Hello, and thank you for standing by for Baidu's third quarter 2014 earnings conference call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at any time. 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. Please go ahead.
Hello, everyone, and welcome to Baidu's third quarter 2014 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website as well as on Newswire services. Today, you will hear from Robin Li, Baidu's Chief Executive Officer, and Jennifer Li, Baidu's Chief Financial Officer. After their prepared remarks, Robin and Jennifer will answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the 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 call will also be available on Baidu's IR website. I will now turn the call over to Baidu's CEO, Robin Li.
Hello, everyone. We delivered strong results this quarter. The top line continued to be robust, driven by our core search service. Mobile contributed 36% of our total revenues for the quarter. Our traffic continued to grow healthily, driven largely by mobile in this quarter, mobile traffic surpassed PC traffic. Please note that prior to this quarter, iPad traffic and revenue were classified as part of PC. As iPads have grown to be a more meaningful portion of our traffic, from this quarter onward, we will classify all tablets as part of mobile to reflect tablets mobile characteristics. If we had classified all tablets as mobile in the second quarter, our mobile revenue would have been 33%. Excluding iPad revenue in the second quarter, our mobile revenue was 30%. Baidu continues to enjoy clear dominance and the upward growth momentum in the key mobile gateways of search, map, and app distribution.
More than ever before, Baidu is pulling together the strands of this gateway products and the breadth of our portfolio to offer to users the best way to connect with the information and services they seek. Mobile enables us to play a broader role in a larger addressable market. O2O is perhaps the most exciting of the many new opportunities that China's mobile internet revolution has opened up. We can help bridge online and offline, and with Baidu's solid mobile foundation, we can extend our value proposition to our users and customers in ways we were not able to before. For users, we can help them connect to services, effectively enabling users to make all decisions online up until the point of offline consumption. Whether enjoying a meal, getting a haircut, or seeing a local attraction, to give but a few examples.
For customers, we have the potential to show true conversion from online to offline as well. With PC, we were limited to generating leads. With mobile, we can participate not only in lead generation, but also fulfillment in a closed-loop transaction. Baidu can help our customers, large, medium, and smaller local merchants alike, bring users through the door. We can help fill empty seats. We can really match the service with the need. We know what users need because the majority of Chinese internet users tell us every day what they're looking for. We've designed our products to deliver an end-to-end experience, from query to payment to service fulfillment. At Baidu World, on September 3rd, we rolled out a new initiative called Baidu CarLife.
Baidu CarLife builds upon light apps and is a powerful tool for merchants that can bring in a large scale of leads from search and maps, built with functionality that enables high conversion and offers merchants a powerful CRM system. We provide easy-to-set-up templates tailored to specific industries. The Baidu CarLife account helps merchants reach new customers and maintain engagement with existing ones. Baidu CarLife enables both pull through search as a general search or adding the at symbol before the real name of a service, and landing directly on the Baidu CarLife page, and push as well through the Discover button in Mobile Baidu or the Nearby button in Baidu Maps. Once a user has decided to follow a business or made a purchase, the merchant can reach out to the user individually or in groups.
With the industry-tailored, user-friendly, click-to-action interface, we think the Baidu CarLife account is how merchants will want to be represented on mobile with the at sign as a domain name-like service for the mobile internet. While Baidu CarLife is still in early phases of rollout, merchants have expressed great enthusiasm, and the early traction is particularly encouraging. Over the past few months, we have worked with over 40 value-added service providers and have accumulated over 400,000 customer accounts, spanning verticals from hospitality to professional services, comprising existing and new customers to Baidu platform. For example, Cloud Home Services, an online platform that connects users with housekeeping and domestic service providers, launched their Baidu CarLife account at the beginning of October and saw their new mobile orders grow by 20% month-on-month, four times higher than the 5% month-on-month growth rate prior to launching their Baidu CarLife account.
The portion of Cloud Home Services repeat customers also increased from 30% to 40% of their customer base after launching of their Baidu CarLife account. We are excited to broaden Baidu CarLife’s rollout to create tangible, positive value for an even larger set of merchants. Our experience is that in China, brick-and-mortar businesses embrace and are eager to work with Internet companies, possibly even more so than their counterparts in more developed countries with entrenched industries and players. Already, over 450,000 local merchants with nearly 2 million storefronts across more than 300 cities have worked with Nuomi to attract new customers. With the new opportunities mobile presents, we can now connect not only with roughly half a million large customers and SMEs that we service today through search, but also the tens of millions of local service-focused businesses who have begun to embrace the Internet.
