Thank you for standing by for Baidu's fourth quarter and full year 2014 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there'll 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 your host for today's conference, Sharon Ng, Baidu's Director of Investor Relations. Thank you.
Hello, everyone, welcome to Baidu's fourth quarter and full year 2014 earnings conference call. Baidu's earnings release was distributed earlier today, you can find a copy on our website as well as on Newswire services. Today, you'll 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 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 and 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 will also be available on Baidu's IR website. I will now turn the call over to Baidu's CEO, Robin Li.
Hello, everyone, thanks for joining today's call. About two years ago, we set out to fundamentally transform Baidu from a PC-centric company to a mobile-first company at the forefront of innovation in the mobile internet. It took firm commitment, focused investment, keen vision, and bold and swift execution. Today, after this ambitious two-year push, we emerge as an even more competitive and innovative company. We have unassailable dominance in mobile search. We are the clear market leader in mobile maps, and we continue to lead the market in app distribution. Baidu's dominance in these three key gateways, along with our technology focus, our broad portfolio of apps in video, travel, and more, and our extensive sales force are competitive strengths which position us well to fulfill our mission of connecting people with services.
2014 was a year of many accomplishments, with Baidu truly seizing the mobile opportunity as mobile continued its inexorable rise. In 2014, our top line re-accelerated, our full year revenue grew 54% over the prior year. Mobile search traffic exceeded PC search traffic during the second half of the year and continues to increase as a portion of overall search traffic. Mobile monetization continued its momentum, ramping from just over 20% of total revenue in Q4 [2013] to 42% in Q4 2014. In December, for the first time, search revenue from mobile surpassed that from PC. In 2014, we also cut the ribbon on our new Silicon Valley R&D center and made notable advances in voice and visual speech technologies. We took further steps to make Baidu a safer, more trustworthy platform for users.
2015 begins a new phase for Baidu to execute on our plan to connect people with services. We are primed to take on this new opportunity that will drive the next chapter of Baidu's growth. Now for progress on the quarter. We continue to be the clear PC and mobile search market leader in China. Our PC and mobile traffic continues to grow year-on-year. Notably, daily mobile searches per user increased by 22% year-on-year. Mobile's portion of overall search traffic continued its upward trend and comprised an even greater proportion after exceeding 50% in the third quarter. The organic part of our mobile search traffic followed a similar trajectory, accounting for a growing proportion after topping 50% in recent quarters. In Q4, we continued to make search faster, more relevant, more visual, more personalized, and more real time.
In November, we launched personalized results, returning tailored, more relevant search results. We made instant search faster and more relevant than before, further improving the Baidu user experience and helping to increase page views and click-through rates. We are also giving our users a more real-world, real-time experience through live cam feeds from select travel sites in China, including Mount Emei, Mount Hua, and Dunhuang. Our investments in technologies like deep learning and natural language processing enable us to give to our users a better differentiated search experience that is exceedingly difficult to replicate. Overall key monetization metrics, the number of paid clicks, click-through rates, cost per click, and CPM continue to trend nicely year-on-year. Over the past several quarters, we continue to raise requirements and standards for Baidu's customers.
We started by requiring new and existing customers to be verified through our PlusV program and gradually implemented stricter requirements. These efforts help us build a safer and more trustworthy platform for our users. A few months ago, we expanded the scope to require new customers to have both PC and mobile landing pages. This meant a portion of merchants could not become our customers unless they met our standards. As of December, 91% of our customers have mobile-optimized landing pages. We continue to hear positive feedback from customers about mobile, and we work with them to further improve their mobile presence through higher quality mobile landing pages, better ad formats, and products such as Baidu Connect. We are also making it easier than ever for our customers to use multiple products across the Baidu platform.
In the fourth quarter, we integrated 24 products into a single interface, creating a streamlined one-stop experience. Display advertising, which includes our PC and mobile app network, Brand Zone, Aladdin, and other related products, grew over 70% in 2014 over 2013. We continue to solidify our lead in app distribution, holding 42% market share as of December, according to Analysys International. Our platform distributed 174 million apps on an average daily basis. That's up from 160 million apps the quarter prior. We believe Baidu remains the best platform for mobile developers to distribute apps and the most attractive ecosystem to be a part of. We also drove a broader effort to increase the adoption of Baidu's unified login.
In the fourth quarter, nearly 180 million monthly active users logged into Baidu products, including Search, Baidu Post Bar, Nuomi, Baidu Wallet, and Personal Cloud Storage, up from 95 million in the fourth quarter 2013. With the transition of our core business behind us, Baidu's next new mobile opportunity is connecting people with services and enabling a closed-loop transaction. The internet disrupted the information and media industries. The next even larger opportunity is the disruption of service industries. With China's young market economy, with verticals both online and offline, embracing technology and the internet, and with mobile opening up new doors, Baidu's market opportunity is larger than it has ever been. In O2O, in traditional verticals, Baidu can help drive value and greater efficiency by leveraging data and technology. Industries like healthcare, financial services, and education, industries where access is still unequal and where inefficiencies persist and are ripe for radical transformation.
