Hello, thank you for standing by for Baidu's first quarter 2014 earnings conference call. At this time, all participants are on a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Ms. Sharon Ng, Baidu's Senior Manager of Investor Relations.
Hello, everyone, welcome to Baidu's first 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 statements except as required under applicable law. Our earnings press release and this call includes 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, thanks for joining today's call. We had a great start to the year, delivering accelerated year-over-year revenue growth for the third consecutive quarter. The strong performance was driven mainly by our core search business, with mobile revenue maintaining strong momentum. This year, we continue to invest heavily to take Baidu's business to the next level. As we outlined last quarter, we think of our opportunity in terms of five strategic areas: search, mobile and cloud, location-based services, consumer products, and international. In addition, we have invested entities in important growth sectors, most notably Qunar and iQIYI, that are already recognized leaders. These investments will pay off over different time horizons. In each case, we believe the long-term opportunity is huge.
For a while now, we've been witnessing the Internet taking a bigger slice of the traditional economy and broadening its role across a multitude of sectors, like media, retail, travel, financial, and local services. In China, with its young market economy and less entrenched, less competitive traditional industries, this is happening at much greater speed than in the more developed economies. In parallel, the Internet is playing a bigger role in people's daily lives, with mobile enabling users to stay connected anytime, anywhere. For Baidu, this is an incredible opportunity to fully realize the potential of our broad ecosystem, spanning media, social, online tools, and all kinds of verticals. As a leading cross-platform information gateway with a core of world-class technology, more than ever before, we are connecting intent to action and taking users all the way from search query to physical or virtual fulfillment.
With that, let's take a closer look at some of the recent key developments, starting with our core search offering. We are encouraged to see both PC and mobile search traffic maintaining solid growth. With our combined share of PC and mobile search page views standing at 73%, according to Analysys International. In Q1, mobile search was again the main driver of page view growth. We expect it to surpass PC as the biggest source of search traffic later this year. The overall search market in PC as well as in mobile still has much more room to expand. In mobile search, we are the clear market leader and continue to gain share. In Q1, we reached 160 million daily active mobile search users, up from 130 million two quarters ago, as we continue to improve our offering and strengthen channel distribution.
On the product end, we generated faster load speeds and further optimized ad formats on search page, making click-to-call, click-to-download buttons, as well as location extensions, more prominent. We also brought to the mobile channel customized vertical results for healthcare, e-commerce, and education previously available only on PC. Since the end of last year, our flagship search app has been the largest and fastest-growing source of mobile search traffic and daily active users. We've now made the experience richer and more personalized. Users can now add cards, hot trending topics, video, and other content to the search homepage, all of which is constantly refreshed. As part of our Light App initiative, the search app now integrates functions like Baidu Wallet, helping to bring users further into the Baidu ecosystem. On the monetization front, Baidu maintains the best platform to obtain cross-channel leads.
Pay clicks, click-through rates, and CPM all grew nicely year-on-year in Q1, driven by our investments in advanced technologies like deep learning and natural language processing. This quarter, we introduced an exciting new feature to our bidding system. Customers can now target users in specific cities as opposed to just at the provincial level. More targeted ads help drive higher ROI for customers and better experience for users. Mobile gave us key information like user location and context, which enables us to target ads more efficiently. We continue to receive great feedback from customers who are seeing strong ROI from the mobile channel. Key metrics such as the % of customers with mobile-optimized landing pages, % of revenue from mobile landing pages, and landing page quality are all trending higher.
We are pleased with the progress we have made on mobile monetization so far, but we are just getting started. As the mobile ecosystem continues to mature and our customers see stronger and stronger ROI from mobile, we expect that the CPC gap between PC and mobile will continue to narrow. On the trust and safety front, our Plus V verification program is now fully rolled out, and now only customers that have Plus V verification can advertise on our search page. We expect customer growth to resume in Q1. By the end of 2013, Baidu had already become the leader in app distribution in China. In Q1, we extended our lead, surpassing 100 million app downloads on a daily basis. Just two quarters into our integration with 91 Wireless, Baidu's app distribution capability has made huge steps forward.
