Hello, and thank you for standing by for Baidu's second quarter 2013 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 this time. I would now like to turn the meeting over to your host for today's conference, Victor Tseng, Baidu's Investor Relations Director.
Hello, everyone, and welcome to Baidu's second quarter 2013 earnings conference call. Baidu's earnings release was distributed earlier today. You can find a copy on our website as well as on Newswire services. Today, you 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 measure 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, and thank you for joining today's call. We are pleased with the headway we made in the second quarter. We delivered a solid financial performance. Customer acquisition on the Baidu platform was stronger than ever as we added a record of 58,000 active online marketing customers. Adoption of our mobile platform gained tremendous momentum, driven in part by the launch of our integrated PC and mobile bidding platform. For the first time, mobile revenue accounted for over 10% of our total revenue. As we have said before, we are in this for the long term. We've made great progress. We will continue to invest and execute on our roadmap to enhance Baidu's position at the center of China's internet.
Before we go into a more detailed discussion, I want to quickly mention the announcement we made last week regarding our planned acquisition of 91 Wireless, a leading mobile app distribution platform. We look forward to providing more information once we sign a definitive agreement. However, we won't be able to answer questions on this subject on today's call. Looking now to highlights from the second quarter. Our core search business grew strongly this quarter. We made further improvements in terms of user experience and monetization, leveraging the advances we have made in deep learning and semantic intelligence. Last quarter, we talked a little bit about the knowledge graph functionality on desktop search. We're now able to predict with good accuracy what the user is looking for by drawing relationships between related topics.
We are able to deliver relevant content in a structured format that both directly resolves the user's initial query and help them discover new information quickly and easily. This quarter, we rolled this new format out in selected verticals, giving users a better search experience and giving customers more effective ways to engage with users. We do this through better integration of structured information using data provided by our partners and customers. For example, in online gaming, if users search for a specific web game or even just the generic term fun games, they will be presented with categories to help them further refine their search, images of game titles that can be played through a single click, and suggestions for related games. We have already heard great feedback and plan a further rollout into additional verticals in the current quarter.
We also did a lot of work to reinforce Baidu's position as a trusted brand that provides a safe search experience. There are a couple of developments we focused on to achieve this. One is the introduction of verified customer accounts, whereby pre-screened, verified customers now appear with the letter V on their results page. The majority of our customers now have the +V verification. We also introduced our Netizen Rights Protection Initiative. Which allows users to submit a claim if they feel they have been defrauded or harmed in some way through a sponsored link on the Baidu platform. After going through a straightforward complaints process, if a user's claim can be substantiated, we compensate them up to a certain amount. We've received great feedback from users and customers, and we are proud that these efforts are contributing to a safer, fairer online environment.
On the customer front, as I've mentioned, we added a total of 58,000 online active customers in Q2. This is the most we've ever added in a single quarter, and it's a real sign of the progress we've made in demonstrating the value of Baidu platform. A part of this was nationwide search engine marketing campaign we launched in the quarter, during which we really highlighted mobile. This was our biggest push to date, with close to 400 events in over 250 cities. During the quarter, we also took a big step in rolling out an integrated PC and mobile bidding system. Customers are still getting accustomed to the upgraded system, but the feedback so far has been positive. Today, nearly all of our customers are using the new platform.
Our efforts to educate customers and drive adoption of mobile advertising channel are paying off, as demonstrated by the milestone we reached with mobile revenue. Increasingly, customers are coming to realize the compelling opportunities inherent in Baidu's mobile channel. Mobile search offers advantages like new ad inventory, new forms of engaging users, like click-to-call and click-to-chat, and better ad targeting and higher click-through rates. We expect further progress in the coming quarters as we push through with technological improvements in areas like geotargeting and click-through rate prediction. Baidu has also taken the lead in providing customers with free tools, such as Site App, to assist them with building out their mobile landing pages. The number of customers with optimized mobile landing pages has grown exponentially from last quarter. This is great progress as our customers clearly see value in investing in mobile.
Today, over half of our mobile search revenues come from customers with mobile-optimized websites, further demonstrating the progress we have made and the potential still ahead. The strides we made in the quarter in terms of increasing mobile adoption and giving customers more ways to engage users drove clear improvement in both desktop and mobile monetization. Our improvements in semantic intelligence, deep learning technology, and bidding systems optimization are driving meaningful improvements in ad relevancy, click-through rates, and CPM all the time. We are optimistic we can maintain this trajectory. On the user side, over the last quarter, our flagship mobile search offering continued to grow in popularity. It is now firmly established as one of the most actively used mobile services in China. Encouragingly, our own native mobile search app and mobile browser are now the biggest drivers of growth within overall mobile search traffic.