We've just begun this effort and have a lot of work to do. Expect Baidu to apply the same commitment, focus, and execution that helped us transition our core search business to this new opportunity. Leveraging our tremendous assets, we are confident that our hard work and investments will pay off, and we have significant long-term shareholder value. Over the past year, we've been busy laying the groundwork to enable users to discover, connect, and transact all through Baidu, whether it's buying movie tickets or tickets to local attractions, hailing taxis and private cars, booking hotels, purchasing group buying offers, or ordering food delivery. In the past year, the number of transactions completed on the Baidu platform has grown over four-fold. In each of these categories, Baidu creates value for users by delivering a better experience through a closed-loop transaction.
For merchants, Baidu brings them new leads and measurable ROI and conversion. In 2014, we solidified the gateway dominance of Mobile Baidu and mobile maps, adding new product features such as Discover and Nearby, respectively, to offer more O2O services to our users. The past year, we also rolled out new key offerings such as Baidu Connect, Baidu Wallet, and Baidu Waimai. Baidu Connect, which we introduced last September, has aggregated more than 600,000 merchant accounts. Baidu Connect is a powerful customer service platform that can be accessed by Baidu's 540 million monthly active mobile search users. We offer merchants an optimal mobile presence with easy-to-use templates tailored to their verticals. We currently have 13 in total, including food and beverage, education, healthcare, and travel. We introduced new templates for real estate, auto, financial services, and wedding videography in the fourth quarter.
We now work with approximately 100 value-added service providers who have helped us sign new Baidu Connect accounts, a majority of which are new to the Baidu platform. Our goal here is to really understand merchant needs in the verticals that they operate in and provide the right integrated solutions to help drive value to their businesses. We also fully integrated the Nuomi Group Buy business over the past year. Over this period, we continued to strengthen Nuomi's operations and infrastructure and ramp up its business. Nuomi now leverages both its direct sales force and Baidu's reseller network and has one of the largest merchant bases of all top Group Buy platforms. The service now offers to users more personalized recommendations and offers our customers an additional channel to attract new users.
Baidu Food Delivery is a high-frequency local consumption service that we pilot tested earlier in 2014 and have rolled out to 73 cities. We saw great adoption from users, with the number of transactions growing over sevenfold quarter-on-quarter. Baidu Food Delivery is complementary to our Group Buy service and is an important component in building out our closed-loop offerings. Baidu Wallet adoption is growing at a rapid clip, quadrupling the number of new user accounts quarter-on-quarter. Baidu Wallet is a payment option across all Baidu products and continues to expand its online and offline merchant base. These service offerings are early stage. We will continue investing in these areas to further build out our closed-loop transaction capabilities and overall ecosystem. Turning now to iQIYI. iQIYI continued to show great momentum, more than doubling its top-line growth in the fourth quarter and the full year 2014.
Online video is an important and strategic vertical with very attractive long-term growth prospects. Fresh content is vital to the success of the platform, and we remain highly committed to and supportive of iQIYI. Over the years, we've faced fierce competition and a sea of change across the industry. We've grown bigger, faster, stronger, and even more capable of cutting-edge innovation. We've been able to do this because of our steadfast commitment to our mission to provide the best and most equitable way for people to find what they are looking for. Because of our unflagging faith in the transformative power of technology. Our mission and our conviction sustain us now as we prepare for the next phase of growth. We are still in the early innings as we build an ecosystem that will truly connect people with services.
The opportunity is exciting and visible, we are well-positioned, and our execution plan is clear and focused. We are fired up and ready to go to compete and to win. With that, I'll now turn the call over to Jennifer for a rundown of our financial performance in Q4 and the full year.
Thank you, Robin. Hello, everyone. We closed the landmark year with a very solid quarter. In 2014, we saw the successful transition of our core search business to mobile. 2014 was also a year of significant investment as we deployed resources to secure leadership positions in key gateways and launched cornerstone pieces of our closed-loop transaction offerings. We're now particularly well-positioned as these investments lay the groundwork for Baidu to capture the new growth opportunity of connecting people with services. Looking into full year 2015, Baidu will continue to execute our plan and invest aggressively in a disciplined, strategic manner. We will spend to support our mobile products, including Mobile Baidu Maps, and App Distribution, and drive adoption of our closed-loop LBS offerings, which includes Baidu Connect, Nuomi, Baidu Waimai, and Baidu Wallet. Key investment areas include sales and marketing, R&D, infrastructure, and traffic acquisition.
We will continue to support iQIYI, which operate in a highly attractive and competitive industry. High-quality content is key. For 2015, the key investment focus for iQIYI will be on content acquisition. Chinese New Year is right around the corner. As you know, because of the holidays, Q1 is a seasonally slow quarter. For this Q1, as compared to historical years, our guidance reflects the combined impact of one, the late timing of Chinese New Year. Two, mobile's growing traffic contribution, which currently monetizes at a rate lower than that of PC. Mobile monetization is on a path of steady and healthy growth. This upward trend will continue as we progress through the year. The fundamentals of our business are robust. We're well-positioned, and we're ready to apply the same dedication and execution capability that drove the success of our mobile transition to our next opportunity.