As the integration continues, we expect to realize significant value in this important space. Our personal cloud storage product, which provides a seamless user experience across devices, has also demonstrated strong momentum. In Q1, it had 160 million registered users, which is a 60% increase from just two quarters ago. Over the same period, the total number of files uploaded more than quadrupled as users trusted Baidu Cloud with their files across a wide range of formats, from music playlists and videos to photos and documents. LBS and online to offline represents a huge opportunity for Baidu. For our existing customer base of large to small and medium-sized enterprises and new potential customers such as local merchants, Baidu's capability to connect query to fulfillment is an extremely powerful value proposition.
In Q1, Baidu's LBS offering continued to make impressive progress, with our mobile maps extending its lead by gaining market share. Monthly active users on Baidu Maps for mobile grew to nearly 190 million, a 30% increase from the previous quarter. The number of transactions on our map platform, including hotel bookings, movie ticket purchases, group buying, and taxi hailing, grew by over 80% quarter on quarter. We are constantly expanding our point of interest database, already the largest in the industry, and adding ever richer content. In the first quarter, we merged our Baidu group buying platform with Nuomi, rebranding the platform as Baidu Nuomi. We have seen solid growth throughout the integration process. Baidu will continue to leverage our vast traffic resources and extensive sales force infrastructure to help Nuomi scale up quickly.
We are confident that Baidu Nuomi is in a great position to lead China's growing group buying market. In consumer products, this quarter, we consolidated our online games operations, combining Duoku and 91 Wireless. Our gaming business is growing quickly, and we expect its contribution to grow more meaningful in quarters ahead. This quarter, we also added more high-quality content to our online literature operations, integrating Zongheng, one of China's largest online literature sites, onto the platform. Now to update you on our online video operations. iQIYI's Q1 performance was very impressive, with the hit show, "I Promise You" and the Korean drama, "My Love from the Star," helping to make it China's market leader. iQIYI is now number one in PC monthly and daily unique visitors, and number one in both PC and mobile by monthly time spent, according to iResearch .
The long-term prospects for online video and iQIYI are very attractive, and we remain supportive of the platform. To sum up, the year has gotten off to a strong start, and everything we've seen keeps us excited about Baidu's prospects for continued growth. We're seeing terrific returns on the investment we've made. They've enabled us to tap into rich seams of opportunity, and we will keep investing in key areas to fully exploit those vast opportunities. Meanwhile, we continue to lengthen our lead as the dominant cross-channel information gateway. Our core strength in technology powers a platform that's truly indispensable to China's internet users, an integral part of their digital life, and becoming ever more integral as Baidu bring users further into our ecosystem. With that, I'll turn the call over to Jennifer for a rundown of our financial performance in Q1.
Thank you, Robin. Hello, everyone. We're excited to have started 2014 with a strong set of results, with growth from our core business driving robust top-line growth. Integration of our acquired businesses, 91 Wireless and Nuomi, progresses smoothly, and those businesses, along with our invested entities, are contributing to the overall picture. The Baidu ecosystem today is broader than ever. While we continue to invest in improvements to our technology, it remains equally important to drive awareness and adoption of our existing services. As such, spending on sales and marketing, R&D, and the TAC increased in the first quarter. We step up our marketing efforts around the Chinese New Year period to promote our mobile products. These sorts of investments are absolutely necessary and directly contribute to the growth of our business. To support our growth momentum, we remain prepared to deploy cash aggressively where needed.
