Baidu, Inc.
Q1 2015 Earnings Call Transcript

Published: 30 Apr 2015

[Operator:]

Hello and thank you for standing by for Baidu's First Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. After management's prepared remark 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 would now like to turn the meeting over to you host for today's conference, Sharon Ng, Baidu's Director of Investor Relations.

[Sharon Ng:]

Hello, everyone and welcome to Baidu's first quarter 2015 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our Web site, 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 U.S Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC including our annual report on Form 20-F. Baidu does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited, non-GAAP financial measures. Our press release contains a reconciliation of unaudited non-GAAP measures, to the unaudited most directly comparable GAAP measures and is available on our IR Web site, at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR Web site. I will now turn the call over to Baidu's CEO, Robin Li.

[Robin Li:]

Hello everyone, and thanks for joining today's call. This quarter we continued to drive mobile [indiscernible] to new heights as we build out our mobile eco system more fully. For the first time mobile represented half of Baidu's total revenues further reinforcing Baidu's industry leadership in mobile. We were able to reach this important watershed by innovating and doing things differently. Our track record proves that we showed the right strategy and tactics and that we executed [deeply] and decisively as we navigated the mobile shift in our home market. Search is still about direct immediate expression of our user intent. We successfully leverage this and the open nature of our platform as far as our extensive underground sales force to achieve this dramatic growth in mobile. And there is much more to come. As many user still just turning to recent to the power of smartphone and how it empowers them as consumers, see opportunities that mobile opens up are limitless. We see huge potential ahead for mobile marketing, online to offline and key life verticals such as healthcare, education and financial services. By leveraging our solid mobile foundation, exceptional technology advantage and proven operational experience. We are redefining the third spot by going beyond returning information like Web sites, addresses and phone numbers to our users. We are now connecting users with services and enabling close look transactions. We are pioneering a different approach to the basic inner way creating more naturalistic intuitive and convenient wave for people to perform search and delivering results than our more intelligently predictive and better matched to the need of time and place. To fulfill our ambition we are building our eco-system by investing heavily in R&D operating our own Baidu offering like Nuomi group buying, Baidu take out foot delivery and Baidu Wallet. Partnering with and investing in best in class players like [Chinar] and Uber and working closely with platform partners across verticals on Baidu Connect. This is the right time for Baidu to seize the opportunity and we are moving boldly and quickly. Tectonic shifts creates opening for forward looking, forward thinking companies to really drive innovation and getting front of tremendous new opportunities and Baidu is ready to lead. Now for an update on our core search wins. The fundamentals of core search remain very robust. Mobile now having reached 50% of top line continues to be the main driver of revenue growth. Mobile search driven by robust traffic growth and improving monetization again contributed the majority of our mobile revenues. We see much more growth ahead from our mobile marketing platform as traffic increases, infrastructure improves, ad targeting grows more precise and ad format proliferate and become more diverse. Meanwhile we continued to be pleased that with our PC wins which continues to grow healthily. We again raised the bar in search by focusing on improving the user experience making enhancements to our bidding system and further pushing infrastructure development. In user experience we've taken further steps to make search faster, more relevant, more immediate and more tailored. This quarter we upgraded instant search by improving speed and relevance. We made our search results more visual and personalized by dramatically increasing the coverage of images in pay search and saw a marked increase in pixel rates as a result. We are taking a vertical approach to the powerful click to action button, which provide unambiguous direct ROI to our customers, for example, in addition to the existing click to call, click to chat, and click to download mobile app format in healthcare we are now offering click to consult and click to appointment. In education we offer click to [Reddit] for a class, and click to lesson to a course. And in restaurant we offer click to book a table. We will be extending this vertical specific click to action button to financial services, travel, transportation and career services. In February we made search a bit more local by further targeting geographic areas for bidding from over 300 cities in China to bidding by distance proximity. We are rolling out distance proximity bidding in phases and the early response has been very encouraging. We think that customers who use distance proximity bidding have a higher propensity to spend on mobile and enjoy higher ROI. We are attracting a new incremental local customer base as our marketing offering grows more targeted and more local. This merchant are thinking mobile first and we offer easy to use tools and infrastructure, that's why compelling mobile marketing solutions to meet their needs. Earlier this month we began our annual nationwide search engine marketing campaign. Our largest to get, spanning 500 cities to reach SMEs and local merchants and further penetrate lower tier cities. Mobile infrastructure has come a long way over the past two years with Baidu playing an active role in pushing the development. Over two years ago we recognized the importance of mobile infrastructure to the user experience. Early on we made increasing the number of mobile optimized landing pages one of the key performance indicators for our sales force. We also provided free software to our customers to convert PC pages to mobile optimized one and we adjusted our algorithm to factor in mobile landing page quality in our search rankings. Now nearly all of our customers have mobile landing pages but we’re not stopping here. The next step is to continue to improve the overall landing page quality and really unlock the value of mobile by enabling services and transactions on Baidu. Now for further I think mobile and O2O. In Q1 mobile search -- Baidu mobile search reached 600 million monthly active users up from 540 million in the previous quarter and in mobile maps