this time, which is formative time of the Internet space in China. This is very important for us to make strategic investment for the long-term sustainability of this business. And we will do so in a very disciplined approach. So as we continue to carry out, invest in our business, we see much opportunities to continue to drive revenue growth at the same time important initiatives like mobile and cloud are very important areas for us to invest. And we invest of these search business the revenue and the cash flow that we generate in this future business, it’s very important for us. So we have been doing this over the past some time and we will continue to do so.
The landscape continues to evolve. The market competitive opportunity is tremendous. We want to make sure that we carry out our duty throughout this time and to maximize our opportunities for the future. In terms of second half business outlook, I think you know, we provide quarterly guidance and the Q3 guidance is very a solid guidance. I think everybody is aware that macro environment is challenging. However, I think because of the beautiful search product, the performance based nature of our service, we and our execution capability, we want to make sure regardless the macro environment we are charging ahead to deliver solid results.
The next question comes from the line of Richard Ji calling from Morgan Stanley. Please ask your question.
Richard Ji - Morgan Stanley
Robin or Jennifer, can you comment on your top five existing categories and which area is -- or which area you have the (inaudible)?
The typical top five sectors are that we report this time is very consistent. In the top five sectors we have medical healthcare, education, machinery equipment, travel and franchising. And all the top sectors we see very strong growth continuously and if we were -- if we have to make comparisons, the B-to-B sector such as machinery is weaker than these B-to-C sectors like the others.
And the next question comes from the line of Andy Yeung calling from Oppenheimer. Please ask your question.
Andy Yeung - Oppenheimer
Obviously you have (inaudible) new applications like mobile browser and mobile applications for your customer. At the same time you also have made same investments to (inaudible). So from a cyclical standpoint, how do you decide where to buy a product (inaudible). And when do you decide to do it in-house?
Okay. We don’t try to differentiate this based on what kind of business to buy and what kind of business to view. In most cases I would say that I prefer to buy [viewed] because that was the last time and give us competitive advantage. There is just a lot of cases, there are just not good enough applications or services or products for us to buy, so we have to view it. For the two [products] you mentioned, (inaudible) and GE, they fall into the category like a vertical. So we -- in the previous calls we mentioned this so-called landing page strategy. When people do search on Baidu, they will probably land on another site. If that site belongs to a important vertical and we believe we can come out with the equally good or even better quality of content or service, we will consider owning that by either acquisition or do it ourselves.
And the next question comes from the line of Elinor Leung calling from CLSA. Please ask your question.
Elinor Leung - CLSA
My question is related to ecommerce service. Last time you mentioned that you wanted to grow more vertical search engine capability and in terms of ecommerce search, can you tell us regarding the progress. It seems that the ecommerce has been a big improvement on the search engine. What about Baidu, would be that a major competition against Baidu? And also if Baidu, does Baidu have any plan to go back to the ecommerce market? Would these also affect your LBS strategy? How are you going to work closer with the merchants in order to give out your LBS strategy. Thank you.
We think we have very good ecommerce search capabilities. That is demonstrated by the loyal customers or advertisers from the commerce category. They all spend a lot of money to advertise Baidu and they just cannot buy enough amount of inventory from us. We continue to try to enhance the user experience for ecommerce related queries. We have a mechanism called open data platform and open application platform. Related parties with data can submit their data to our platform and we can show that to our users when necessary.
Having said that, I think there are still a lot of room for improvement for the ecommerce related search. We have devoted resources, engineering resources to improve that experience. We do not necessarily need a separate product for ecommerce search. We still believe that users can find the necessary information from one search box. LBS, it’s a potentially huge sector. There are lots of things we can do and like I mentioned, our products and our strategy is centered around Baidu Maps. We are actually having a lot of information, merchant information and shopping information, travelling information, all kind of information on this platform. And we believe it will become more useful to the users and deliver better value to merchants going forward.
We are now approaching the end of the conference call. I will now turn the call back to Robin Li, Baidu’s Chief Executive Officer for his closing remarks.
Well, once again thanks for joining the call. Please do not hesitate to get in touch with us if you have any further questions. We look forward to speaking again soon.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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