Now, moving to the financials. All monetary amounts are in RMB unless otherwise stated. For the first quarter, total revenues were RMB 9.5 billion, representing a 59% increase year-over-year. During the first quarter, Baidu had approximately 446,000 active online marketing customers, a 9% increase from the corresponding period in 2013 and a 1% decrease from the previous quarter. Revenue per online marketing customer for the first quarter was RMB 20,900, a 44% increase from the corresponding period in 2013 and flat from the previous quarter. Traffic acquisition cost as a component of cost of revenue in Q1 was RMB 1.2 billion or 12.4% of total revenues, compared to 10.2% in the corresponding period in 2013. The increase was mainly due to increased contextual ads contribution and Hao123 promotions through our network.
Bandwidth and depreciation costs as a percent of revenues in Q1 were 6.8% and 4.5%, respectively, compared to 6.8% and 5.6% in the corresponding period in 2013. Content costs as a component of cost of revenues were RMB 394 million, representing 4.1% of total revenues, compared to 1.6% in the corresponding period in 2013. This increase was mainly due to iQIYI's increased content cost. Selling, general, and administrative expenses in Q1 were RMB 2 billion, an increase of 137% year-over-year. The increase was mainly due to an increase in promotional spend, especially for mobile products. R&D expenses in Q1 were RMB 1.3 billion, an increase of 57% over the corresponding period last year. The increase was mainly 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 RMB 169 million in the first quarter from RMB 111 million in the corresponding period last year. SBC increased due to more shares being granted to Baidu employees. Operating profit in Q1 was RMB 2.4 billion, an increase of 7% over Q1 2013. Total headcount on a consolidated basis, including invested entities, was about 34,600 as of the end of Q1. This represents an increase of 9% as compared to the period last quarter. Income tax expense was RMB 130 million for the first quarter. The effective tax rate for the first quarter was 16.1% compared to 16.2% in Q1 2013. Net income attributable to Baidu for Q1 was RMB 2.5 billion, a 24% increase from the corresponding period in 2013.
Basic and diluted earnings attributable to Baidu per ADS for the first quarter amounted to 7.24 and 7.21 respectively. Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure for Q1, was RMB 2.7 billion, a 26% increase year-over-year. Basic and diluted earnings attributable to Baidu per ADS, excluding share-based compensation expenses, both non-GAAP measures, were 7.72 and 7.69 respectively. As of Q1, the company had cash equivalents, and short-term investments of RMB 39.7 billion. Net operating cash inflow and capital expenditures for the first quarter were RMB 3.6 billion and RMB 1 billion respectively. Now let me provide you with our top-line guidance for the second quarter of 2014. We currently expect total revenues for the second quarter to be between RMB 11.82 billion and RMB 12.11 billion, representing a 56.3%-60.2% 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. This concludes our prepared remarks. Operator, please go ahead. Operator, please go ahead with the questions.
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 the first question has been addressed. To queue for a question today, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question today comes from the line of Philip Wan from Morgan Stanley. Philip, please go ahead.
Hi, good morning. Thank you for taking my question. My question is looking at the average revenue per customer, which has been expanding pretty strongly over the past couple of quarters. I wonder if you could give us more color about the drivers behind. In particular, what has been the trend for your PC search monetization?
Overall, the number of the customer base and our pool contributes to the top-line growth. Over the past few quarters, as you know that we have been strengthening the quality of our customer base with the Plus V initiative. With a higher quality of customers and really good ROIs, that's really the true merit of the platform, our pool continues to grow strongly. The customers' adoption of the mobile bidding, the mobile search product is really terrific, and the mobile revenue growth is really the stronger and the fastest growth sector. Overall, the PC monetization capabilities continues to improve and stepping up and both the PC front and the mobile front, the monetization capability has enhanced over the quarters. I would say the PC monetization progress is also very impressive.
Your next question today comes on the line of Eddie Leung from Merrill Lynch. Eddie, please go ahead.
Hey, good morning, Robin, Jennifer, and Sharon. I have a question about your mobile pre-installation program. I'm wondering if you can give us more color on the long-term effectiveness of your pre-installation program. To be more specific, do you think pre-installations will always be needed given users are changing their handsets quite frequently? Is there any evidence that you have seen suggesting that pre-installations and then the follow-up user experience could actually increase the so-called repeat customer rate? Any color would be helpful on that front. Thanks.