we hit 270 million monthly active users and we continue to occupy the top slot in app distribution in China. The scale and reach of this asset are the foundation of our mobile platform and mobile Baidu search app and mobile maps serve as powerful gateways that not only support the growth of our newer O2O offering such as Nuomi and Wallet, but also enable closed loop transaction. Baidu products share rich and diverse resources within our platforms and across our ecosystem For example, in Q1, 25% of Nuomi movie tickets transactions originated from and were completed on mobile Baidu and maps. In March over International Women’s Day weekend we’ve run a successful movie ticket marketing and promotional campaign. Nearly 15% of all online and offline movie tickets sold in China on March 7th flowed through Baidu money, with nearly 70% of those transactions completed with Baidu Wallet. The campaign educated users on discovering O2O services through our gateway products and demonstrated the ease of buying movie tickets through Baidu, driving user adoption for both Nuomi and Baidu Wallet. Speaking of Baidu Wallet, it now boasts nearly 26 million connected dot coms where users have both linked a bank card to an account and spend at least once with Baidu Wallet. Baidu Connect now has over 700,000 merchants. We continue to build out the infrastructure for this platform more fully and work more closely with verticals to tailor our offering. A brief example is cuLearn the online arm of new oriental education. cuLearn students on average spend RMB1,000 per transaction. Baidu worked with cuLearn to drive these through our marketing platform and enable a closed loop transaction through Baidu Connect. Over the past month cuLearn tripled monthly revenue as compared to October last year when we launched via Baidu Connect account. Our takeout for delivery service was launched last August in less than nine months, we grow to cover 70 plus cities and we believe we are already the leader in nearly half of those cities within the working age demographic by GMV. Including Beijing and five additional provincial capitals and we are the leader in 16 cities overall that also include Beijing by GMV. Take-out food delivery not only complements our group buying services but also leans on our technology advantage. The key sustainable edge in take-out food delivery is scale and optimizing logistics and resource allocation. Our technology platform pulls the resources of our math, data and software capabilities. Baidu take-out food delivery offers a differentiated experience by targeting the working age demons graphic, higher quality, license the restaurants and faster delivery time. O2O address the enormous opportunity in local and it’s still early days. The majority of conception and transactions takes place locally and offline. With the write-off mobile connecting local services from online to offline becomes possible. Bringing services online opens up information transparency and allows for better matching of supply with real time demand. That means increased efficiency in resource allocation. For example, with restaurant industry a multi trillion RMB industry in China behind only real-estate and automotive in market size more than half of these are left empty daily. Only 1% of reservations are made online. And online take-out food delivery represents only a low single-digit percentage of overall restaurant GMV. On average 85% of movie theater seats are unsold and more than 40% of trucks on the go carry no merchandise. By connecting people on these services Baidu is providing users with convenience and choice and enabling merchants to fulfill real-time demand which can drive incremental revenue and improve capacity utilization. This is a long-term strategy and ecosystem build-out for Baidu. We still have a lot of work to do but the results thus far are very encouraging. We will continue to run online and offline marketing and cross product promotional campaigns for Mobile Baidu, Maps, Nuomi and take-out food delivery in the coming quarters. This campaign will educate users about new services that can be discovered through our platform and foster the right user behavior. But connecting people with services goes beyond local, our gateway position our focus on data and technology are enormous accumulated user base and customer base all combined to put us in the unique position to truly transform major service verticals like healthcare, education, financial services which in aggregate represent nearly 20% of China’s economy. Baidu we’ll have an opportunity to place an impact overall in transforming each of this sectors. In healthcare, we are helping to better match patients to the right doctors. In China, people sometimes line up for days to make a medical appointment to see a doctor, who might not be the right one to treat their condition. Baidu Doctor which we launched in Q1 addresses the situation and the support online registration. The transform has brought nearly 700 hospitals and over 25,000 doctors across three provinces to the platform. We will work to expand the service in the coming quarters. We’re also making education more accessible by providing an online education platform and funding where at comp rate. Our online education platform Chuanke, which we acquired last August already partners with nearly 7,000 educational institutions providing over 25,000 courses to millions of registered users. In financial services, we launched a pilot program to offer consumer loans or consumer credit to lower the barriers to access for potential students. A few words on Baidu Research, our research program this is [indiscernible] in Beijing and the Silicon Valley continues to yield great results. In addition to advance setting on our deep speech approach which uses deep learning to deliver the highest accuracy in English speech recognition in the industry to-date. We are making great strides in vision as well. In January, Baidu Research announced industry leading results achieved by the Baidu deep image in each recognition system and our systems continue to improve. ITE continues to perform very well and grow its Q1 top line revenue over 80% year-on-year. It continues to offer a superior user experience among China’s Internet video sites and we remain highly committed to and supported ITE. We are clearly excited by the opportunities ahead of us and we have seen -- we have been selective about choosing those [wave length]. Baidu's strategy is very focused and we do regularly review our portfolio for effectiveness and we have in the past and we'll continue to prompt our portfolio and [sound] that products that do not meet our expectations. In closing, Baidu is redefining the search box and [indiscernible] of our addressable market. We are working hard and investing aggressively to fulfill our vision and packing to our platforms through potential. With that, I’ll now turn it over to Jennifer for a look at our financial.