We are hard at work building out our O2O offering and are enthusiastic about the immense market opportunity. On the search front, in Q3, we launched Instant Search on PC, a feature that has resulted in a better user experience and marked improvements in click-through page views. An instantaneous predictive feature like this is particularly challenging for Chinese search, with one of the reasons being diverse text input methods through pinyin, five-stroke input method, and English. Our success with it owes to our long-standing leadership in natural language processing, machine learning, and large-scale network infrastructure. We continue to be the clear dominant leader in mobile search. As mentioned at the beginning of the call, mobile traffic comprised of over half of search traffic this quarter.
We continue to build the organic portion of our mobile search, which comprises over half of our mobile traffic, driven by user adoption of our Mobile Baidu and Baidu mobile browser apps. Aside from channel distribution, search is ultimately driven by technology and big data. Mobile search technology is an order of magnitude more difficult than PC-based search, requiring more diverse, intuitive interfaces such as voice search and visual search, and more relevant targeted results. Voice search queries already make up around 10% of mobile on Baidu today, and we believe that in the next five years, over 50% of searches will be speech or image driven. Baidu has invested heavily in these cutting-edge technologies, and we are far ahead of the competition. Our global lead is especially clear in visual recognition technology.
Baidu's visual search is one of the most sophisticated in the world and has the broadest functionality. In the updated 6.0 version of our flagship Mobile Baidu app, the old visual search function, which required the user to select an image category such as facial recognition or OCR translation, has been replaced with a smart visual search function. We now intuit intent by the object framed in the image and return the right results. For example, a visual search for a shirt, a blouse, a handbag, or certain other categories of items will return mobile commerce results for matching items. Aim the camera at a QR code and it will resolve to the corresponding link. Snap a selfie and it will show you which celebrity you most resemble. This is all possible because of our commitment to deep learning, which has already revolutionized computer vision.
Baidu is a pioneer in making this breakthrough technology available to the mainstream user and in applying deep learning to visual search. Mobile Baidu 6.0 also launched a breakthrough feature in the Discover button. Both the Mobile Baidu Discover function and our Nearby feature on Mobile Map help push to users personalized recommendations and promotional offers based on the user's interests, time of the day, and location. Version 6.0 is also optimized for Baidu CarLife. Baidu Mobile Map is the clear dominant player in the market. With over 240 million monthly active users, up from over 200 million in Q2 and growing nearly 70% year-on-year. We added great new features in our monthly map app updates, including better navigation and rich real-time public transit information. We also added new local O2O services such as food delivery and private car hiring, which complements the existing taxi hailing functionality.
Hotel bookings through Baidu Map have shown explosive growth, nearly tripling year-on-year. Closed-loop hotel booking has been available through Baidu Map and Mobile Baidu since September. With over half of hotel bookings on Mobile Map completed in a closed-loop fashion. In Q3, we ran a hugely successful promotional campaign with McDonald's China that tapped a number of our mobile products and highlighted the breadth of our product portfolio. McDonald's China worked closely with Map and Nuomi and leveraged Baidu products such as Mobile Baidu, Hao123, 91 Wireless, among others.
The soft-serve ice cream cone product promotions through Baidu Map brought over 20 million visits to the promotions homepage and 70 million views in social media, driving user awareness not only to McDonald's China products but also to Baidu CarLife, which users accessed both by jumping directly to the promotion page from the product icon on Maps and through the personalized push offering on the Nearby function. For the first time, McDonald's China ran a nationwide offer with the group buy platform and worked with Nuomi as the exclusive partner. In map distribution, we continue to solidify our leading position. During the third quarter, we distributed an average of 160 million apps on a daily basis, up from 130 million apps the quarter prior, and more than doubling since we combined Baidu and 91 Wireless app distribution platforms about a year ago.