Eddie, I think the mobile market and mobile industry continue to evolve very quickly. In the past couple of years, most of the users when they switch phones, they switched from function, from feature phones to smartphones. During those kind of process, pre-installation is very essential. We need to get users to have a chance to try our apps, our services. Going forward, more of the users will switch phones from one smartphone to the next smartphone. Many of them already are familiar with services or apps we offer, a brand is going to play a bigger role in their future decisions to Use all kind of apps and services. Yes, I think going forward, pre-installation may not be as important as it was before, but branding, quality of services will be increasingly more important to us.
Thank you. That's very helpful.
Your next question today comes on the line of Alan Hellawell from Deutsche Bank. Alan, please go ahead.
Thank you. I hope you can hear me. There's a weak connection on my side. You mentioned earlier that the sheer range of maps-based transactions that have emerged, such as for travel bookings, group buying, et cetera. Can you talk about the GMV that has occurred on Baidu Maps in the first quarter, and what we can expect for full year 2014? Thank you.
Yeah. Alan, you were kind of breaking up, but I kind of got the question. Like I said, during the prepared remarks, the transaction volume on the Baidu LBS platform has growing very significantly, roughly 80% quarter-over-quarter. We are very happy about the progress. We choose not to disclose the GMV at this point because it's relatively early. We believe we are roughly number 3 in the group buying market right now, but quickly catching up. We have a very strong platform. Lots of users come to Baidu through Baidu Search, Baidu Maps, and many other apps and services. They search for local related information. We need to build the capability to satisfy those kind of needs, not just in terms of information, but also services. Baidu Nuomi and the overall LBS related services is trying to meet those kind of needs.
Right now, we have lots of room for improvement in terms of operation efficiency. Going forward, that will be the focus, too. We will continue to give you updates on the status, and when appropriate, we are disclose the GMV.
Thank you.
Your next question today comes on the line of Dick Wei from Credit Suisse. Dick, please go ahead.
Great. Thank you for taking my questions. I have questions on the PC and mobile traffic. Wonder if you can share with some of the new mobile installation what kind of organic traffic versus inorganic traffic, if you would, traffic contributions on the mobile front as well as maybe on the PC side with the expanded the affiliate, the contextual search program. Thank you.
Yeah. I think on PC, organic represents a super majority of the overall traffic on mobile because the early stage nature of the market, we had a lot of pre-installations. We also rely on third-party channels like third-party browsers to drive traffic. It's a little bit mixed, the largest traffic source on mobile, search traffic source on mobile, also comes from the Baidu search app which is part of the organic traffic. We also have organic traffic from other channels including browsers. Users may explicitly choose baidu.com as their search tool choice. We are quite happy with the progress we have made for mobile search. We believe the organic part will continue to grow at a faster pace.
Great. Just a quick follow-up. Wonder if you can share the mobile search traffic ratio out of the total traffic?
It is growing quite quickly. It is not larger than the PC traffic yet, but we do expect mobile will surpass PC sometime this year.
Great. Thanks a lot, Robin, and congrats on a good quarter and guidance.
Thank you, Dick.
Your next question today comes on the line of Jiong Shao from Macquarie. Jiong, please go ahead.
Good morning. Thank you for taking my question. My question is on your margins, and congrats on a very strong results, first for Q1. The margins for Q1 was actually better, much better than what we forecasted. I was just wondering whether or not you still maintain the flat profit growth for this year. If that's the case, looks like expenses investment will accelerate for the rest of the year. What are some of the areas you're looking to accelerate the investments? Thank you.
Yes. Hi, Jiong. We provided some comments last quarter giving you some ideas as to the margin levels or the profit levels last quarter. That kind of commentary is still safe. As I mentioned, this is a critical year, and it's an important year for investment. We have identified the five strategic focal areas, and we're making terrific growth on each front. The Q1 obviously is seasonal. There is also variation for sales and marketing spend when it relates to events, activities, or campaigns that we carry out. For Q1, it is just all the activities that we thought were meaningful for us, we conducted. Throughout the year, we'll be having more efforts focusing on branding as well as making our products available to the end users, all kinds of products, particularly with a mobile focus.