[Jennifer Li:]

Thank you, Robin. Hello everyone. In Q1, we again saw dramatic growth from mobile and continued to see tremendous opportunities on the horizon. We’re executing our investment plans and closely tracking and monitor trajectory, scale and conversion metrics to measure returns. While investments in some of the newer products such as Nuomi, take-out food delivery, Wallet and Baidu Connect are still at a early stage, we’re pleased with the progress that we have made thus far and we’ll continue working hard to ramp up these services in the coming quarters. In Q2, we’ll continue our marketing and promotional spend to take advantage of spring time travel and various consumer oriented shopping days. As we said before, sales and marketing will be an area of particular focus, we’ll be optimistic and spend will vary from quarter-to-quarter. ITE continues to be a highly strategic asset with attractive long-term growth prospect. We’ll continue to invest in content and spend where needed to procure high quality license to content and develop self produced content to support ITEs growth. Content cost will vary quarter-on-quarter. The fundamentals of our business are very strong and the growth opportunities ahead for Baidu are vast, but also very much within reach, we’re working hard and moving quickly to execute on our plan. In addition to leveraging our existing platform, we’ll continue to deploy the necessary resources to further build out our ecosystem and create long-term shareholder value. Now moving to the financials, all mandatory amounts are RMB, unless stated otherwise. For the first quarter total revenue were 12.7 billion, representing a 34% increase year-on-year. Over the first quarter Baidu had approximately 524,000 active online marketing customers, a 17% increase from the corresponding period in 2014 and flat from the previous quarter. Revenue per online marketing customer for the first quarter was 23,800, and a 14% increase from the corresponding period in 2014 and a 10% decrease from the previous quarter. Traffic acquisition cost as a component of cost of revenue in Q1 were 1.7 billion was 13.5% of total revenues compared to 12.4% in the corresponding period in 2014. The increase was mainly due to increased to contribution of contractual ads. Bandwidth and depreciation cost as a percent of revenue in Q1 were 6.7% and 4.6%, respectively, compared to 6.8% and 4.5% in the corresponding period in 2014. Content cost, as a component of cost of revenue was RMB608 million, representing 4.8% of total revenues, compared to 4.1% of the corresponding period in 2014. This increase was mainly due to ITE's increased to content cost. SG&A expenses in Q1 were 3 billion, an increase of 47% year-on-year. The increase was primarily due to a increase in promotional spend for mobile products and services. R&D expenses in Q1 were RMB2.3 billion, an increase of 79% over the corresponding period in 2014. The increase was primarily due to an increase in the number of R&D personnel. Share-based compensation expenses, which were allocated to related operating costs and expense-line items, increase in aggregate, to RMB291 million in the first quarter, from RMB169 million in the corresponding period in 2014. SBC increased due to more shares being granted to employees. Operating profit for Q1 was 2.2 billion, a decrease of 9% over Q1 2014. Total headcount, on a consolidated basis including invested entities, was about 46,800 as of the end of Q1. This represents a increase of 1% compared to the end of Q4 last year. Income tax expenses were 541 million for the first quarter. The effective tax rate for the first quarter was 20.7%, compared to 15.1% in Q1 2014. The hiring effective tax rate reflects that some loss generating entities in the group cannot be consolidate for tax purposes under PRC tax law and the expiration of preferred tax license for one of our subsidiaries. For the remainder of the year we expect our effective tax rate to be around this range of 20%. Net income attributable to Baidu for Q1 was 2.4 billion, a 3% decrease from the corresponding period in 2014. Basic and diluted earnings attributable to Baidu per ADS for the first quarter amounted to RMB6.79 and RMB6.76, respectively. Net income attributable to Baidu excluding share based compensation expenses a non-GAAP measure for Q1 was 2.7 billion a 1% increase year-over-year basic and diluted earnings attributable to Baidu per ADS excluding share based compensation expenses both non-GAAP was 7.62 and 7.58 respectively. As of Q1 the company had cash, cash equivalent and short term investment of 58 billion. Net operating cash inflow and the CapEx for the first quarter were 2.8 billion and 1 billion respectively. Now let me provide you with our top line guidance for the second quarter of 2015. We currently expect total revenue for the second quarter to be between 16.365 billion and 16.75 billion representing a 36.5% to 39.7% year-over-year increase. Please note this forecast reflects Baidu's current and preliminary view, and is subject to change. I will now open the call to questions. Operator please go ahead with questions.