Over a million individual developers work with Baidu to help them to get their apps discovered and monetized. Key monetization metrics, paid clicks, click-through rates, and CPM continued to grow nicely. We upgraded our bidding system and introduced more ad formats like dynamic ads and richer ad extension to provide customers with more choices and greater ability to tailor their campaigns to their specific needs. We continue to see more traction with city-level bidding, which enables customers to refine their bid for over 360 cities. We have continued to push quality standards higher for mobile landing pages and have provided numerous free tools to our customers to continue to aid their mobile transition. Baidu's extensive sales force remains one of our key competitive advantages and gives us the breadth and depth to reach new and existing customers and swiftly execute on key initiatives.
Our nearly 20,000 person strong direct sales force and broad reseller network cover well over 300 cities in China. Turning now to iQIYI. iQIYI continued to show great traction in Q3 and continues to lead in key metrics. We believe the long-term prospects for online video and iQIYI are very attractive, and we remain supportive of the platform. Before I hand over to Jennifer, I want to add that we are delighted to have Ya-Qin Zhang on board. A long time veteran of Microsoft, both in China and in the U.S., Yaqing joined us in September as president in charge of new business. He has hit the ground running, and we know that we will be doing great things together. Technology is changing the internet, creating numerous tremendous new opportunities for those with bold vision and driving changes that will meaningfully improve people's lives.
Our dominance in critical gateways, along with our infrastructure, our big data capabilities, our group buying resources, and our extensive sales force give Baidu unrivaled strengths across the mobile internet ecosystem. The combination of these unique assets places us in a powerful position to capture the vast mobile opportunity in China. With that, I'll now hand over to Jennifer, who can update you on financials.
Thank you, Robin. Hello, everyone. We delivered a solid quarter with strong results, with mobile continuing to perform well. We continue to invest aggressively in talent, technology, and sales and marketing to further build out our mobile platform and ecosystems to capture the vast market opportunities. Our focus remains on solidifying our leadership positions in key gateways such as search, maps, and app distribution, and driving adoptions of our newer initiatives such as mobile and the cloud and LBS, which Baidu CarLife is a key part of. We are committed to fulfilling our vision and are confident about our ability to execute, leveraging upon our competitive strengths. We're very excited about the opportunity and this will be an ongoing effort. Now moving to the financials. All money amounts are in RMB unless otherwise noted. For the third quarter, total revenues were CNY 13.5 billion, representing a 52% increase year-over-year.
During the third quarter, Baidu had approximately 516,000 active online marketing customers, an 11% increase from the corresponding period in 2013 and a 6% increase from the previous quarter. Revenue per online marketing customer for the third quarter was CNY 25,900, a 36% increase from the corresponding period in 2013 and an increase of 7% from the previous quarter. Traffic acquisition cost as a component of cost of revenue in Q3 was CNY 1.7 billion, or 12.9% of total revenues, compared to 11.7% in the corresponding period in 2013 and 12.7% in the second quarter of 2014. The increase reflects increased contribution of contextual ads, mobile, and promotion of Hao123. Bandwidth and depreciation cost as a % of revenue in Q3 were 5.6% and 3.8% respectively, compared to 5.8% and 4.2% in the corresponding period in 2013.
Content cost as a component of cost of revenue were CNY 498 million, representing 3.7% of total revenue, compared to 2.5% in the corresponding period in 2013. Content costs are mainly related to iQIYI. SG&A expenses in Q3 were CNY 2.7 billion, an increase of 95% year-on-year. The increase was mainly due to an increase in promotional spending for mobile products. R&D expenses in Q3 were CNY 1.8 billion, an increase of 68% over the corresponding period in 2013. 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, increased in aggregate to CNY 234 million in the third quarter from CNY 143 million in Q3 2013. SBC increased due to more shares being granted to Baidu employees. Operating profit for Q3 was CNY 3.9 billion, an increase of 17% over Q3 2013.