These kind of products really span from not only mobile search, but like our Mobile Assistant, Mobile Guardian, our Maps, our Group Buy products, and some of our consumer products. It's a wide spectrum of products that we offer. At the same time, we're building the branding. Some of the variations throughout the year as you look at operating expenses, the main drivers will be sales and marketing. The patterns that you have seen in last year, it does vary quarter-over-quarter. Even though Q1 might be seasonally, from a revenue standpoint and margin standpoint, a low quarter in history, it may not be true this year. For the whole year, the comment still stands.
Okay, great. Thanks for the helpful comments.
Your next question today comes on the line of Alicia Yap from Barclays. Alicia, please go ahead.
Hi. Thank you. Good morning, Robin, Jennifer, and Sharon. Congratulations on the good results. I think my question is, as we continue to penetrate into the O2O business expansion, is there any complementary business that Baidu would like to strengthen in the area? For example, is there any need to get into the classified worker site? Similar to that, given there were recently some reported news on, whether it's true or not, Baidu potential interest in investing or partnering with Ctrip, any possibility of the combinations of Ctrip and Qunar. Appreciate if any comment or clarity from the management. Thank you.
Alicia, our O2O mainly right now are focused on Map, in terms of user products, and Group Buying, in terms of commercial products. We think there are still lots of things we could do in these two important areas. Of course, we always try to satisfy all kinds of location-based needs for our users, be it takeout or movie tickets or whatever. We will continue to add features to our Map and other existing services to serve our users better. Our focus in terms of commercial activities will be on Group Buying. Regarding to the Ctrip-Qunar thing, as you would expect, we do not comment on rumors. I can tell you that travel is an important strategic area for Baidu. We will continue to support Qunar to serve the users on Baidu, on Qunar better.
Thank you.
Your next question today comes on the line of Wendy Huang from Standard Chartered Bank. Wendy, please go ahead.
Thank you. I wonder if you can comment on the loss magnitude of your non-search business, and when should we start to see the loss contribution from those non-search business, such as video and Qunar to narrow down? Thank you.
I think, Wendy, some of the entities like you mentioned, video and even travel, these are important strategic verticals. We have already established a pretty good leading position in the marketplace, and we'll continue to support these entities. These are important strategic focal areas for our overall value proposition and platform. They are making great progress. We're pleased with the progress. Given time, they have a business model, and given time, as they emerge to be the market leader and continue to scale, profitability will improve. At this point, that is not really the focus area. For other strategic important areas such as LBS, such as consumer products, these are important long-term initiatives. It's early for us to expect profitability. I think on the product front and the user accumulation front, all these fronts are making terrific progress.
Over time, they will start to play bigger, important roles in the overall revenue contribution.
Thanks, Jennifer. I will go back to the queue.
Your next question today comes on the line of Eric Wen from China Renaissance. Eric, please go ahead.
Oh, thank you very much for taking my questions, congratulations on a great quarter and the guidance. I have a question regarding the hardware space. I noticed that there has been a lot of activities from companies like Xiaomi in terms of rolling out home routers as well as other earlier hardware. I noticed that Baidu has also recently undertaking a lot of activities in launching individual hardware products. What is the overall strategy for Baidu in the hardware space? Thank you.
Eric, we think there will be a lot of opportunities in intelligent hardware, smart hardware. Baidu is pretty much a software and platform company. We try to come up with necessary software and systems so that we can partner with those hardware manufacturers to foster a healthier, stronger ecosystem around our platform. We do not try to get into this area in any significant way directly, but we should benefit from the growth of the hardware industry.
Okay, thank you.
Your next question today comes on the line of Cynthia Meng from Jefferies. Cynthia, please go ahead.