[Operator:]

Thank you. [Operator Instructions]. Your first question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question. Eddie Leung Just two questions, the first one is about the Internet landscape in general. We have seen some consolidations among certain verticals in the Internet landscape. So just wondering how that could affect the positioning of a search engine and how Baidu could cater for the changes in the industry. So that is my first question. And then secondly besides what we've disclose in 20 year just wondering if you could share a bit more color on some of your key advertising industries in terms of contribution and perhaps more importantly what some of the opportunities and challenges you have seen in some of your key advertiser industries. Robin Li Eddie I'll take the first question and Jennifer is going to talk about the second one. Yes we also, nowadays there are some consultation in certain verticals but overall I think the Internet especially if it's a mobile Internet is still in its early days, there will always be new players coming in and old players some of them will fade, Baidu position at the gateway to mobile Internet stays strong, our Mobile Baidu app or Baidu Maps continue to hit new highs both in terms of number of page views, number of searches, daily active users, monthly active users. So we are quite confident that our vision which is in addition to connecting people this information we are connecting people with services. There are a lots of lots of verticals that we can connect to this, some of those verticals we decide to do it ourselves such the take-out food delivery service or movie ticket, but for most of the verticals we will choose to work one or more of those players and we believe we will continue to be one of the most important channel for those service providers if not the most important channel and we will be able to work with many-many verticals not just 360 verticals, maybe 3600 verticals and users will benefit I think the user experience for, start from one place and get all things that's possible, it’s the best user experience plus you know we have the faster voice recognition, it is processing natural language, understanding technologies not only users can type and text they can talk to our apps and they can take pictures and initiate queries. All those kind of conveniences add attractiveness of our platform and we are quite confident this will be the main form of connecting with all client services. Jennifer Li And with regards to your question on the advertiser base and the future opportunities, as of last year end you know that we have over 800,000 customers, a lot of the customers have been really doing business with us as well the years, and I think the large customer base has been built over time and predominantly over the majority of our lifetime that is PC dominated. And with now mobile becoming a much more important trend these advertisers already recognize the opportunity and are fully embracing the opportunity that mobile brings. So as you have already seen much of the existing customers are spending also very, investing heavily on the mobile side. And what mobile opportunities really brings for these existing customers are some of these customers -- can really take the incremental opportunity on the mobile side and increasing their overall spend and the contribution to the Baidu platform. As an example if you look at some of the C2C, the B2C business services such as business service, financial services, travel and education, these sectors are growing their spending on Baidu very-very nicely. As an example, in Q1 if we look at the top sectors other than the familiar ones like medical, education and travel, we see financial services and business services becoming part of the top five also. So that is encouraging with existing customers and with mobile it really brings a lot more new customer base and advertiser base for us. As we mentioned earlier in Robin's comment, developing local merchants as we develop our technology and roll out the infrastructure platform and also with the data points that mobile can bring to us we can help you know the advertisers with more precise targeting and that help even smaller advertisers to be able to spend less. So I think you know, as we look at the advertiser base existing advertisers really continue to see the huge value that search engine brings. At the same time new customers can start to take advantage of the platform and the power of search because of mobile and so as we look at past and future opportunity I think the customer base Baidu can service continues to be very huge and promising in the future.

