Earnings Call: Q3 2014

Oct 30, 2014

Earnings release

Hello, and thank you for standing by for Baidu's 3rd 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 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, BARDAU'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 copy on our website, as well as on Newswire Services. Today, you will hear from Robin Lee, Baidu's Chief Executive Officer and Jennifer Lee, 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 Capital Law. Our earnings press release on this call include discussions of certain unaudited non GAAP financial measures. Our press release contains a reconciliation of unaudited non GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website atir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on the Baidu's IR web site. I will now turn the call over to Baidu CEO, Robin Lee. Hello, everyone. We delivered strong results this quarter. The top line continues to be robust, driven by our core search service. Mobile contributed 36 percent of our total revenues for the quarter. Our traffic continued to grow health driven largely by mobile this quarter mobile traffic surpasses PC traffic. Please note that prior to the water, iPad traffic and revenue were classified as part of PC. At iPads, as 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 on all tablets as mobile in the second quarter, our mobile revenue would have been 33%. Excluding IPAC revenue, in the second quarter, our mobile revenue was 30%. Baidu continues to enjoy clear dominance and onward and the upward growth momentum in the key mobile gateways of search, math and app distribution. And more than ever before, Baidu is putting together the strengths of this gateway products and the breadth of our portfolio to offer to users the best way Global enables us to play a broader role in a larger addressable market. O2O is perhaps the most exciting of cementing 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 expand 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 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 TC, we were limited to generating leads. But this 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. And we know what users need because the majority of Chinese Internet users tell us any 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 Connect. Baidu connect built upon live apps and it's a powerful tool for merchants that can bring a large scale of these 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 Connect account helps merchants reach new customers and maintain engagement with existing ones. Baidu Connect enables both pool through search as a general search or adding the app symbol before the real name service and landing directly on the Baidu Connect page and push as well as to the discover button in mobile Baidu or the nearby button in Baidu Maps. We the user has decided to follow a business or made a purchase, the merchant can reach out to the user individually or in groups. As the industry tailored user friendly click to action interface, We think the Baidu Connect account is how merchants will want to be represented on mobile with the app sign as a domain name like service for the mobile internet. While Baidu Connect is still in early phases of roll out, 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 comps, spanning verticals from Hospitality To Professional Services, comprising existing and new customers to Baidu Platform. For that connects users with housekeeping and domestic service providers launched at the beginning of October and saw their new mobile orders grow by 20% month on month. Four times higher than the 5% on Sanlam's growth rate prior to launching their Baidu Connect account. The portion of cloud home services repeat customers also increased from 30% to 40% of their customer base after launching off their Baidu Connect account. We are excited to broaden Baidu Connect's rollout to create tangible, positive value for an even larger set of merchants. Our experience is that in China, Britain, Malta business in place and are eager to work with internet companies, possibly even more so than their counterparts and more developed countries with entrenched industries and players already over 450,000 local merchants with nearly 2,000,000 storefronts across more than 300 Cities have worked with Naomi to attract new customers. With the new opportunities mobile presents, we can now connect not only with roughly 500,000 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 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 end market improvements in click page views. An instantaneous predictive feature like this is particularly challenging for Chinese search, with one of the reasons being diverse text input methods submitting file stroke input method and English. Our success, let's say, both to our longstanding leadership in natural language processing, machine learning and large scale network infrastructure. Continue to be the clear dominant leader in mobile search. And as mentioned at the beginning of the call, mobile traffic compressed of over half of search traffic this quarter. We continue to build the organic portion of our mobile search which compresses 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 odor 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, by due today, and we believe that in the next 5 years, over 50% of searches Welby's speech or image driven. Baidu has invested heavily in this cutting edge technologies and we are far ahead of the competition. Our global lead is especially here 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 banking app the old bit of search function, which required the user to select an image category, such as speech