We're excited about our growth prospects and confident we are creating long-term value for our shareholders. For the fourth quarter, total revenues were RMB 14.1 billion, representing a 48% increase year-on-year. Mobile revenue represented 42% of total revenue for the fourth quarter of 2014, up from 36% in the third quarter of 2014. Total revenue for the full year 2014 were RMB 49.1 billion, an increase of approximately 54% from 2013. Mobile revenue represented 37% of total revenue for fiscal year 2014. During the fourth quarter, Baidu had approximately 523,000 active online marketing customers, a 16% increase from the corresponding period in 2013 and a 1% increase from the previous quarter. Revenue per online marketing customer for the fourth quarter was RMB 26,400, a 26% increase from the corresponding period in 2013, and an increase of 2% from the previous quarter.
For the full year 2014, active online marketing customers increased by 8%, and revenue per online marketing customer increased by 41% over the full year 2013 figures. Traffic acquisition cost as a component of cost of revenue in Q4 was RMB 1.9 billion, with 13.4% of total revenues, compared to 12.3% in the corresponding period in 2013 and 12.9% in the third quarter of 2014. Full year 2014 traffic acquisition cost as a % of revenue was 12.9%, up from 11.6% for 2013, which primarily reflects increased contribution of contextual ads, mobile, and promotion of Hao123. In 2015, expect the gradual increase in traffic acquisition cost as a % of revenue that we saw in 2014 to continue. Bandwidth and depreciation cost as a % of revenue in Q4 were 5.3% and 3.9%, respectively, compared to 5.9% and 4.3% in the corresponding period in 2013.
In 2014, bandwidth and depreciation cost as a % of revenue decreased to 5.8% and 4%, respectively, compared to 6.1% and 4.6% respectively in 2013. Content cost as a component of cost of revenues in Q4 were RMB 592 million, representing 4.2% of total revenues, compared to 3.8% in the corresponding period in 2013. Total content costs for 2014 were RMB 1.9 billion, 3.8% of total revenues, compared to 2.6% in 2013. This increase was mainly due to iQIYI's increased content cost. In 2015, we expect content cost to step up at a similar rate compared to last year as we invest in high quality and self-produced content to support iQIYI. Selling, general and administrative expenses in Q4 was RMB 3.5 billion, an increase of 89% year-over-year. Total SG&A expenses for 2014 were RMB 10.4 billion, 101% increase from 2013, primarily due to an increase in promotional spending for mobile products.
In Q1, we have already begun our marketing efforts around the Chinese New Year period to promote our mobile products and LBS offerings, which include television ads on CCTV and celebrity endorsements for Mobile Baidu and Baidu Maps. We have also seen good traction on the promotional marketing spend to drive adoption of Baidu Wallet, Group Buying, and Baidu Waimai. For full-year 2015, we'll continue to spend aggressively on sales and marketing to support our key gateways and build out our closed-loop offering. We expect 2015 SG&A to step up at a similar RMB level as last year's step up. Within sales and marketing, spending will increase for online and offline marketing campaigns and promotional marketing. We plan to engage in marketing and promotional campaigns strategically, at times taking advantage of seasonal holidays or events.
As such, sales and marketing spend will be an important expense item that will vary in magnitude quarter-over-quarter. These efforts are necessary to support our long-term strategy and are generating good results. We'll continue to aggressively promote our products and services and monitor effectiveness closely. R&D expenses in Q4 were RMB 2.1 billion, an increase of 69% over the corresponding period in 2013. Total R&D expenses for 2014 were RMB 7 billion, a 70% increase from 2013, 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, including increase in aggregate to RMB 339 million in the fourth quarter from RMB 177 million in the corresponding period in 2013. SBC expenses for 2014 increased 87% over the 2013 level. The increase reflects year-end true-up and incentive granted to one of our subsidiaries.
Operating profit for Q4 was RMB 3 billion, an increase of 8% over Q4 2013. Operating profit for the full-year 2014 increased to 14% from 2013. Total headcount, including our invested entities as of December 31, 2014, was about 46,400, an increase of 7% compared to the end of Q3. Most of the headcount increase was in R&D. Income tax expenses was RMB 538 million for the fourth quarter. The effective tax rate for the quarter was 15.6% compared to 11.2% in Q4 2013. For the full year, our effective tax rate was 15.4% compared to 15% in 2013. For 2015, we expect our effective tax rate to be in the high teens. Net income attributable to Baidu for Q4 was RMB 3.2 billion, a 16% increase from the corresponding period in 2013. Basic and diluted earnings attributable to Baidu per ADS for the fourth quarter amounted to RMB 9.05 and RMB 9.01 respectively.
Net income attributable to Baidu for the full year increased by 25%. Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure for Q4, was RMB 3.6 billion, a 20% increase year-over-year. Basic and diluted earnings attributable to Baidu per ADS, excluding share-based compensation expenses, both non-GAAP measures, were RMB 10.02 and RMB 9.97 respectively. Net income attributable to Baidu, excluding share-based compensation expenses for the full year, increased by 28%. As of December 31, 2014, the company had cash equivalents, and short-term investments of RMB 57.7 billion. Net operating cash inflow and capital expenditure for the fourth quarter were RMB 5.3 billion and RMB 1.5 billion respectively. Full-year net operating cash inflow and capital expenditure was RMB 17.9 billion and RMB 4.8 billion respectively. Now let me provide you with our guideline guidance for the first quarter of 2015.