[Operator:]

The next question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your question. Alan Hellawell Regarding the relatively robust 79% growth in R&D I was just hoping to find out how much incrementally relates to new initiatives and connected devices, how much to after element and what other areas of growth I have not mentioned. I would assume that R&D would grow maybe very moderately as a percentage of revenues, we don't seem to be tracking that so I'd love to get an update around how that relates to the full year. And then any further color on some of the e-commerce initiatives I do [mall] and others that you got now? Jennifer Li On the R&D expenses we commented last quarter as I was trying to help providing some light on the whole year spending throughout Baidu’s history we’re very committed to invest in R&D capabilities. And R&D expense as a percent of revenues continue to adjust that reflects our commitment to R&D and our focus on technology. Over the past quarter I think we net added about 1,000 headcounts in the R&D work force and we already have a large work force as these are spread throughout the different functions. Within the Baidu R&D infrastructure it’s really a very powerful house. You have really the team that does Baidu research leading into the cutting edge world class technologies and we have the work force to really continue to refine our search technology as well as the monetization power. And for new initiatives such as medical, financial services and education, that leverages on the existing platform and it will be reflecting only a small incremental spend. But I think this is the commitment to R&D is not like one project focus it is Baidu’s long history of committing to technology. And frankly if you look at the absolute dollar spend for Q1 compared to Q4 and that is consistent with prior year trends. Robin Li And regarding to ecommerce the overall market is still growing and evolving very quickly mobile ecommerce has shown some new characteristics that’s different from desktop ecommerce. Baidu mall is really a advertising our end model that we can aggregate all kinds of different ecommerce players and drive traffic to them so it’s -- although it’s a new initiative for Baidu it’s very consistent with our prior practices in enabling ecommerce and driving traffic to our partners.

[Operator:]

The next question is coming from the line of Dick Wei from Credit Suisse. Please ask your question. Dick Wei So looks like we’ve got very good progress in food delivery and ticketing areas. I wonder for other areas of O2O ecommerce like real-estate or second hand car or like filling services, what is kind of our plans in those kind of other ecommerce area, are we going to be more heavily involved or we’ll be picking into some partners or are we just led the -- we’re just focusing on advertising with some of the players in the space I am not sure if there is anything you can add some color on? Robin Li I think our O2O strategy really have three layers, the first one the internal line is on an operated service like you mentioned to take-out food delivery and movie ticketing. And the second layer is for companies that we will have typically a stake either minority or majority stake and we’ll be able to work together with them in a very tight fashion to integrate those services into our maybe apps. We invested in companies that do second hand car or other verticals that you mentioned. But we’ve been selective on those. The third layer is really the majority. We don’t need to have equity relationship with those companies but we are equally happy to work with those companies to integrate their services into our platform into Mobile Baidu and Baidu Maps, so that our users are served and those services get customers and get traffic. So we are -- they're open and we provide all sorts of preparation opportunities for the overall mobile Internet ecosystem in China. Dick Wei And then just a quick follow up question I think Baidu Wallet we have got like 26 million users. I wonder what’s the company plans and say -- you might say in two years time like what kind of target the company has in terms of like user number or in terms of maybe the non-Baidu off platform transaction or offline transactions any thoughts we want to be market leaders or not maybe if you can share some thoughts on the plans that’d be helpful. Robin Li I think the two fundamental issue is connecting people with services and in order to finish a close loop transaction Wallet is very necessary part. So in that regard we’re being very aggressively pushing the adoption of Baidu Wallet. But having said that this has been early stage development for connecting people with services. There are a lots of lots of things that we need to do to really complete those closed loops, it's probably the last part of that closed group transaction, before that we need to read out how we direct user queries to the necessary service provider and then how we integrate those services seamlessly so that users get served. There are lot of things we need to worry about and we will really examine the current market condition, competitive landscape and we are selectively to decide where to invest more from time-to-time. But yes, this is very important part of our overall plan.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Alicia Yap from Barclays. Please ask your question. Alicia Yap I have a questions regarding active customer growth, so you added 78,000 net add for the active customer this quarter also grew on the flat sequential basis despite a weak seasonality. How should we reintroduce -- so can we assume that your effort of cleaning up and verifying accounts and putting higher quality requirements over the past 1.5 year is now largely down and should we expect a similar growth rate on the customer add counts going forward? And does any of the 700,000 Baidu Connect accounts contribute to the active customer number in the first quarter? Jennifer Li No, the active online marketing customers are really advertiser market - advertising customers that does online marketing services with us. So the Baidu connects accounts those customers are not included even here and so as sequentially I think we had about 1000 net customer add Q1 compared to Q4. Yes, I think that you're right in saying that on one hand we put into the discipline to make sure that we have high quality customer base, we continue to make that our priority to make sure that lower quality customers do not really show up on Baidu’s platform. At the same time there is a vast customer base that's out there for us to tab and that is the marketing effort that we are currently conducting nationwide and we continue to see that with the power and extension of our platform much more online marketing customers can be brought platform. So we will continue to develop the customer base, the customer potential is big, but at the same time we also want to ensure quality and that is an ongoing process. So, I would say to the specific question on that there is no end to how you ever ensure that there is continued effort to make sure that there is high quality customer base. And the customer base is dynamic and the platform, the product, the services that they can conduct continues to be dynamic and we’re keeping close eye on it, but we’re very confident that the customer base can grow and is because of the market opportunities out there.