recognition, or OCR translation have been replaced become smart, visual search function We're now For example, a video search for a shirt, a blouse, a handbag or certain under category of items, well returned mobile commerce results for matching items. Aim the camera at a QR code and a well resolved to the corresponding link. Snap selfie and it will show you which library you'll also 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 being 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 helped push to users personalize the recommendations and promotional offers based on the user's interests, time of the day and location. Version 6.0 is also optimized for Baidu Connect. Baidu mobile map is the clear dominant player in the market with over 240,000,000 monthly active users. Up from over $200,000,000 in Q2 and growing nearly 70% year on year. We added great new features in our monthly map app updates, including better navigation and reach 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 strong 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 hugely successful promotional campaign with Misonas China that panned a number of our mobile products and highlighted the breadth of our product portfolio. McDonald's China was a closely listed map and normie and leveraged Baidu products such as Mobile Baidu, Taiwan 2391 wireless among others. The soft serve ice cream corn product promotions through Baidu math brought over 20,000,000 visits to the promotions homepage and 70,000,000 views in social media, driving user awareness not only to McDonald's China products, but also to Baidu Connect, which users assessed both by jumping directly to the promotion page from the product icon on maps and through the personalized push offering on the nearby function. Also for the first time, McDonald's China ran a nationwide offer with a group buy platform. And worked with Sonomi as a exclusive partner. In mass distribution, we continue to solidify our leading position. During the third quarter, we distributed an average of 160,000,000 apps on a daily basis, up from 130,000,000 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 like app and richer 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 3 60 Cities. We have continued to push quality standards higher for mobile landing pages and have provided numerous free tools to our customers to continue key competitive advantages and gives us the breadth and depths to reach new existing customers and swiftly execute on key initiatives. Our nearly 20,000 persons from direct sales force and broad reseller network cover well over 3 100 Cities in China. Turning now to ITE, ITE continued to show great traction in Q3 and continues to lead in key metrics. We believe IT 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 up Yachinjiang on board. A long time veteran of Microsoft both in China and in the U. S, Yachin joined us in September as president in charge of new bins. 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 given by due to unrivaled trends across the mobile internet ecosystem and the combination of these unique assets placed with 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 financial. 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 master 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 LBL which I do connect is a key part of. We are committed to fulfilling our vision and 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 RMB13.5 billion, representing a 52% increase year over year. During the third quarter, Baidu had approximately 516,000 active online marketing customers, a 11% increase from the corresponding period in 2013 and a 6% increase from the previous quarter. Revenue per online marketing customer for the funding period in 2013, an increase of 7% from the previous quarter. Traffic acquisition cost as a component of cost of revenue in Q3 was $1,700,000,000 or 12.9 percent of total revenues compared to 11.7% in the corresponding period in 2013 12.7 percent in the second quarter of 2014. The increase reflects increased contribution of contactor apps, mobile, and promotion of Hao 123. Bandwidth and depreciation cost as a percent on revenue in Q3 were 5.6% and 3.8%, respectively, compared to 5.84.2 percent in the corresponding period in 2013. Content cost as a component of cost or revenue or 498,000,000, representing 3.7 percent of total revenue. Compared to 2.5 SG and A expenses in Q3 were $2,700,000,000, a increase of 95% year on year. The increase was mainly due to an R and D expenses in Q3 were $1,800,000,000, an increase of 68% over the corresponding period in 2013. The increase was primarily due to an increase in the number of RND personnel. Share based compensation expenses which were allocated to related operating costs and expense line items increased in aggregate to RMB234 1,000,000 in the third quarter from 143,000,000 in Q3 2013. SBC increase due to more shares being granted to Baidu employees. Operating profit for Q3 was $3,900,000,000, an increase of 17% over Q3 2013. Total headcount on consolidated basis, including domestic 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 And D headcount. Income tax expense was $657,000,000 for the 3rd quarter. The effective tax rate for the 3rd quarter was 15.5%, compared to 16.3% in Q3 2013. Net income attributable to Baidu for Q3 was RMB3.9 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 RMB 4,100,000,000, 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 11.7211.67 respectively. As of Q3 2014, the company had cash, cash equivalents and short term investments of 51,300,000,000. Net operating cash inflow and the capital expenditure for the 3rd were RMB 4,900,000,000 RMB 1,400,000,000, 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 