Good morning. Thank you, Jennifer, Robin, and Sharon for giving me the chance. I have a question on the internet finance. What is Baidu's strategy on internet finance, and how do you see the potential regulatory risks there? We understand that Baidu is in the progress of applying for financial licenses. Thank you.
Yeah, we think the internet finance represents another huge opportunity for China. Since we have a large user base, we are evaluating ways to tap into this area. I think the most fundamental thing is that we need to have a payment method, which we launched in Q1, Baidu Wallet. This will help to make a closed loop between the user query and service fulfillment. We recently integrated Baidu Wallet into the Baidu Search app so that users, when they search, they can also pay for services there. I don't count that as internet finance. It's more of a way to help our users to pay for services. We are still evaluating and exploring all kinds of true finance-related services. When there is more solid progress, I'll update you and give you more details.
Thank you.
Your next question today comes on the line of Ella Ji from Oppenheimer. Ella, please go ahead.
Good morning, Robin, Jennifer, and Sharon. My question is regarding the Baidu Wallet, which you just launched. Can you share with us some initial signs of the number of merchants signed up for your services and also the user activities? Also, some companies would love to use some marketing strategies, such as sending out a hongbao to attract users quickly. Will you consider that? If so, I wonder if you have factored in any budget in your sales and marketing. Thank you.
Well, Baidu Wallet was just integrated into the Baidu Search app a couple of weeks ago. We are going to do some marketing events to help users to get familiar with the way Baidu Wallet works and how convenient it is when it's integrated into the Baidu Search app. We think payment is very much scenario-driven, context-driven. We have no plans to come up with a game-like marketing event to promote this product. We try to facilitate users' real needs by identifying when and where the users really need a payment system.
Your next question today comes on the line, Piyush Mubayi from Goldman Sachs. Piyush, please go ahead.
Thank you, Robin. Thank you, Jennifer. Congratulations on a great set of numbers. Could you help us think about how we can break SG&A down between the percentage that is being used to change user behavior, such as pre-installs, and could potentially go away, and the rest of the SG&A part? Thank you.
If you see the step up in SG&A, predominantly that is because of increased promotional expenses. A majority of the increased promotional expenses are for installation. We have been, over the past few quarters, still in the stage of making sure our products are available in front of the users, and they get in the habit of using it. At the same time, we started to kick in branding efforts. Branding efforts like over the past Chinese New Year, to increase awareness and brand awareness for Baidu Search products, Mobile Guardian, products like that. As Robin mentioned earlier, I think at this stage, the pre-installation is still pretty key. Over time, the branding efforts will be the more focal point for sales and marketing expenses. It's early to say that the overall sales and marketing expenses would decrease this year.
As you see the guidance, the comments that we provided, we will still be very strong and aggressive in pushing for sales and marketing, both on the installation front and the brand awareness front. Over time, I think that the brand awareness front will be the more focal spending areas.
Would it be a right conclusion from your comments that pre-installs are necessary in round 1, and when users switch to a second smartphone, then they're already used to a Baidu app, and they'll automatically download it. Would that be the right thinking?
I would say that would be our hope and expectation.
Thank you very much.
The next question today comes on the line of Thomas Chung from Bank of China. Thomas, please go ahead.
Hi, good morning. Thanks for taking my questions. I have two questions. My first question is about your landing page strategy. Can Robin comment about, apart from travel, which other verticals do you think are very important in future? My second question is, if we look at your second quarter guidance, it still has a very strong year-on-year growth. Can management provide some color about if we exclude some of the acquisitions like 91 Wireless, iQIYI? How should we think about the core organic business growth in the second quarter? Thanks.
In terms of landing page strategy, we already have travel and video, and I mentioned that iQIYI is leading in many of the most critical metrics for online video. There are many other verticals that have a lot of potential and synergy with Baidu. Some of the areas we will try to develop by ourselves, some of the areas we may be able to buy from the market. The important ones, I would think, would include healthcare, education, finance, and many others. I wouldn't just limit us into the areas we mentioned, that we will constantly evaluate and review all kinds of vertical opportunities.