[Operator:]

Your next question comes from the line of Alex Yao from JP Morgan. Please ask your question. Alex Yao I have a question regarding the mobile ad services. So we understand a meaningful portion of the PC advertising revenue is from long search product such as Baidu Union, the affiliates network and one, two, three. Just wondering what is the development of the similar long search as services on mobile and what kind of the monetization gap is there for this mobile services versus PC? Robin Li I think it's similarly on the mobile front we have affiliate programs that show display ads where as form of advertising on properties not on the Baidu. This have a variety of stages on the monetization to mobility, right now is relatively low. And of course we see a lot of growth potential here, we see opportunities that we can come out with interesting format that really related to say the context when both in terms of format and content. So going forward, we expect very dramatic growth of those kind of areas that right it's a very low base.

[Operator:]

Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question. Piyush Mubayi How do you determine which verticals you'd like to get into and how would you be leveraging the resources across all of your subsidiaries. Robin Li We cannot afford to get into too many verticals so we have to select them very carefully. The basic criteria is frequency because we run major gateways like Mobile Baidu and Baidu maps. People use our services on a daily basis many times actually any day. On certain verticals so this is that people use it on more frequent basis and we like to integrate those services to more tightly [indiscernible] therefore we need to mount those services. You've seen we have down group planning, movie ticket and take-out food delivery those are high frequency activities in terms of construction and we decide to do it ourselves. Right now I think pretty much all the areas that high frequency and we intend to get in we already got in. So we do not expect to add a lot more also sound and operated vertical services.

[Operator:]

Your next question comes from the line of Ming Zhao from 86Research. Please ask your question. Ming Zhao I want to ask just very latest incident, there is some news about the PHICC there action towards using Baidu search. We understand it's a negotiation process. Maybe could you update us on that, is that a concern. Jennifer Li Yes I think Ming as you mentioned I think when it comes to contract signing with customers there are specific issues that we deal with the customer. I will say the specific incidence you are referring is by far already finished and behind us and I think if you look at our two Q2 forecast as we indicated that reflects our current view the best view. And so I think obviously there is an order customer we service there will be different issues and that we talk to our customers and engage word with our customers. I don’t think the particular issue you mentioned I would say behind us and moving forward is a not a issue for us.

[Operator:]

Your next question comes from the line of Chao Wang from Nomura. Please ask your question. Chao Wang Just on those for those key advertising categories. Do you have a sense that how [ROI] on mobile is and how does it compel to the PC side. And also for these financial services category, are they mostly brand ad from the traditional financing situations or more performance based next from the internet finance companies. Robin Li What's your first question -- mobile ROI okay? We actually manage the ROI so that it's roughly the same on mobile and desktop. We use price at leverage we constantly monitor the performance for ROI for our customers and advertisers and we make sure as we get good value on those traffic clicks and conversion. Jennifer Li And with regards to the financial services I think it's a little bit of both. But I would say majority of these are really brand companies they come to our platform to release other financial services insurance and also investment legal. Customers such as [Emei, Donghuang] these are really high quality customers and we're happy to see the sector grow.