Total headcount on a consolidated basis, including invested entities, was about 43,500 at the end of Q3. This represents an increase of 7% as compared to the end of last quarter. The headcount increase was largely due to increase in R&D headcount. Income tax expense was CNY 657 million for the third quarter. The effective tax rate for the third quarter was 15.5%, compared to 16.3% in Q3 2013. Net income attributable to Baidu for Q3 was CNY 3.9 billion, a 27% increase from the corresponding period in 2013. Basic and diluted earnings attributable to Baidu per ADS for the third quarter amounted to 11.05 and 11 respectively. Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure for Q3 was CNY 4.1 billion, a 29% increase year-on-year. Basic and diluted earnings attributable to Baidu per ADS, excluding share-based compensation expenses, both non-GAAP measures, were 11.72 and 11.67 respectively.
As of Q3 2014, the company had cash equivalents, and short-term investments of CNY 51.3 billion. Net operating cash inflow and the capital expenditure for the third quarter were CNY 4.9 billion and CNY 1.4 billion respectively. Now let me provide you with our top-line guidance for the fourth quarter of 2014. We currently expect total revenues for the fourth quarter to be between RMB 13.85 billion and RMB 14.25 billion, representing a 45.5%-49.6% 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, please go ahead.
Thank you, ladies and gentlemen. The question and answer session 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. Ladies and gentlemen, if you do want to ask a question, you'll just need to press star one on your telephone keypad. Your first question comes from the line of Alan Hellawell from Deutsche Bank. Go ahead, please.
Thank you very much. A big picture question. The company has shown itself willing to invest heavily to win certain strategic markets. This year, we can argue that margins have declined to support your success in mobile. As we look into 2015, is there an emerging opportunity for margins to recover? Would, for instance, the centrality of succeeding in O2O that Robin was reflecting on lead to another year of investment? For that matter, are there any other initiatives that would create another year of investment in 2015? Thank you.
Hi, Alan. I can understand the question. I think we have outlined to everybody our strategic important areas, and these areas are at the early stage of their investments. We have established our vision to really connect people with services, and we are just at the very critical time to execute on that. As we have communicated consistently, we're very optimistic about our future, and we're very optimistic about the opportunities in front of us. We're right in the middle of the execution, and it's really not a quarters question or a near 2015 question. It's really the tremendous opportunities in front of us and what really calls for resources as well as commitment to execute on our plan and really win for the future. I have to say, for 2015, it's a little bit early to comment on that.
I think in my prepared remarks, what I wanted to really emphasize is we are excited about the opportunity, and the investment efforts are an ongoing effort as we go forward. Really not getting into the specifics of margin questions. You are already seeing that the investment we made on the mobile front are starting to paying off, and there are new initiatives that we have identified and are working on, and you are very aware of these strategic focus areas that we have communicated.
Thank you. Our next question comes from the line of Dick Wei from Credit Suisse. Go ahead, please.
Hi. Good morning. Thank you for taking my questions. I have a question on the mobile search front. Number one is that looks like we have a pretty good increase in mobile search traffic during the quarter. Maybe the monetization rate seems to be growing a little bit slower compared to the mobile traffic. I just wonder what the dynamics of that change and maybe related to that, how is the mobile search trend traffic growth coming along? Have you seen some deceleration of growth already? Are we still seeing triple digit growth now? Just maybe some sense of the overall mobile traffic growth picture will be helpful. Thank you.
Yeah, Dick, I think you are right. The traffic growth for mobile outpaced monetization capability growth in the past quarter, which I think is kind of expected. We don't want to over-monetize the
Mobile traffic at this time, because we think it's still early. We still see a lot of growth opportunity in terms of stickiness for mobile search. We are not going to publicize the exact growth rate for our search traffic, but I can say that we still expect mobile search traffic to continue to grow at a very fast rate. Like I mentioned before, monetization will continue to grow, and we will decide how aggressive we become on the monetization front on mobile.
Thank you. Next question comes from the line of Alicia Yap from Barclays. Go ahead, please.
Hi. Good morning and good evening, Robin, Jennifer, and Sharon. Thanks for taking my questions. My question is related to the Baidu CarLife and the O2O initiative. I think you highlighted that there's pretty good initial tractions and also from the customer account sign up. Just wonder if you could share with us, is there any difficulty or hurdle that the team or the sales team might have faced during the initial process of signing up customer or educate them? What is our expectations in terms of this Baidu CarLife to start to potentially maybe gaining some good real momentum into the next year, maybe potentially some revenue contribution? Thank you.