With regards to your second question, the guidance we provided for Q2, we believe it's our best guess, and it is a strong guidance. It is predominantly very much driven by the core business. Our core business, as you can imagine, on the mobile front, is growing very fast, and that's really the whole core business is accelerating. That's the underlying driver for the overall acceleration of our revenue growth. Some of the invested entities, like iQIYI, was already fully consolidated last year. On a year-over-year basis, it is comparable. Some of the new acquisitions, like 91 Wireless, in sum, the level, as you would have some publicly accessible information, is relatively really small. That in itself is not going to move the needle for Q2 guidance on a year-over-year basis that much.
I would say the strong guidance that we provided for Q2 is very much driven by the core business.
Your next question today comes on the line of Alex Yao from J.P. Morgan. Alex, please go ahead.
Hi, good morning, everyone, congrats on a very strong quarter. Can you comment on the significance and importance of your union business on mobile versus PC? Is the union business structurally difficult to do on mobile because of smaller screen or because of the app-centric user behavior at this stage? Have you been able to identify a mobile unique way to do the union business on mobile? Thank you.
The union network continues to be a very important part of our overall strategy. We continue to leverage union network to promote our products. On the PC front, we have established a pretty massive union network, through the network, I think predominantly as you see TAC as a % of increase, we drive incremental revenue like contextual ads. We also use the network to promote products like Hao123. On the mobile front, some of the TAC expenses would relate to certain business that comes from some browser partners, there will be a little bit of a revenue split related to that. That would drive the TAC ratio, potentially. That hasn't been the main driver. I would say overall, the union network is important not only because of those browser type of union partners.
There are also many union potential partners that we could be friend with. We could launch a contextual ad kind of business in other mobile partners, like in-app advertising, for example. We do have the best technology, the biggest advertiser base. We can target those kind of businesses through our network of partners, that's been driving incremental revenue for us. I would say overall, the union network continues to be very important, equally for mobile, that carries incremental opportunities for us. If contributions from the union partners on the mobile front also increase, that would be happy spend for us.
Your next question today comes to the line of Chi Tsang from HSBC. Chi, please go ahead.
Good morning. Thanks for taking my question. I have two quick questions. Firstly, I'm wondering, given the 160 million DAU in mobile search, I was wondering if you could give us maybe a split between what's coming from your app and what's coming from your own browser and also third-party browser. Secondly, I was wondering in terms of, can you give us a rough sense of how many apps get pre-installed in the first quarter and also sort of cumulatively, given the spending on pre-installation, how many apps have you actually pre-installed cumulatively? Thank you.
On the DAU distribution, I already mentioned that our own search app, Baidu Search, represents the largest portion among all the search traffic, and it is also the fastest growing one. We also have other type of organic traffic from channels like third-party browsers. People would type in baidu.com to search, especially on the iOS platform. I think those users are more sophisticated as they understand the brand, the quality of the search. Whereas we also partner with other different channels to drive search traffic to us. Like I said none of them represent the largest part of our total traffic. I do not have the numbers for apps installed during the past quarter. It's a tricky metric because there will be phones being replaced, and users have all kinds of behaviors.
Some of them would use the channel they prefer through a third-party browser or through a Baidu search app or many other ways. We also have our own browser, Baidu Browser. A lot of users come through Baidu Browser to search, too.
Your next question today comes to the line of Ming Zhao from 86Research. Ming, please go ahead.
Thanks for taking my question. My question is about the number of customers. This quarter, we saw some decline. Understanding there is quality improvement process going on and seasonality, but this quarterly number below 500,000 seems way small compared with the addressable market out there. We have always heard that. My question is, what measures is Baidu taking to grow the number to a big level? Are we going to see some significant reacceleration this year? I think that you said in the prepared remarks that now advertisers can buy ADS at city level instead of a province level. Is that going to help you penetrate the merchants in similar size to those on classified sites? Thank you.