[Operator:]

The next question comes from the line of Thomas Chong from Citigroup. Please ask your question. Thomas Chong I have two questions. The first question is about the long-term competitive landscape performance based advertising as we see Ten Cents has already started doing this new advertising models. And my second question is about the second half outlook, given we see the revenue the acceleration in the second quarter how should we think about the third quarter and the fourth quarter revenue growth. Robin Li On the performance based advertising I think Baidu dominated the market for many-many years and we expect to stay in dominating position for a very long time. We believe that our platform either Mobile Baidu or Baidu Maps or other Baidu properties provide the best scenario for customer, for users to be converted into customers and time and time again it has been proven by hundreds of thousands of customers and most of the Internet companies who are very-very performance sensitive spend most of their advertising dollar or marketing dollar on our platform. For other companies who also run ads on their properties I think those are pretty much brand oriented instead of performance oriented so there's still a big difference between us and the rest. Jennifer Li And I think, you know that we provide one quarter's guidance, so already comment on the second half of the year but I think you know the one thing I can say is the fundamentals is very robust and we continue to see many arrears of monetization effort and customer base that we can drive the future growth.

[Operator:]

The next question comes from the line of Chi Tsang from HSBC. Please ask your question. Chi Tsang I just had a question on SG&A, you're spending a lot of SG&A you've really seen a lot of success with that it seems of your O2O efforts. I was wondering how you sort of prioritize and how you might allocate your SG&A, it seems such as Nuomi and Baidu Connect, Wallet and Delivery. Jennifer Li Obviously we have very key strategic focus and I think on one hand our key gateway such as Mobile Baidu and Baidu Map, these are pretty solid entry points to connect and to synergize with our other new initiatives such as Take Out Food Delivery, such Baidu Nuomi. So I think the advertising spend as we allocate for one is it has to be a strategic focus and also at the time of those SG&A expense to occur there has to be a product readiness at the same time there will be opportunistic opportunities that whether it's a seasonal holiday or a consumer event that we can take advantage of. So you should expect that SG&A expense vary quarter-on-quarter, at the same time as we deploy these resources of advertising efforts I would, I commented in the past and a lot of the efforts will be spending on the promotional activities to drive these new products and user adoption and we closely monitor these ROIs and tractions and as you noted already that we are gaining great traction and we're pleased with the progress and we'll continue on this path to exercise discipline and really have a very focused approach to SG&A.

[Operator:]

Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your question. Cynthia Meng My question is on the Baidu Connect. Can management provide any feedback on Baidu Connect in terms of conversion ratio of traffic into orders for the merchant and are these merchants also bidding for keywords and if not do you expect them to be bidding for keywords and place advertising, search advertising budget on Baidu in the future and related to that the Baidu mall strategy, what is the differentiation of Baidu mall versus other e-commerce players or platforms. Robin Li So, on Baidu Connect the conversion has been very encouraging I've given you examples during the prepared remarks, there are a lot of users or accounts or customers using Baidu Connect, they basically provide more loops or socially oriented features on the Baidu, Mobile Baidu apps. So the conversion is definitely better than before, before I mean a simple Web site. But it’s sophisticated mechanism different customers use it at different level. Those who use it to a very advanced stage will have a better conversion those who use it at a more basic stage. We’re also seeing improvement over their previous version but they may not be able to close the loop or maybe about yet. I think this is pretty much independent from their app budget some of them spend money to promote their sites, gateways, some of them have not but I believe once they are hooked they see the performance they all be able to convert to our customers. And for Baidu Mall it’s really an aggregation of those name brand that users can trust and have a good selection of quality goods that’s the basic characteristic and of course we can drive traffic to them.