We also continue to build up our market-leading alternative input methods, namely voice and image recognition. We launched a cutting-edge general image search feature on shitu.baidu.com, whereby users can input any picture to search for similar ones on the internet. This technology is based on our proprietary deep learning models, and the accuracy is unmatched in the world. This technology, combined with our market-leading facial recognition database, is the key to our hugely popular celebrity face match function in Photo Wonder, our top-ranked photo app. Mobile Map is the key gateway to mobile internet, and we've been really encouraged by the continued traction of our offering in this area. According to CNNIC, we have the most popular mobile map, with over 40% of the users surveyed choosing Baidu's mobile app, putting Baidu far ahead of the next provider, which is around 23%.
We have the largest, most comprehensive point of interest database on the market, and we are continuously building out value-added features such as hotel booking, movie ticket booking, and social features like Share My Location and Find Friends. Baidu is also an important gateway for app distribution, both through search and through our app store. This quarter, app distribution through the Baidu platform increased more than five-fold year-on-year, and we expect momentum to build going forward. In Q2, we completed the acquisition of online video unit of PPS, which will continue to operate as a sub-brand of iQIYI. Following the successful merger with iQIYI, we now have the largest online video platform by number of mobile users and video viewing time. PPS is very complementary to iQIYI due to its differentiated user base, distribution channel, and clear leadership in mobile.
The scale of the combined platform positions iQIYI well in this strategically important vertical. Overall, Q2 was a great quarter, especially in terms of our progress in mobile. The investments we've been making are driving growth in the areas that will matter the most going forward, whether it's search, LBS, app distribution, or online video. With our market-leading technology and the strides we are making in segments where we expect long-term growth, we are confident Baidu will be at the core of China's internet for a long time to come. Before handing over to Jennifer for a closer look at the financials, I would like to remind everyone that Baidu World 2013 will be held on August 22nd in Beijing. As always, we'll be debuting some exciting new products and initiatives. I hope to see many of you there. Over to you, Jennifer.
Thanks, Robin. Hello, everyone. We were pleased to maintain strong growth on the top line this quarter as we pushed forward with our aggressive investment strategy. Our investment in mobile are already beginning to bear fruit. As Robin mentioned, mobile revenue for the first time accounted for over 10% of total revenue. In Q2, we increased our focus on promotional efforts to drive user adoption of our mobile products. We conducted our largest ever search marketing campaign and continue our aggressive investment in R&D. We will continue to invest and position ourselves for the opportunities ahead to drive long-term value for our shareholders. Our investment focus remains on infrastructure and R&D, as well as marketing and promotional efforts to drive product adoption, particularly in mobile. Alongside this, we'll continue to pursue suitable M&A opportunities to complement organic growth. Now, moving on to the financials.
All monetary amounts are in RMB unless otherwise noted. For the second quarter, total revenues were RMB 7.6 billion, representing an increase of 39% year-over-year. During the second quarter, Baidu had approximately 468,000 active online marketing customers, a 33% increase from the corresponding period in 2012, and a 14% increase from the previous quarter. Revenue per online marketing customer for the second quarter was approximately RMB 16,100, a 4% increase from the corresponding period in 2012, and an increase of 11% from the previous quarter. Traffic acquisition cost as a component of cost of revenues in Q2 was RMB 880 million, or 11.6% of total revenue, as compared to 8.3% in the corresponding period in 2012 and 10.2% in the first quarter. The increase mainly reflects increased contextual ads contribution and Hao123 promotion through our network.
Bandwidth and depreciation cost as % of revenues in Q2 were 6% and 4.7%, respectively, compared to 4.4% and 3.5% in corresponding period of 2012. The increase was mainly due to an increase in network infrastructure capacity. Content cost as a component of cost of revenues were RMB 151 million, representing 2% of total revenues, compared to 0.6% in corresponding period in 2012, and 1.6% in the previous quarter. This increase was mainly due to the inclusion of iQIYI's content cost. New content is important for iQIYI's business. We continue to invest in this area. SG&A expenses in Q2 were RMB 1.1 billion, an increase of 83% year-over-year, mainly due to promotional expenses for our mobile products. Mobile promotional expenses include pre-installation and downloads of Baidu apps in mobile devices.