RMB13.85 1,000,000,000 $14,250,000,000, representing a 45.5 to 49.6% year over year increase. Please note this forecast reflects Baidu's current and preliminary view and is subject to please go questions. After your first question But your first question comes from the line of Alan Halewell 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 and mobile. As we look into 2015, is there an emerging opportunity for margins to recover or would, for instance, the centrality of succeeding an O2O that Robin was reflecting on, lead to another year of investment or 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, 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 to people with services, and we are just at the very critical time to execute on that. As we have communicated consistently, we're 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 quarter's question or a near like 2013s question. Is really the tremendous opportunities in front of us and what really cause for resources as well as to execute on that plan and really win for the future. So it's, I have to say, for 2014, 2015, it's early a little bit early to comment on that, but 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. So really not getting into the specifics of margin questions. We are, 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 these FOCO strategic focus areas that we have communicated. Thank you. Your next question comes from the line of Dick Wei from Credit Suisse. On the mobile search front. Number 1 is that it looks like we have a pretty good increase in mobile search traffic during the quarter. Maybe the monetization rate seems to be up growing a little bit slower compared to the mobile traffic. I just wonder what dynamics of that change? And maybe related to that, how is the mobile search trend traffic growth coming along? Have you some deceleration of growth already. Are we still seeing like triple digit growth now? Just maybe some sense of the overall mobile traffic growth picture will be helpful. Thank you. Yes. I think you are right. The traffic growth for mobile outpaced monetization capability growth in the past quarter, which I think is kind of a affected. We don't want to over monetize the mobile traffic at this time because we think it's deal early. We still see a lot of growth opportunity in terms of the stickiness for mobile search. We are not going to, to publicize the growth rate, 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. And like I mentioned before, manualization will continue to grow and that we will decide how aggressive we become they turn prompt on mobile. Thank you. Your 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 Connect and the O2O initiative. I think you highlighted that I think there's pretty good initial traction and also from customer account sign up. So 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 educating them? And what is kind of like our expectations in terms of this Baidu Connect to start to potentially maybe gaining some good real momentum into the next year, maybe potentially some revenue contribution? Thank you. Yes, Baidu Connect is new. Like I mentioned, more than point or silent accounts or customers already joined in this new initiative. But they represent a wide variety of industries. Every industry has their own unique requirements or unique needs. And we sometimes need to tailor built things for each industry. And we work with many of the value added service providers who help us on that, but this will take some time. It also will take us have time to understand different industry, specific requirements in order to serve those vital connect merchants better. But overall, we are very encouraged that this is the right direction. It really takes advantage of the nature of mobile and of nature of third and map products, we have a stronghold off. Our mobile people tend to communicate more and they they can get instant feedback. It's sensitive to the location, to time of the day, and it's easier to manage the customer relation ship. So we are building all kinds of features and fine tune these kinds of features for lumber cans. And we hope, over time, the customer experience will all become better and better. For those early adopters, they already see the results they are already benefiting from this this new infrastructure we set up. Great. Thank you. Your next question comes from the line of Jingxiao from Macquarie. Go ahead please. Thank you for taking my question. Just following on Baidu Connect. I was wondering what are some of the initiatives you have in a plan to roll out to sort of educate the consumers, the Baidu Connect accounts actually exist, do you have 400,000 accounts, many consumers may not know the Baidu Connect account existing in the Baidu ecosystem, particularly I think if I search a certain restaurant in Baidu itself with other apps. I think the Baidu Connect account is not popping up yet. At least the ones I tried Thank you. You're very right that we will need to to step out 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, some Baidu cat names, which means a name starts with an at sign. In the search box. So we will keep our consumer suggestions on those search queries. People typing names of those merchants. That's just one way. There are many other ways, for example, on the discover button of the Baidu mobile Baidu app, If a merchant has Baidu Connect account, we will enable that in those recommended merchant list. And similarly, on Baidu Map, We will also have a nearby function and, merchants listed there while having opportunity to be marked as Baidu Connect merchant. So we have lots of apps that's very sticky, very high frequency with their