[Operator:]

Your next question comes from the line of Natalie Wu from CICC. Please ask your question. Natalie Wu Just one follow question on the mobile revenue. Firstly congratulations on over 50% in mobile contribution. But can you give us some color on the mobile revenue contributions on those O2O in the share gain for example ticket sales both delivery sales et cetera. And can you update us your current and mobile CPC at the end level as well as mobile traffic relative to PC? Jennifer Li The mobile revenue that we currently are generating are predominantly circulated. For the O2O side that is really to drive the transactions so that doesn’t get categorized as online marketing revenue. And as you know that our O2O initiative is focused on user growth in also the GMV transaction and so that really does not account for as our mobile revenue. I think your question is related to mobile monetization. I don’t think CPC itself is representative here for monetization power, if we look at the overall monetization capabilities on mobile it continues to narrow the gap versus PC, the trending is encouraging and going smoothly. And we’ll continue to spend effort to narrow the gap. And we are very confident about the mobile monetization power a comparison to PC. At the same time obviously the mobile traffic continues to grow as a percent of total traffic and overall both the monetization trend and the traffic trend are as I mentioned very robust and healthy.

[Operator:]

The next question comes from the line of Eric Wayne from Blue Lotus. Please ask your question. Mr. Eric Wayne, your line is open please ask your question. Eric Wayne I just have some housekeeping questions one is your bandwidth cost seems to went up spiked up this quarter -- the question is just about the bandwidth cost that despite company's quarter is there any one-time reasons that lead to the cost increase? And second is if you can give us some color regarding to the growth profile of ITE literature and music in your other revenue lines? Jennifer Li I think the bandwidth did increase a bit this past quarter but this sequential increase is not out of line compared to prior quarters but specifically to this quarter majority of that driver is ITE, ITE is a business that’s growing nicely. And their business growth and user traffic growth occupies bandwidth cost as you understand. In the other revenue line yes as you rightly noted these are I would say non-online marketing related revenue and the contributors are predominantly ITE and the other services such as music and online reading. I think there is no -- they continue to grow these are smaller part of the overall business and I think the main part is ITE subscription membership revenue growth and that continues to track very nicely.

[Operator:]

Your next question comes from the line of Ella Ji from Oppenheimer. Please ask your question. Ella Ji Just a quick question, can management provide us an update of your total OpEx budget spending level for the year on a full year basis including for example SG&A content cost impact? Jennifer Li I think I provided the ballpark outlook last quarter in our call and that remains the same, there is no additional update. Ella Ji And then a quick follow-up relating to ITE, I think you mentioned that the revenue growth is around 80% and this quarter the content cost is up around 55%. So seems like you are making some nice progress in terms of moving towards less loss, is this trend sustainable for the rest of the year? Jennifer Li I think you should look at ITEs top line and maybe the content cost separately, they do not necessarily match on a quarter-over-quarter basis. ITE is general business continues to grow very nicely and we’re very pleased to see that. At the same time I mentioned last quarter content cost is strategic asset for ITE and you should expect that overall content cost to step up and I mentioned also earlier that content cost can vary very much quarter-over-quarter depends on what kind of program is brought online and the content cost because it's amortization based will start to trigger. So you should expect content cost to vary quarter-over-quarter, but I did give you the outlook for the whole year and that will remain the same.

[Operator:]

Your next question comes from the line of Wendy Huang from Macquarie. Please ask your question. Wendy Huang Just want to get more color on the SG&A given the different dynamics at industry and company level. So we have seen actually handset shipment in China actually decline recently, and previously you actually guided the mobile pre-installation cost to be flattish year-over-year in dollar amount. So were you just budget given the industry change? And also I think your corporation with Uber and other private car companies was really announced after you made that RMB5 billion kind of the budget guidance a quarter ago, and also given recent R&D cost of search. So how lucky do you think that you may spend up more than RMB5 billion before the whole year? Jennifer Li As every company does, you do have a plan if you try to manage the companies whether it's strategic focus and execution resources. As mentioned that as we’re looking forward for this year the new products we push such as Baidu Nuomi, Take Out Food delivery, a lot of these and movie tickets, a lot of these relates to marketing spending and that would be very much promotional effort focused and that is not the kind of channel spending that you used to see. And for this majority of the SG&A expenses will be incurred on the promotional efforts to drive these product adoptions and among users and also to make sure that the synergy among cross sell between these products. There is I would say obviously we manage the SG&A expenses as a whole group category. There is no specific budget as just for channel and resources can be deployed depends on the situation, depends on competitive landscape and also depends on how the market is evolving user behavior is shaping and also products that gets ready. So it is managed dynamically, but from the whole year’s perspective the guidance that I provided last quarter for SG&A continues to hold.

[Operator:]

We are now approaching the end of the conference call. Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.