Yeah. Baidu CarLife is new. Like I mentioned, there are more than 400,000 accounts or customers already joined this new initiative. They represent a wide variety of industries. Every industry has their own unique requirements or unique needs, and we sometimes need to tailor-build things for each industry. We work with many of the value-added service providers who help us on that. This will take some time. It also will take us some time to understand different industry-specific requirements in order to serve those Baidu CarLife merchants better. Overall, we are very encouraged that this is the right direction. It really takes advantage of the nature of mobile and the nature of search and map products we have a strong hold of. On mobile, people tend to communicate more, and they can get instant feedback.
It's sensitive to location, to time of the day, and it's easier to manage the customer relationship. We are building all kinds of features and fine-tuning this kind of features for the merchants, and we hope, over time, the customer experience will become better and better. For those early adopters, they already see the results. They are already benefiting from this new infrastructure we set up.
Great. Thank you. Next question comes from the line of Jeong Seo from Macquarie. Go ahead, please.
Thank you for taking my question. Just following up on Baidu CarLife. I was wondering, what are some of the initiatives you have in a plan to roll out to sort of educate the consumers that the Baidu CarLife accounts actually exist? Though you have 400,000 accounts, many consumers may not know that the Baidu CarLife accounts exist in the Baidu ecosystem. Particularly, I think if I search on certain restaurants in Baidu itself without the app, I think the Baidu CarLife account is not popping up yet, at least the ones I tried. Thank you.
Yeah, Jeong, you're very right that we will need to step up the consumer education process, like when you type in certain name of the merchants, for example, a restaurant name. We will, in the future, have suggestions of those Baidu CarLife names, which means a name start with an @ sign in the search box. We will give consumer suggestions on those search queries when people are typing names of those merchants. That's just one way. There are many other ways. For example, the Discover button of the Mobile Baidu app. If a merchant has a Baidu CarLife account, we will label that in those recommended merchant lists. Similarly, on Baidu Map, we will also have a nearby function, and merchants listed there will have an opportunity to be marked as Baidu CarLife merchant.
We have lots of apps That's very sticky, very high frequency with a very high number of daily active users. We will use those apps to remind and to educate consumers to start to use Baidu CarLife.
All right. Thank you. Your next question comes from the line of Eddie Leung from Merrill Lynch. Go ahead, please.
Hi, good morning. Thank you for taking my questions. Just a question about mobile search marketing. I think a couple of your competitors recently talked about they are getting more aggressive in mobile search activities into next year. Especially, I think they are deepening their relationships with handset manufacturers. Some of them talking about having more assets in mobile OS. Some of them even though are thinking about strategic investments. Just wondering how you think about the competitive landscape in mobile search heading into next year, especially, whether you would change your pre-installation strategy in next year. Thanks.
I think for the mobile search, there are two very important fronts that we need to compete. One is the channel distribution, the other is the search quality. I think search quality is a more longer-term sustainable thing, by far, we have a clear lead on this. In the long run, I think mobile users will actively choose to download the Baidu app instead of the competition's app. Most of our investment in the future will be in the search quality front, and we think consumers will be able to tell. They are already able to tell the difference, but it's going to be easier for mobile users to tell the difference of Baidu search and other searches. Having said that, we will continue to invest in channel, in the pre-installation of handsets and other channels that can bring search traffic to us.
This front is quite competitive. There are always companies who think they have a chance in mobile search. We will continue to invest. Going forward, hopefully, we will see more organic traffic, we'll see more downloads from users who do not rely on or dependent on those pre-installation.
Thank you. Our next question comes from the line of Philip Wan from Morgan Stanley. Go ahead, please.
Hi, good morning, Robin, Jennifer, and Sharon. Thanks for taking my question. My question is about mobile search. Could you share with us the top spending categories on mobile search? Among these categories, how does click-through rate of CPC compare to the respective ones on PC? Lastly, based on the current run rate, when would you expect, on average, your mobile CPC or click-through to reach or exceed the PC level? Thank you.