high number of daily active users. And we will use those apps to remind and to educate consumers to start use Baidu Connect. All right. Thank you. Your next question comes from the line of Eddie Young 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 a competitive, recently, talked about they are getting more aggressive in mobile search expertise in to the year, into next year. Especially, I think they are deepening of their relationships with our handset manufacturers. So I've been talking about, having, more efforts in mobile OS. So I'm even thinking about strategic investments. So just wondering how you think about the cognitive landscape in mobile search heading into next year, especially, whether you would change your print relation strategy in next year? Thanks. I think for the mobile search, there are 2 very important fronts that we need to heat. One is the channel distribution. The other is the search quality. I think search quality is a more longer term sustainable thing. And we, by far, we have a peer lead on this. And in the long run, I think mobile users, well, actively choose to download the Baidu app instead of the competition tab. So 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 they will be 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 presale installation of handsets and other other channels that can bring sort of traffic to us. This front is quite competitive. There are always companies who think they have a chance in mobile search. So we will continue to invest. But going forward, hopefully, we will see more organic traffic. We will see more downloads from users who do not rely on or dependent on those pressing installation. Thank you. Your next question comes from the line of Philip Wang from Morgan Stanley. Go ahead please. Good morning, Robin, Jonathan 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? And among these categories, how does click through rate of CTC compared to the respective ones on PC see. Lastly, based on the current run rate, when would you expect on average your mobile CCC or click through to reach or exceed the PC level? Thank you. To a large extent, our customer group, our same group And they really take advantage of this integrated bidding platform that, advertise their service and products on both mobile and PC. So for the categories on PC and mobile, the sectors are not that much different. And for the particular sectors, that contribute to the revenue, you're very aware of that our top 5 sectors kind of surround around medical services education, travel, machinery, and, you know, some local services is emerging. And home refurbishment sectors like that is improving fast. And so 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 elements, the mobile overall business traffic continues to grow. The customers continue to embrace the mobile platform and really take advantage of it. And we haven't seen meaningful improvements or changes of that. But I think it's overall the CPC is tracking. And on 3rd, the long time perspective, something wrong to comment on that. Yeah. I think eventually the CPCO or click through rate on mobile, we'll be able to be on par with desktop or sometimes surpass that up desktop. Already in certain categories or to certain customers, the CPC mobile is already higher. Than desktop. But overall, it's still lower as Jennifer mentioned. And the categories, although right now, there's not much difference, but we see the trend that mobile, more those more consumer oriented services, well, become a larger percentage of our total revenue, probably because the nature of mobile is people using their fragmented time. To do things. And on desktop, they will be more serious doing research type of of work. So I guess what I'm trying to say is that it's not really comparable that the CPU see or optics rate between the top and the mobile because the over time, the industry mix could change. Right. Thank you. Your next question comes from the line of Xi Zhang from HSBC. Go ahead please. Hi, good morning. Thank you very much for taking my questions. I have a question regarding spending again. So this year, we've seen a large step up in spending mostly related to channel costs and free installation. So I'm wondering, you can get an update on whether or not the pace of spending on translational door to the level out or decline. And relatedly, I'm wondering for the investment as it relates to O to O, has ever present sort of a step up, again, of overall sort of G and A spending or is that sort of a moderation from sort of the current trend of SG and A? Thank you very much. Overall for this year, we invested in sales and marketing and that falls into buckets of, 1 is channel, 1 is promotional efforts. And I would say the 3rd is branding efforts. And really focused on our key products, like the mobile Baidu, Baidu Maps, the, mobile assistant, and also our securities products and browsers. With regards to going forward, the auto investments, I would say, you know, we are just really starting to kick off the auto investments There are broader categories of services that we want to offer. There is education that we need to do for, our, for customers, our users to really come up to our group buy, platform. We're very, you know, pleased with the key strategic position we have on maps and we'll continue to invest in the overall o to o platform that would have both the service side as well as the fundamental, map functionality. Going forward, I would say, you know, this is we're only at the very early stage. We'll for sure to step up, the eligible investments. Great, thank you. Your next question comes from the line of Allen Gee from Oppenheimer. Go ahead please. Also talk about your guidance for 