Yeah. I think the number of customers will resume growth starting from Q2, we did some house cleaning over the past few quarters. In terms of the absolute number of customers, I do agree that we still have a lot of potential. Our efforts need to focus on the overall revenue opportunity instead of the pure number of customers. You're right, when we allow customers to bid on the city level, we are actually enlarging the potential customer pool. That still is quite different from those classified advertisers. We think we are targeting different segments, different nature of businesses. When you go down one level down further, that will be the LBS business, which we are trying to tackle using the group buying business like Nuomi.
Your next question today comes on the line of Chao Wang from Nomura. Chao, please go ahead. Hello, Chao, your line is now open.
Hi, thank you for taking my question. Actually, do you expect the recent anti-pornography activity taken by the government to have any impact on your video and literature business? Thank you.
There has been no impact on our business. Next question, please.
Your next question comes on the line of Tian Hou from TH Capital. Tian, please go ahead.
Hi, Robin, Jennifer, and Sharon. Congratulations on a good quarter. I have a question related to your online video business. Q1 actually was a good quarter for your online video traffic. I guess a lot of traffic is really driven by the popular content like "iPartment." As what we see in the past, a lot of this traffic actually driven by those kind of hit content that can come and go, depends on the content itself. When you spend a lot of money, you get good content, you have traffic. However, one day when you buy less good content or you did not buy a good content, the traffic will go. It is not permanent. It is come and go, and it is like hit and miss driven. That is also one of the reasons you increase a lot of content costs.
I wonder, what is the long and permanent strategy to really break this kind of cost-spending cycle for the online video business to go towards profitability? What is the strategy for Baidu?
Yeah, Tian, I think you're right. The video business is kind of a hit-and-miss. It's quite content driven, at least in the past. Our strategy is really connecting user demands with service fulfillment. We try to provide the best quality of service, including online video services, so that the iQIYI brand is the best-recognized brand in video. When people search for relevant content, we show them the highest quality of video service. They will be more satisfied. Although the business is pretty much content driven, the content could be available to multiple video service providers in a lot of cases. We do not expect iQIYI to win by unique content. We expect iQIYI to win by the strong quality of service, brand recognition, and user traffic we can drive to them.
Your next question today comes on the line of John Choi from Daiwa. John, please go ahead.
Good morning. Thanks for taking my question. Could you perhaps comment on the recent mobile search pricing trend, and also, has the CPC gap between mobile and PC narrowed down? Thank you.
Yeah. I mentioned this during the prepared remarks. The CPC gap between mobile and PC continue to narrow. All of the metrics we track for mobile monetization have been trending higher. Mobile traffic is growing very fast, mobile monetization is growing even faster.
Your next question today comes on the line of Wendy Huang from Standard Chartered Bank. Wendy, please go ahead.
Thank you for taking my follow-up questions. I think, Robin, you mentioned previously that when it comes to the M&A strategy, you prefer to take the majority ownership of the investees. I think given the evolution of China's internet market and also the increasing competition for those valuable assets, are you still sticking to that kind of approach? In your M&A mapping, what are the holes that you're looking to fill in the future? Thank you.
Well, that strategy still holds. We do not try to be everything for everyone. We don't think that will work. When we look at possible targets in terms of M&A, we value synergy the most. Whenever we can find a strong synergy, we have a strong incentive to do a deal. When synergy is not that strong, we tend not to do the deal. A minority investment usually does not give you that kind of opportunity to integrate services. We try to avoid that kind of deals. In terms of our product map, there are a lot of things we try to fill. Many of them we rely on internal developments, whenever there's an opportunity to buy, we prefer to buy rather than build.
We are now approaching the end of the conference call. I will now turn the call over to Baidu's Chief Executive Officer, Robin Li, for his closing remarks.
Once again, thank you for joining us today. Please do not hesitate to contact us if you have any further questions.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.