To a large extent, our customer group are a same group, they really take advantage of this integrated bidding platform that advertise their service and products on both mobile and PC. For the categories on PC and mobile, the sectors are not that much different. For the particular sectors that contribute to the revenue, you are very aware of that our top 5 sectors kind of surround around medical services, education, travel, machinery, and some local services is emerging. Home refurbishment sectors like that is improving fast. To your first question, it's really not much different between PC and mobile in general. There are some categories that could be ranked higher than others just because of different features. To your second question, the CPC on mobile continues to have a gap compared to PC. Largely, it is one area that drives the overall monetization.
It's only just one element. The mobile overall business traffic continues to grow. The customers continue to embrace the mobile platform and really take advantage of it. We haven't seen meaningful improvements or changes of that. I think overall, the CPC is tracking. On the 3rd, the long time perspective, Robin, you want to comment on that?
Yeah. I think eventually, the CPC or our click-through rate on mobile will be able to be on par with desktop or sometimes surpass that of desktop. Already in certain categories or to certain customers, the CPC mobile is already higher than desktop. Overall, it's still lower, as Jennifer mentioned. The categories, although right now there's not much difference, but we see the trend that mobile, those more consumer-oriented services will become a larger percentage of our total revenue. Probably because the nature of mobile is people are using their fragmented time to do things, and on desktops, they will be more serious doing research type of work. I guess what I'm trying to say is that it's not really comparable, the CPC or clicks rate between desktop and the mobile, because over time, the industry mix could change.
Great. Thank you. Next question comes from the line of Chi Zhang from HSBC. Go ahead, please.
Hi. Good morning. Thank you very much for taking my questions. I have a question regarding spending again. This year, we've seen a large step-up in spending, mostly related to channel costs and pre-installation. I'm wondering if you can give an update on whether or not the pace of spending on pre-installation will sort of level out or decline. Relatedly, I'm wondering for the investments as it relates to O2O, does it represent sort of a step-up again of overall sort of SG&A spending, or is that sort of a moderation from sort of the current trend of SG&A? Thank you very much.
Overall, for this year, we invested in sales and marketing, and that falls into buckets of one is channel, one is promotional efforts, and I would say the third is branding efforts. Really focused on our key products like Mobile Baidu Maps, the mobile assistant, and also our securities products and browsers. With regards to going forward, the O2O investments, I would say we are just really starting to kick off the O2O investments. There are broader categories of services that we want to offer. There is education that we need to do for customers, our users, to really come on to our group buy platform. We're very pleased with the key strategic position we have on Maps, and we'll continue to invest in the overall O2O platform that would have both the service side as well as the fundamental map functionality.
Going forward, I would say we're only at the very early stage. We'll for sure step up the O2O investments.
Great. Thank you. Next question comes from the line of Ella Ji from Oppenheimer. Go ahead, please.
Thank you. Good morning, management. Can we also talk about your guidance for fourth quarter? In terms of both year-over-year and Q-on-Q growth, it came down a little bit from the prior two quarters. Just any color you can share, that would be helpful. Then as we look out into the next 12 to 18 months, I think, Robin, you have talked a lot about Baidu CarLife and O2O, but it seems that monetization, we may not see that to contribute meaningfully to the revenue. Is it fair to say that for the next 12 to 18 months, search, especially mobile, will continue to be the primary growth driver?
With regards to the guidance, I think we offered a very solid guidance, and I think it's very good guidance. If you look at the driver of the business, mobile has performed very well, and as we reported, it contributes to 36% of the revenue, and it continues to trend very well. If you look at the sequential growth, for the sequential growth, and I think compared to last year, last year, if you recall, in Q4, we did have completed some consolidation of M&A company efforts. Namely, we had the 91 Wireless acquisition, and we also had the Nuomi acquisition. Last year's sequential, as a reference, would be a very high base if you compare both on a sequential basis as well as on a year-over-year basis.
If you stripped out those kind of one-time and normalize these earnings, and I think our guidance is a very healthy and good guidance.
On the 12 to 18 month timeframe, you are right, we don't expect Baidu CarLife or O2O efforts to contribute significantly to the revenue part directly. Indirectly, I think it's going to be very good for our mobile ecosystem. We do expect these kind of initiatives will enhance our user experience. Because of Baidu CarLife, users will use Baidu Search more, use Mobile Baidu more. Because of our O2O, because of our group offerings, people will get this kind of services more easily from the existing Baidu apps, be it Mobile Baidu or Baidu Maps. We have this vision that in the PC era, search is trying to connect people with information, but in the mobile age, the goal of search is to connect people with services.