4th 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. And then as we look out into the next 12 to 18 months. I think, Robin, you have talked a lot about Baidu Connect and O to own, but it seems that monetization, we may not see that, to contribute meaningfully to the revenue. So is it fair to say that for the next 12 to 18 months, Ray Mobile and will continue to be the primary growth driver? With regards to, the guidance, I think we offered a very solid guidance, and they were very I think it's a very good guide If you look at, you know, the driver of the business, mobile has performed very well. And as we reported, it contributes to 36 percent of the revenue. And it continues to trend very well. If you look at the sequential growth. So the sequential growth, and I think compared to last year, last year, you recall, in Q4, we did have completed some consolidation of M and A namely, we had the 91 wireless acquisition and we also had a normal acquisition. So 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. So if you stripped out those kind of one time, and to normalize this 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 Connect or O2O efforts to contribute significantly to a revenue part directly. But indirectly, I think it's going to be very good for our mobile ecosystem. We do expect this kind of initiatives, well enhance our user experience people will because of Baidu Connect, users will use Baidu search more. Mobile by no more. Because of our O2O, because of our group buy offerings, people will get this kind of services, more easily from the existing, I do app be it mobile Baidu or Baidu Metups. We have the suspicion that in the PC era search is trying to connect people with information, but in the mobile age search, the goal of search is to connect people, with services. And in order to achieve that goal, to realize that mission, we need to be our capabilities in O2O and we need to be able to connect so that tents, especially those small local ones, will have a very strong, good mobile presence in the Baidu mobile ecosystem. I think, this kind of offerings well become a meaningful driver in terms of user stickiness to further differentiate us from the competition in terms of mobile search. So, 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 2. Thank you. Your next question comes from the line of Wendy Huang from Standard Chartered Bank. Go ahead please. Thank you. My first question is how secure it by doing the medical search and what will be the potential impact from Chihu is Chihu is to commercialize this medical search keyword in the near term. And there's a housekeeping question on the operational cost It seems that operation costs in both dollar term as well as the percentage term actually declined in the Q3. How should we think about this item going forward? Okay. Other medical search question, I think in general, being aimed at the search bins for more than 10 years. The nature of the bins is that advertisers or customers can never buy enough amount of traffic. Our bottleneck for growth all this traffic, not customer demand. I think because of that, our revenue, it's not going to be impacted by the change in competitive landscape. And with regards to operational cost, I would say it takes 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 Generali's revenue categorized under operational cost And if if you look at it closely, some are probably content in nature and that there is a small portion of that. Because the business is going to be more meaningful and these are content needed later. It gets reclassed into our content cost. So 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. Your next question comes from the line of Meng Zhao from 863 search. Go ahead please. Yes, thank you for taking my question. I have a question on the app distribution. So you talked about 160,000,000 daily, daily after the downloads. But if we look at the handset market, right, you know, Samsung's losing market share, but Xiaomi Huawei, the Norbora gaining market share. And they all have, in addition, these local brands They all have their own app stores on their cell phones. People may just download apps from their app stores So is that a concern to your ampe distribution business in your view? And is there any way that you could encourage users to download your apps, to maintain that strength in the market. Thank you. I mean, in my mind, there's strong synergy between app distribution and the mobile search. At the end of the day, we are fundamentally or distribution, be it app distribution or for web page distribution. So, there are lots of ways for us to improve upon the user experience of app distribution. And we already have the best user experience and largest traffic or app downloads as of today. But going forward, I think we will be able to differentiate the user experience from our investment in technology in in distribution, I mean, app distribution or web page distribution, people come to us to look for saying It can result in a web page, can result in a local merchant in the form of Baidu Connect it can result in being a native path. So all of this should be served within one platform. So 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 they're experiencing those other markets are too far away from the quality of ours. I think users well make their own choice. All right. Thank you. Your next question comes from the line of Jin Yoon from Mizuho. Go ahead please. Hi, good morning guys. Just on the traffic acquisition costs going forward. As the traffic shift continues to happen from PC to mobile, does the DAC cost trajectory change, because of that? And second of all, regarding, just kind of 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 