We currently expect total revenue for the first quarter to be between RMB 12.645 billion and RMB 13.065 billion, representing a 33.2%-37.6% 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, we're ready to take questions.
Thank you. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. To ask a question, please press star one on your telephone and wait for your name to be announced. Our first question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.
Hi, good morning. Thank you for taking my questions. My question is about your guidance. It is a relatively large step down in terms of growth. We understand the seasonality factors as well as mobile monetization. Besides that, could you also give us some color on the macro environment? Is it any softening of the advertising markets that may have contributed to the guidance? If so, have we seen any bigger fluctuations in some of your advertiser industries in terms of the budget allocation process? Thanks.
Hi, Eddie. Thank you for your question. As we noted for the Q1 guidance, we wanted to make clear that what is reflected in the projection for us is mainly because of a very strong seasonal factor. As you know, the Chinese New Year falls right in the middle of the quarter. It's kind of for the first half of the quarter, and people are in the holiday mood. For the second half of the quarter, it's not long enough for the whole business to fully recover. The Q1 is pronouncedly affected by the seasonal factor. Obviously, we also talked about the mobile is during this time, from a traffic perspective, would be particularly strong. However, on the monetization front, it does have a distance versus the PC monetization capabilities. Reflected in our guidance, I would say macro is not really a consideration.
We operate in an emerging market and with full of opportunities. There are not only the existing advertising customers that we're servicing, we are also cultivating new service sectors and really reach out to build in local service and local businesses as well. From a business side of the perspectives, the overall environment is full of opportunities and potential. Reflected in the guidance is primarily because of the seasonal factor as well as the mix of mobile versus PC.
Understood. Thank you, Jennifer.
Thank you. Our next question comes from the line of Alicia Yap from Barclays. Please go ahead.
Hi. Good morning, Robin, Jennifer, and Sharon. Thanks for taking my questions. I also have a related question from the first quarter guidance. Jennifer, if we actually have a normal Chinese New Year this year, let's say late January or early February, what will be the guidance look like if we only have the issues on the mobile being monetized lower, right? If we take out the seasonal factor on Chinese New Year. In relation to that, will the second quarter this year have a much higher sequential rebound than the previous year? Also on the mobile for Chinese New Year, given higher percentage of traffic coming from mobile and mobile devices is more portable, should we actually continue to see more traffic and even more queries than previous year when people are away from the PC?
Any color you could provide will be helpful. Thank you.
Yes, Alicia, thank you for the question. As we said, the main factor driving the Q1 guidance is the seasonal factor as well as the mobile mix. The seasonal factor reflected on the Chinese New Year is this year, the Chinese New Year is in late timing, and that affects the full quarter. The mobile monetization part, it can't really clearly separate these two components because the mobile mix part is a moving part. Over the past two years, as we set out to really transition from the PC-centric business to mobile first business, we have seen steadily healthy growth of our mobile monetization capability. We are on that path, and we're still on that path for steady and healthy growth of the monetization rate. This element is a moment in time, and that happens to fall in this first one quarter.
This one quarter is a combined impact of those two and not really clearly can separate that out. Having said that, for your second question, obviously we don't give out the Q2 guidance. Because of the Q1, the strong seasonal timing, if you expect that Q2 has a strong rebound, I wouldn't say that would be a wrong assumption. I do expect that. For Q1, we have already seen mobile traffic surpassing PC, and during holiday times, mobile traffic will be particularly strong. Just as you noted, even people are on the go, they will have access to the internet through our mobile search box. Mobile traffic is strong, very strong, very solid. The fundamentals are robust, and we're just in that timing of having the mobile monetization rate trying to catch up with the PC's monetization capability.
I just want to reconfirm this, that the mobile traffic mix is also part of the seasonality because right around the Chinese New Year, probably one month before the Chinese New Year and two to three weeks after, people are on the go. A lot of people are on the go. They will use the mobile to do search instead of PC. If we don't consider the rapid growth of mobile traffic year-over-year, just looking at the seasonality, mobile would represent a larger % of total traffic during the Chinese New Year period.
Actually, can I follow up on this answer? Is there any big difference from advertiser willingness to spend and the budget they are spending as we move more to mobile during the holiday season? Have you seen any change from the advertiser sentiment and willingness from PC to mobile shift? Thanks.
I would say in general, our larger advertiser base, they really understand the value of our platform, and they have been very open to take advantage both on the PC side and the mobile side. I think you will note that mobile opens up new opportunities. For example, like local services. Local services traditionally wouldn't be part of the PC-centric advertiser base. With mobile, that is new opportunities and for these business to get on Baidu's platform and also for users to really look for information that relates to local service merchant service providers. We are obviously on that path to develop these new sectors. I would say from the existing advertiser base, there's not preferred unwillingness not to spend during holiday season.
Their patterns are normal, but a lot of the, I would say, huge mobile traffic that generated new business opportunities, new queries, and those are elements and sectors that we are on the path to develop. With time, that's why we're putting so much efforts in Baidu CarLife, in Group Buy, in all the driving high frequency service providers and make them become our advertiser base on the Baidu platform. I would say not really, but we're in that transitional time to developing new customer base, and the mobile, the traffic base is very robust, and we're in that time to really cultivate new advertiser base, and that could be monetized.