As some of you may have already seen in the city of Beijing, we're conducting offline marketing to promote our mobile maps product. The campaign was launched at the end of Q2 and will mainly be carried out in Q3. We'll continue to invest in marketing spend in Q3, and this line item should step up next quarter. These expenses are necessary and will be monitored closely for effectiveness. R&D expenses in Q2 were RMB 942 million, an increase of 73% over the corresponding period in 2012, primarily due to increase in the number of R&D personnel. Search-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to RMB 83 million in the second quarter from RMB 54 million in the corresponding period in 2012. The increase was a result of more shares being granted to employees.
Operating profit for Q2 was RMB 2.9 billion, an increase of 3% over Q2 2012. Total headcount as of June 30th, 2013 was about 24,000, a sequential increase of about 2,100 employees, of which 800 were due to our acquisition of PPS.tv. Income tax expense was RMB 513 million for the second quarter. The effective tax rate for the second quarter was 16.3% compared to 7.9% in the corresponding period of 2012. We benefited from a one-off low tax rate in Q2 2012, due to tax provision adjusted for one of our subsidiaries. Net income attributable to Baidu for Q2 was RMB 2.6 billion, a 5% decrease from the corresponding period in 2012. Basic and diluted earnings attributable to Baidu per ADS for the second quarter of 2013 amounted to $7.52 and $7.52 respectively.
Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure for Q2, was RMB 2.7 billion, a 3% decrease year-over-year. Basic and diluted earnings attributable to Baidu per ADS excluding share-based compensation expenses, both non-GAAP measures, were $7.76 and $7.75, respectively. As of June 30th, 2013, the company had cash equivalents, and short-term investments of RMB 34.1 billion. Net operating cash inflow for the second quarter of 2013 was RMB 3.2 billion. Capital expenditure for Q2 was RMB 548 million. Now let me provide you with our top-line guidance for Q3 of 2013. We currently expect total revenues for the third quarter to be between RMB 8.73 billion and RMB 8.96 billion, representing a 39.7%-43.3% year-on-year increase. Please note, this forecast reflects Baidu's current and preliminary review, which is subject to change. I now open the call to questions. Operator, please go ahead.
The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. Your first question comes from the line of Haofei Chen of CICC. Please go ahead.
Thank you very much. Thanks, Robin and Jen, for the introduction. My question is, I want to know the revenue and the net adds of online active customers, if we exclude the acquisitions and exclude the [traffic spot] from Baidu Alliance. I want to know the mobile business margin, versus the PC business margin. Thank you.
Excuse us. Didn't quite understand the first part of your question. Do you mind repeat?
Sure. I want to know now the revenue growth is like 38%, right? What if we exclude the acquisitions and the revenues from Baidu Alliance? If we exclude that, how much revenue growth we would have? I know the 58,000 net adds for the online customers is a historic high. What if we exclude the acquisitions? How much net adds we have?
Yeah. His question is, if we don't count the acquisitions, will be how many customers less? How much revenue would be less than the current one, and what's the growth rate on an apple-to-apple comparison basis?
I see.
Yeah.
One of the highlights for the quarter was the phenomenal growth in new customer additions. As you can understand, the platforms that we offer, and the revenues that we earn, most of the customers are small, medium-sized enterprises. When you think about the acquisitions, whether it's video or it's our travel vertical search, these are largely larger customers. Predominantly, the net add of customers are coming from the Baidu main business. That is the fundamental driver, basically, for the outstanding performance on Q2.
Your next question comes from the line of Eddie Leung of Merrill Lynch. Please go ahead.
Hey, good morning, guys. Thank you for taking my questions. I'm actually more curious on your third quarter guidance. We see the revenue growth would be pretty impressive. I guess part of that probably because of full consolidation of PPS.tv, as well as the growth of contextual advertising. I'm wondering, Jennifer, if you could give us some color on how should we look at the margin, because I suspect some of these growth drivers could have lower margins than the core search pieces. Another quick question is, could you remind me what's in other services revenue? Thank you.
Yes. In Q3, I think the whole guidance would reflect the consolidated picture that includes the PPS.tv acquisition. From a margin standpoint, we have provided indications over the last quarter as we reported on Q1. If you look at the year-over-year change in terms of operating margins, the levels, and the magnitude in the line items, it is pretty much predictive and indicative for the current outlook as you look at our business going forward. Specifically, last quarter, you see a 12-point change in operating margin, and this quarter you're looking at a 13%. Ballpark, I think that gives you a pretty good indicative level.
As we've been talking about the two-year transition period, we have been aggressively investing in the core business as well as the new growth drivers like video, LBS, and some of the verticals. During the investment period, the margins would be lower, we do expect that the high growth potential will more than pay off in the future.
Your next question comes from the line of Alan Hellawell of Deutsche Bank. Please go ahead.