In order to achieve that goal, to realize that vision, we need to build our capabilities in O2O, and we need to build Baidu CarLife so that those merchants, especially those small local ones, will have a very strong, good mobile presence in the Baidu mobile ecosystem. I think this kind of offerings will become a meaningful driver in terms of user stickiness to further differentiate us from the competition in terms of mobile search. Although directly, there's not going to be a big portion of revenue contribution, we think this is strategically very important and will contribute to our overall revenue growth over the next year or two.
Thank you. Next question comes from the line of Wendy Huang from Standard Chartered Bank. Go ahead, please.
Thank you. My first question is how secure is Baidu in the medical search, what will be the potential impact from Qihoo to commercialize its medical search keywords in the near term? There's a housekeeping question on the operational cost. It seems that operational cost in both CNY term as well as a percentage term actually declined in the Q3. How should we think about this item then going forward? Thank you.
Okay. On the medical search question, I think in general, we've been in the search business for more than 10 years. The nature of the business is that advertisers or customers can never buy enough amount of traffic. Our bottleneck for growth is always traffic, not customer demand. I think because of that, our revenue is not going to be impacted by the change in competitive landscape.
With regards to operational cost, I would say take a combined look at operational cost and the content cost together. That would be helpful. Some of the elements that we do business for that generates revenue are categorized under operational cost. If you look at it closely, some are probably content in nature, and there is a small portion of that because the business is going to be more meaningful, and these are content in nature. It gets reclassed into a content cost. If you look at content cost and operations cost together, that would give you a better sense of what the cost is moving and how that's shaping.
All right, thank you. Next question comes from the line of Ming Zhao from 86Research. Go ahead, please.
Yes, thank you for taking my question. I have a question on the app distribution. You talked about 160 million daily app downloads. If we look at the handset market, Samsung is losing market share, Xiaomi, Huawei, Lenovo are gaining market share. These local brands, they all have their own app stores on their cell phones. People may just download apps from their app stores. Is that a concern to your app distribution business in your view? Is there any way that you could encourage users to download your apps to maintain that strength in the market? Thank you.
Ming Zhao, in my mind, there's strong synergy between app distribution and mobile search. At the end of the day, we are fundamentally all distribution, be it app distribution or webpage distribution. There are lots of ways for us to improve upon the user experience of app distribution. We already have the best user experience and largest traffic or app downloads as of today. Going forward, I think we will be able to differentiate the user experience from our investment in technology, in app distribution or webpage distribution. People come to us to look for things. It can reside in a webpage, can reside in a local merchant in the form of Baidu CarLife. It can reside in a native app. All of this should be served within one platform.
That's our vision, and I don't think any of the handset manufacturers have this kind of capability. Longer term, when users find that the experience in those other app markets are too far away from the quality of ours, I think users will make their own choice.
All right. Thank you. Next question comes from the line of Jin Yoon from Mizuho. Go ahead, please.
Hey, good morning, guys. Just on the traffic acquisition cost going forward. As the traffic shift continues to happen from PC to mobile, does the TAC cost trajectory change because of that? Second of all, regarding just revenues generated from the mobile side, does the agency fees or kickbacks to agencies change because of the fact that more revenues are coming from mobile? Thanks.
With regards to our traffic acquisition cost, I think you should expect that continues to trend up. The biggest driver of the increase in TAC is contextual ads, and contextual ads is growing nicely. It's both on the PC side as well as on the mobile side, and there is vast opportunity that we can explore to grow contextual ad business on the mobile front. Regardless, it's not really just PC specific. As I mentioned, you should expect TAC to continue to go up. For your second, we don't have a separate arrangement on mobile.
All right. Thank you. Next question comes from the line of Cynthia Meng from Jefferies. Go ahead, please.
Thank you, management. I have two questions. Within the 36% mobile revenue contribution, could management give some more color on the breakdown between mobile search, mobile game, and what drives the strong sequential growth, 35%? What is your outlook for mobile revenue contribution by year-end next year? As a follow-on, can management also talk about your content strategy? How should we think about the content cost going forward, given that iQIYI is increasing its in-house content production? Thank you.