I see. Thank you. Can I just lastly, is the CPC on mobile still at 60% of PC in fourth quarter?
That's one of the metrics we look at. Obviously, CPC itself doesn't represent the whole monetization capability for mobile. You obviously have the click-through, CPM and all that. Just for CPC per se, largely it's stayed constant.
Okay, thank you. Great.
Thank you. Our next question comes from the line of Dick Wei from Credit Suisse. Please go ahead.
Hi, good morning. Thank you for taking my questions. I guess I also want to follow on the mobile monetization side. I wonder what kind of the monetization gap do we expect to close between mobile and PC, say, towards the end of this year? Any sense management can share? Is it going to help to re-accelerate the full-year revenue growth? I guess Q1 is, I guess, the midpoint is around at 35%. Is it realistic that, I guess, with mobile monetization, with other PC pricing increases, is it more realistic to see more closer to like 40%, high thirties percentage growth for 2015? Thank you.
Yes. Hi, Dick. As I mentioned earlier, the mobile monetization rate is on the trajectory of growing. We have seen that steadily and healthily been growing over the past two years, we expect the same will occur throughout the year. Obviously, we do expect the mobile and PC traffic to PC monetization rate, the gap to narrow. In fact, I think we're very optimistic about the mobile monetization capabilities, given there's richer data points and enhanced capabilities that we're building to build the closed loop transaction, drives better ROI for our customer, holistically provides really high ROI for our customers and therefore, mobile monetization rate should be, if not exceeding, the PC's monetization capability.
For the Q1, I would say, somewhat you can interpret that the Q1 year-on-year comparison is somewhat depressed because of the seasonal factor, given that there is seasonality in that, given that we do expect mobile monetization to trend up, I would say this is not truly representative of the whole year's picture.
Okay, great. Jennifer, just a quick follow-up on that. I guess for Q1 guidance, maybe I just wanted to clear whether we are being more conservative given it's late Chinese New Year because maybe the visibility is a bit lower than usual, or it is just purely seasonality worse than kind of the historic seasonal early Chinese New Year trends?
Yeah. I think you're correct. During the Chinese New Year time, it is a slow time, and business typically resumes two weeks after the Chinese New Year. As we provide the guidance, there is obviously not as much, we're not that deep into the quarter or after the holidays. Obviously, there is a lack of visibility. I would say, as we have always done consistently, we provide our best guidance, given our knowledge to the business, and in that our best expectation as of now.
Great. Thank you very much.
Thank you. Our next question comes from the line of Alex Yao from J.P. Morgan. Please go ahead.
Hi, good morning. Thank you for taking my question. I have a follow-up question on the mobile monetization. Jennifer, as you say, you guys are very optimistic on the mobile monetization capability over time. The traffic from mobile also increased rapidly. Should we expect at some point in 2015, the mobile monetization rate increase could possibly re-accelerate the revenue growth? That's the first question. Secondly, given the revenue growth outlook and your investment strategy, can you talk about how should we think about margin outlook for this year? Thank you.
I think we commented, we provide one quarter's guidance, and I give you some color on how you should read this number and how it may not be that representative for the full year. We are optimistic about our monetization capability on the mobile front. I wouldn't get into further comments on the annual revenue outlook. On the investment side, I think in the prepared remarks, I tried to give you as much way to think about our investment angles as possible. The key investment areas for us is to extend our service and build the closed loop transaction and enable connecting people with services. The main activities we will carry out for products are like Baidu CarLife, Nuomi, the food delivery service, and Baidu Wallet. Areas of investment, I think areas of significant investment would be in the sales and SG&A line.
For SG&A expenses, as I mentioned, the absolute dollar step-up for 2015 over 2014 will be similar compared to the year-ago step-up. That would be the key item to look at. For other main expense line items, I think they have pretty established patterns, and you could really model that pretty closely. Another line item that I have put you to pay attention to is content cost. I gave you specific ways to think about content cost as well. I would say those two elements are the main investment areas, and other elements will continue the traction of the prior patterns in terms of investments.
Understood. Thank you.
Thank you. Our next question comes from the line of Ming Zhao from 86 Research. Please go ahead.
Thank you for taking my question. I have a similar question on the mobile monetization. The question I have is because in the first half of last year, the mobile traffic growth is actually helping the monetization. It's re-accelerating the top-line growth, if you look at the first 2 quarters of last year's growth. Towards the year-end into first quarter this year, the higher traffic from mobile is actually causing a problem to your monetization. My question is really, is this because some low-hanging fruits have been picked? Some of the early adopters of mobile search have been already on the platform, but what's left is, are those industries very hard to adopt mobile search? You must go to local services for a brand-new area for growth. Is that the situation the company is facing now?
Ming, I think that's not an apple-to-apple comparison. You're talking about the first half of 2014. We're talking about the guidance for the first quarter of 2015. The timing of Chinese New Year for 2014 and 2015 is very different. As I said, both the mobile traffic mix and the timing of Chinese New Year are, in essence, seasonality. I don't think that's a fair comparison. Regarding the mobile monetization, I don't think we have reaped all the low-hanging fruit. There are still a lot of room for growth in terms of improving monetization capability of mobile, and even more exciting opportunity is that on mobile, we have the chance to really connect people with services, which is in addition to the traditional sponsorship or advertising RMB. We do see a lot of opportunities going forward.