traffic acquisition cost, I think you should expect that continues to trend up The biggest driver of the increase in tag is contextual ads and contextual ads is growing nice It's both on the PC side as well as on the mobile side. And there's vast opportunity that we can explore to grow contextual ad business on the mobile front. So regardless, it's not really just PC specific. And as I mentioned, you should expect attack to continue to go up. And for your second, I don't think we don't have a separate arrangements 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 percent mobile revenue contribution, could management give some more color on the breakdown between mobile search, mobile games? And what's drives the strong sequential growth, 35%. And what will be the what is your outlook for mobile revenue contribution by year e/nd next year? And as a follow on, can management also talk about your content strategy, how should we think about the content costs going forward given that ITE is increasing its in house content for it. Thank you. Yeah. On the mobile, overall mobile contributed to 36 percent of revenue, And the biggest of fundamental driver is mobile search. Mobile game is a small part of the overall business Albyte is growing very nicely year on year. If you look at sequentially, the growth, we did mention that for this we're categorizing all the tablets traffic as well as, as revenue to be mobile. It used to be be lost to PC. So if if you were to take another look at Q2, using this new classification, the Q2's mobile revenue would be totaling to 33%. So sequentially, net net, we had a step up of 3 points, in terms of mobile revenue contribution. And I think, it paced well. And it's, it's, 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 one angle acquisition for professional content. And there's also the plan to do self productions to generate exclusive high quality contents that will help us both build generating revenue on the advertising side as well as growing the subscription business for ITE. So we should expect the content cost to ramp up over time with the of production peak coming in. Thank you. Question comes from the line of Thomas Chung from Citigroup. I have two questions. My first question is about management strategy with regards to international expansion and about the use of cash. And secondly, the management has any pain about the commission based business model going forward? And when should we expect this kind of business model to kick in in the next couple of quarters? Thanks. Yes. With regards to international and you would have been aware, that we have launched our service in several markets And we're 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, and I think there is a lot of opportunities for users to grow and newcomers and new services to get in. So for those emerging markets with vast user base and with mobile as an opportunity, those would be that we would like to experiment to see that we have, products that cater to the local market's needs. So those would be the areas of us to get into markets internationally. I would say international markets and international efforts our medium longer term efforts. We are getting into these markets at a very early stage and we will take our time to under in the market and to establish ourselves. With regards to I don't know if your question on use of cash is related to international, Obviously, we deploy our cash. We were 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. And today, we use our own cash mainly to support these strategic initiatives. And 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 with our 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, And, with with the commission based business model, over time, it could become a meaningful business model. All right. Thank you. Your next question comes from the line of Mark Chen from UBS. Go ahead, please. Hi. My question is regarding your mobile search. Can management give more color on the how how you start revenue growth, how much coming from the ARPU trend and how much a number of unique customers from mobile? I think right now, the base between PCN and mobile has a very high degree of overlap. And the growth is driven by both think the ARPU and a number of customers. But, we don't separate out the ARPU pool and a number of customers between PC and Tom Bollay. And we think it's a one a unified platform for customers to reach out to their targeted consumers. Thank you. Your next question comes from the line of Piyush Mubay from Good Sorry, Goldman Sachs. Go ahead, please. Thank you. I have two questions, if I may. Corresponding to the 36 percent revenue from Mervl's. Could you give us a sense of what the traffic was from both Mervl's in terms of the new definition that includes tablets for the quarter? And second, just big picture, we're seeing a big difference between traffic usage at China Mobile between 4G and Wi Fi. Class or Wi Fi and then 3J. Are you seeing anything that's corresponding to a difference in paid click, patterns for sale? Between these two distinctly different customer bases? On the mobile traffic, we already said that it surpassed the traffic of PC. So it represents over half of the total traffic while revenue represents about 36%. On the different internet involvement, We don't have any insight right now of the different customer or user behaviors right now. But the Wi Fi is the preferred enrollment for most of our API patients, it's, they're already free and, stable and fast. But under 40 or 50 or even slower internet connections, users are much more sensitive to the bandwidth cost. So we were used 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.