On the mobile, overall mobile contributed to 36% of revenue, and the biggest fundamental driver is mobile search. Mobile game is a small part of the overall business, albeit it's growing very nicely year on year. If you look at sequentially the growth, we did mention that for this quarter, we're categorizing all of the tablets traffic as well as revenue to be mobile. It used to be belongs to PC. If you were to take another look at Q2, using this new classification, the Q2, the mobile revenue would be totaling to 33%. Sequentially, net, we had a step up of three points in terms of mobile revenue contribution. I think it paced well, and it's a nice increase. It's not totally because of mobile games. Our mobile search is the fundamental driver of the mobile business.
With regards to your content cost question, yes, I think you should expect content cost to increase. There is, on one angle, acquisition for professional content, and there's also the plan to do self-productions to generate exclusive high-quality content that will help us both build our business, generating revenue on the advertising side, as well as growing the subscription business for iQIYI. We should expect the content cost to ramp up over time with the self-production piece coming in.
Thank you. Next question comes from the line of Thomas Chong from Citigroup. Go ahead, please.
Hi, good morning. I have two questions. My first question is about management strategy with regards to international expansion and about the use of cash. Secondly, does management have any plan about the commission-based business model going forward? When should we expect this kind of business model to kick in the next couple of quarters? Thanks.
With regards to international plan, you would have been aware that we have launched our search service in several markets, and we are also doing products, mobile products in some of the emerging markets. What we see is there are countries with vast user base that continues to see faster growth for users to get into the internet, and particularly with mobile. I think there is a lot of opportunities for users to grow and newcomers and new services to get in. For those emerging markets with vast user base and with mobile as an opportunity, those would be markets that we would like to experiment to see that we have products that can cater to the local market's needs. Those would be the areas of us to get into markets internationally. I would say international markets and international efforts are medium longer term efforts.
We are getting into these markets at a very early stage, we will take our time to understand the market and to establish ourselves. With regards, I don't know if your question on use of cash is related to international. Obviously, we deploy our cash. We're pretty cash rich in terms of operating capabilities, and we can tap to the capital markets as we have done so in the past. We have much opportunities in front of us, today we use our own cash mainly to support these strategic initiatives. Our use of cash is really for us as a strategic tool to help us establish ourselves, deploy resources where we think is strategically important, and help us build for the future.
With regards to your commission business, I think, this is a business model and that could potentially kick in when we connect our users with services. We are at the very early stage to build that overall business, to shape it, to build the overall ecosystem, with a commission-based business model, over time, it could become a meaningful business model.
All right. Thank you. Next question comes from the line of Mark Chen from UBS. Go ahead, please.
Hi. Hello. Hi. My question is regarding your mobile search. Can management give more color on your search revenue growth, how much coming from the ARPU trend and how much coming from number unique customer from mobile?
I think right now the customer base between PC and mobile has a very high degree of overlap. The growth is driven by both ARPU and number of customers. We don't separate out the ARPU and the number of customers between PC and mobile. We think it's a one unified platform for customers to reach out to their targeted consumers.
All right, thank you. Our next question comes on the line of Piyush Mubayi from Goldman Sachs. Go ahead, please.
Thank you. I have two questions, if I may. Corresponding to the 36% revenue from mobiles, could you give us a sense of what the traffic was from both mobiles, in terms of the new definition that includes tablets, for the quarter? Second, just big picture, we're seeing a big difference between traffic usage at China Mobile between 4G and Wi-Fi, plus or Wi-Fi and then 3G. Are you seeing anything that's corresponding to a difference in paid click patterns for search between these two distinctly different customer bases? Thank you.
On the mobile traffic, we already said that it surpassed the traffic of PC, it represents over half of the total traffic, while the revenue represents about 36%. On the different internet environment, we don't have any insight right now on the different customer or user behaviors right now. Wi-Fi is the preferred environment for most of our applications. It's usually free and stable and fast, under 4G or 3G or even slower internet connections, users are much more sensitive to the bandwidth cost, they will use less of our services.
Great, thank you. Ladies and gentlemen, that's all the time we do have for today's conference. We'd like to thank you for your participation today. This now concludes the presentation. You may all now disconnect from the call.