To add on that, Ming, I understand your question. If you're looking at the early part of 2014, that comparison was versus the earlier part of 2013. 2013, if you recall, mobile monetization barely existed. That comparison is, I would say, on a low base and you can say purely incremental, an easier comparison. As we stand in 2015 compared to 2014, obviously, the mobile is already becoming a very meaningful component of the overall picture. The mix issue is playing a significant part. I wouldn't draw the conclusion that mobile monetization becomes a problem. It's not a problem. We're still on the trajectory of healthy and steady growth, and there is a lot of room for us to continue to improve, a lot of customer base to develop. A lot of room and the potential opportunities.
It's only because of the base that you're comparing is different.
Thank you very much.
Thank you. Our next question comes from the line of Ella Ji from Oppenheimer. Please go ahead.
Good morning, management. Thank you for taking my question. I also have a question relating to the mobile monetization. Within mobile revenue, how much is coming from non-search related services? Since you have been saying that mobile monetization has been increasing, growing healthily, but mobile CPC discount to PC remains stable. I just wonder if it's non-search related services that's driving the mobile revenue growth.
The mobile revenue predominantly is still search. Actually, from an advertising product perspective, it's not as rich as PC today. We've been doing that business for quite some time. There are different forms of products that we can use to monetize the PC traffic. For mobile side, I would say majority of the mobile revenue is still search related. There are other revenues, like display revenues, that's generated out of mobile, because of IE, for example. It's not because of the different products that's driving the growth of the mobile. The mobile revenue is growing, while CPC is relatively stable. That is just saying that we continue to improve the monetization capabilities. CPC, as I mentioned earlier, is really not the full picture for mobile monetization capability. For the mobile monetization capabilities, you look at really the display, the relevancy, the click-through, and all that.
CPC is just one element. Because the advertising, the keywords choices are much more, the advertisers are spending more, when it comes to average CPC, it could stay constant. That's why I think you just looking at the CPC won't solve your question.
Got it. Is it fair to say that your mobile is still mostly driven by search-related services?
Yes.
Got it. Thank you. If I can have one more question that's relating to your SG&A spending in this 4Q. The total RMB amount is up for more than 30% quarter-over-quarter. I wonder, Jennifer, if you can help break down this additional spending by different categories such as pre-installation or branding or promotion. If you can provide any detailed colors, that would be very helpful.
Yes. The incremental SG&A expense is almost all because of promotional efforts that drive products, like Baidu Wallet, Group Buy, and Baidu Waimai. We launched Baidu Waimai in Q4.
Thank you very much.
Thank you. Once again, as a reminder, please keep your questions to one at a time. Our next question comes from the line of Alan Hellawell from Deutsche Bank. Please go ahead.
Thank you very much. Yeah, Jennifer, very much appreciate the broad framework you offered around how to think about SG&A in 2015. If I'm not mistaken, we did see a pretty significant jump in R&D as a % of revenues. Are you saying that we should probably assume maybe a similar percentage point increase as a % of revenues on the R&D front, or can you give us a little more color as to how we should think about that operating expense? Thank you.
Well, I think if you look at the R&D expense as a % of revenue over the years, we have steadily concentrated on investment in R&D. Expect that trend to carry on, maybe more moderate pace, not as sizable as last year.
Thank you.
Thank you. Our next question comes from the line of Wendy Huang from Macquarie. Please go ahead.
Thank you. First want to clarify your answer to Alicia's question at the very beginning. You just mentioned the gap between the PC and the mobile CPC stay constant at 50% only. If I recall correctly, I think Robin mentioned in Q3 2013 that mobile CPC already accounted for 55% of the PCs, and in Q4, that ratio also went up further to 60%. How come now it came back to 50% in recent quarters? Also, related to that, it's interesting that you mentioned about different seasonality of the PC and the mobile traffic. Taking a longer-term view, given that mobile traffic is stronger in Q1, should we expect by the time that gap between the PC and mobile CPC to narrow down, actually, the seasonality for your overall business actually should be stronger in Q1 rather than weaker in Q1? Thank you.
I think there were some numbers going around for CPC as a percent mobile versus PC. That number, I think I mentioned earlier on the call, was 60%. I want to direct your attention probably away from CPC. CPC is only one aspect of the monetization capability. Looking at CPM, the overall monetization capabilities will be more relevant. For the second question is about Q1 mobile traffic mix, right?
Yeah. Would Q1 be stronger going forward when mobile monetization catch up?
Yeah.
Eventually, I think it will. It's going to be a gradual process. Right now, the monetization capability for mobile traffic is still lower than PC. It's gradually catching up. Eventually, we are confident that mobile monetization capability will be on par or even bigger than PC monetization. When that happens, during Q1, when seasonally mobile represent a larger traffic mix, the revenue growth will show a stronger pattern at that time.
Mobile revenue seasonality will dominate the Q1 seasonality pattern?
Going forward, yes.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Thomas Chong from Citigroup. Please go ahead.
Hi, good morning, Robin, Jennifer, Sharon. Thanks for taking my questions. My first question is about the integration with Uber. Can management talk about how the integration goes on with Baidu Maps and what's the potential P&L impact? My second question is related to PC search. Should we expect in terms of the PC search revenue growth momentum for this year is similar to last year? Thanks.
On the Uber integration, we are still working on it. We are providing APIs for Uber to work with. It's still work in progress. From what we have heard, the GMV or number of transactions of Uber China has been growing at a very fast pace. We are optimistic about the future perspective of this collaboration.
Thomas, as you know, we look at our search business holistically. If you have to single out the PC side, and I think the PC is pretty stable, and there is still room for us to continue to improve on the monetization capabilities, be very innovative with experimenting different advertising products, and continue to enhance user experience and also drive more relevant search ads that's good for the user as well as good for the customers. We don't really separate our overall business separately, but I think we're not unhappy with the progress on the PC front.
Thanks, Jennifer.
Thank you. Our next question comes from the line of Cynthia Meng from Jefferies. Please go ahead.
Thank you, Robin, Jennifer, and Sharon for giving us the opportunity. My question is regarding the recently announced reorganization. Can management give some color on the rationale and what kind of milestone management has in mind in terms of developing new businesses that will drive the future growth of Baidu? In addition, as a follow-up for the questions before, given the small market share of Baidu Wallet, will management consider subsidize taxi hailing activities for Uber and other companies that you have affiliation with? Thank you.
On the reorg, the competitive landscape is changing quickly. Market dynamics are very vibrant. Before, we had six business units. We kind of combined LBS into the mobile unit and combined our international business and consumer business into the new business group. That give you three big business groups. The first one focus on search, which is our current core asset. The second one focus on mobile, which is growing the fastest. The third one focus on all kinds of emerging opportunities, including healthcare, education, finance, et cetera. That's the rationale behind the reorg. We think by combining some of the business units, the efficiency will be increased. Some of the redundancy can be eliminated. The overall company will be more agile.
On Baidu Wallet, we have been subsidizing all kinds of transactions in our ecosystem primarily for services we operate by ourselves. For example, the Group Buy, the Baidu Waimai, or movie tickets. We occasionally would subsidize other partnership deals that would be on a case-by-case basis.
Thank you. Robin, can you talk about some of the milestones you might be able to share with regard to the new business units?
Well, the new business units actually comprise of a number of initiatives we are working on. Right now, they are at very early stages. For example, for healthcare, we are trying to connect patients with doctors. There are about two million doctors in China. There are lots of patients. Right now, the resources are not allocated optimally. Lots of the patients go to those very famous top-notch doctors. Those doctors only can spend a few minutes with each patient. We think that's not a good use of medical resources. We're trying to do the matchmaking to send the relevant patients to relevant doctors. We look at that as a closed-loop transaction. We're connecting people with services. We measure those number of transactions or deals as milestones.
For education, we're trying to find opportunities to fund those potential candidates or potential students with financing options, consumer credits, so that they can have more incentive to take some of the classes offered by our partners. Based on our platform, we can route traffic to a lot of potential students and encourage them to take more classes. That will enable lots of people who didn't have the money to take on courses to be engaged in this kind of new system. There are initiatives like this in our emerging business group, and the main measurement is the number of transactions we complete on those platforms.
Thank you.
Thank you. As a reminder, please refrain to one question at a time. Our next question comes from the line of George Meng from Morgan Stanley. Please go ahead.
Hi, good morning, Robin, Jennifer, and Sharon. Thank you very much for taking my question. I wonder if you can provide more granularity of your revenue growth, especially on mobile. In terms of, for example, the advertiser categories and also type, basically, if you view your business between KA and SME, do you think the SME is actually meaningfully different in terms of growth rate from KA? Also, in terms of the advertising categories, do you see any impact from, say, healthcare from some of your competitors? Thanks.
I think, overall, the customers, because of their size and their business, they do have different needs. That's the beauty of our platform that can really cater to whatever size and whatever kind of advertisers and whatever budget they may have. For SMEs, I would say, the population is huge. For our SME salespeople, there are opportunities as we penetrate into the deeper 3rd-tier, 4th-tier cities and to really develop new customer base. Also with our technology and the city-level bidding that gets into more refined geographical accuracy, that really opens up opportunity for local businesses that really want to do very targeted promotion. For large customers, their adoption of mobile is also progressing very well. Their needs do vary, and the drivers of those businesses could be different.
For large advertisers, they look for novel products, ways to help them carry out campaigns and generate overall ROIs, and also for branding purposes. For SMEs, the needs will be different, will be very performance-based, could be. I think on both fronts, the business is growing healthily because of different drivers.
Okay, got it. Anything on the categories, like healthcare? Do you see any impact from your competitor launching a healthcare search also? Thanks.
Healthcare continues to grow very strongly. It's still one of our top five sectors. What we're seeing is service sectors are growing very nicely on our platform. Mentioned earlier, education services like travel, even financial services, these sectors are really growing nicely and are among the top five sectors.
Great. Finally, you mentioned branding. You also mentioned 70% year-over-year growth of your display ads. I understand it is still very small, but can you quantify what the mobile contribution within the display ads, if you exclude, say, iQIYI? Is there any impact expected from Weixin launching their ads on Weixin? Thanks.
Right now, I think most of the branding budget are spent on our PC platform, including Brand Zone or our Baidu Union. On mobile, we do not allow graphical display of any content. Even though there are also Brand Zone on mobile, the overall brand advertising contribution to mobile revenue is still much smaller than that of PC. Having said that, I think the brand advertising budget for online is still a very small percentage of the total brand advertising budget. I think both us and Weixin are very, very small in terms of brand advertising budget. I do not see competition as an important factor right now. We do see strong potential for brand advertisers to shift their offline budget to online and to mobile.
Thank you very much.
Thank you. As a reminder, to be fair to all callers, please keep to one question at a time. Our next question comes from the line of Chao Wang from Nomura. Please go ahead.
Hi. Morning. Thanks for taking the question. I have a question on your PC revenue growth. It seems that 4Q results and 1Q guidance implies that PC revenue is down year-over-year. Could you comment on PC revenue growth as well as PC traffic growth? Secondly, regarding the late Chinese New Year impact, does that have a bigger impact on a brand ad alone? Thank you.
On your first question related to the PC, I think there was the same question earlier. I said overall, the PC business is pretty steady, the traffic is solid, and we continue to have ways to improve on the monetization capabilities for PC. Overall, I think PC continues to grow, and we're not unhappy with that progress. What was the second question? Oh, the Q1 brand advertiser?
Brand advertiser.
Yeah. Q1 brand advertiser is seasonally a slower quarter. That has been historically the pattern. Brand advertiser, as Robin mentioned, we don't do much of that on the mobile front. Because mobile's traffic is the dominant component of the overall, of course, the spending will be less. PC, because of its seasonal nature, the brand advertising spending for Q1 is the reason the advertising overall is slower in Q1.
Got it. Thank you.
Thank you. Our next question comes from the line of Chi Tsang from HSBC. Please go ahead.
Hi, this is Chi Tsang from HSBC. Thanks for taking my question. I had a question on Baidu CarLife. We're seeing very strong adoption from the merchants. The 600,000 figure is very, very large. I'm curious what you're seeing in terms of click-through from users, transactions or engagement levels. Thank you very much.
Yeah, as I mentioned during the prepared remark, we rolled out a lot of verticals for Baidu CarLife. We enabled those merchants to come up with their own customized Baidu CarLife sites. Right now, the conversion is very good, we would like to see more transactions or GMVs happen on those platforms. There are a number of early adopters who have seen very encouraging results, it will take some time for the majority of the merchants to learn how to take advantage of the Baidu CarLife system and enable transactions on it. Next question, please.
Thank you. Our next question comes from the line of Erica Poon from UBS. Please go ahead.
Yes. Hello, thank you. About the content cost or the self-produced content that you mentioned earlier, can you just give us a bit more color, what type of content you plan to produce, and also the kind of cost associated with those? Thank you.
I think content cost is primarily attributable to iQIYI. During the last quarter in Q4, you've already noticed that there is a step up in content cost. New high-quality content has been acquired. It's important because over the past year, iQIYI has established itself as the market leader and also created this great market perception that they have the high-quality content and really having the entertainment high-quality programs that the users can look to. Unique content is the way that you differentiate yourself. We have already started producing self-produced content last quarter. Some cost component is reflected in the picture. Going into 2015, there will be more increased emphasis on the self-produced content. It's not particularly the categories that we define as of this moment.
The main strategic underpinning is really to drive high-quality content that differentiates the iQIYI's platform versus others, and therefore attracts users and nurtures users' reliance and possibly also grow user subscription. That's why it's strategically important, and I give you some guidance in terms of how to think about the cost related to that. We think this is strategically important because as iQIYI is already the market leader, and with this kind of method, this kind of investment, it further strengthens its market leader position and build a solid business. As we go forward, given the attractiveness of this vertical, we expect longer-term shareholder returns.
Thanks, Jennifer.
Thank you. Due to time constraint, we only have time for one last question, and it comes from the line of Natalie Wu from CICC. Please go ahead.
Hi. Good morning, Robin, Jennifer, and Sharon. Thanks for taking my question. Firstly, just to clarify, you mentioned that SG&A setup pattern this year will resemble last year. Wondering whether you are referring to absolute value or in terms of percentage of revenue. Secondly, noticed that you have already started a lot of O2O initiatives lately, like Baidu Waimai, Group Buy, movie ticket, healthcare, et cetera. Wondering, can management share with us your revenue target on this initiative? Is there any target on revenue contribution from commission-based business, say, 40%-50%?
Natalie, for your first question, it's the dollar amount.
On those O2O initiatives, over time, this kind of initiative, be it food delivery or group buying, while bringing revenue, it's going to be a more of a take rate basis. Right now, we are in the investment stage. There are lots of subsidies in each of those categories. Near term, we do not expect any meaningful contribution to revenue from this business.
Thank you, Robin. Is there any long-term target?
Of course. I think longer term, the take rate-based businesses will represent a very significant part of our overall revenue.
Thank you.
Thank you. We're 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.