Hi, guys. Question's just about TAC, if you don't mind. Jennifer mentioned that contextual ads and Hao123 promotion evidently drove TAC growth in the second quarter. If I could just ask a simple question. If I'm simply a Baidu Union search partner, am I generally receiving the same revenue share as I would have same time last year, or in the first quarter for that matter? Then also, second part of the TAC question. We generally were thinking about a 50 to 100 basis points per quarter lift in TAC throughout the year. If I'm not mistaken, last quarter alone, it was maybe 120 or 140 basis points quarter-on-quarter. What does that say for the formula that we would have used for the rest of the year? Thank you.
Yeah. As you can tell from the TAC as a percentage of total revenue, it is higher than a year ago. In terms of revenue sharing ratio, it is slightly higher than a year ago, but not very material.
Alan, to your question on if a union partner that receives this kind of a revenue share from us, it really depends on the mix of the kind of contribution that brings to our platform. Majority of the TAC spend and the TAC increases are due to contextual business, and contextual business generates incremental revenue for us, and we share a part of that with our union partners. As I mentioned, also, Hao123 promotion is a driver for the increase of TAC, and that has been going on since the last quarter as well. Overall, as Robin mentioned, the arrangement hasn't really changed per se. The initiatives we're driving specifically are mainly in contextual ADS and Hao123.
As you look into the future for the rest of the year, I think looking at TAC, obviously it's dynamic and it depends on the mix of the different sources of revenue our union partners help us bring in. I think with 2012, the quarterly relationships of the Q2 to Q4 time frame give you a reference of how you might be able to think about the TAC going forward.
Your next question comes from the line of Jiong Shao of Macquarie. Please go ahead.
Thank you very much for taking my question, and congrats on the good results and guidance. Before I ask my question, I have a clarification. I think Robin and Jennifer mentioned that Q2 operating margin will be indicative for the future. Should we interpret that as the margins going forward should be sort of flattish from Q2 level?
To that question, I would say the year-over-year change. As we mentioned, we're in a very aggressive investment mode. We have been investing consistently in infrastructure and R&D. This year in particular, sales and marketing is a main focus to drive our products. If you look at the year-over-year change in terms of operating margin levels, that's what I'm referring to as indicative, not the absolute level itself.
Oh, okay. If that's the case, could you please comment on the absolute level?
I think this is a comparison really based off the 2012 level. I think that's a simple math.
Okay.
Your next question comes from the line of Jin Yoon of Nomura. Please go ahead.
In your prepared remarks, you mentioned that you're bundling mobile queries or mobile search with the PC side. Does that mean that you're mandating your PC search customers to also buy inventory on the mobile side? If so, what % of your total customer base is actually buying inventory on the mobile side? Thanks. I'll stop there. Thanks.
All of our customers have the option to use either PC or mobile, or both. They have full flexibility to decide how much % of their budget will be spent on mobile or on the PC platform. It's the integrated platform that makes placing ad or sponsored links on both desktop and mobile easier, and the experience is better. Plus, we provide a lot of optimization tools for mobile ad campaigns. I think customers are increasingly adopting the mobile platform. They do have the option to opt-out.
There's no mandate in terms of allowing customers to, or requiring customers to put X amount of % of their ad revenues on the mobile side?
There's no mandate, but there are all kinds of suggestions, and customers can change the percentage to whatever they like.
Your next question comes from the line of Philip Wan of Morgan Stanley. Please go ahead.
Hi, Robin, Jennifer. Thanks for taking my question, and congrats on a solid quarter. Could you please help us understand more about your mobile sales for this quarter? I wonder how much of them are coming from the keyword bidding service, and also what percentage is from other mobile services, such as other advertising or mobile videos? Thank you.
Oh, I didn't quite get How much of the revenue coming from Other mobile.
Predominantly, the mobile revenue we're generating are through the integrated bidding system that help our customers run their ad campaign across the different device. The main mobile revenue is really coming from the search business model and the bidding for targeted performance for our customers. Other ancillary mobile products generate minimum revenue.
Thank you.
Your next question comes from the line of Cynthia Meng of Jefferies. Please go ahead.
Thank you, Jennifer and Robin, for giving us the opportunity, and congratulations for the good quarter and guidance. My question is on the acquisition of 91 Wireless. Can management give more color on the strategy behind that? Also, the strategy to integrate that business with Baidu's own application store. What is your outlook for the revenue potential from this acquisition? Thank you.
Hi, Cynthia. Thank you for your question. We mentioned at the beginning of the call that everybody is aware that we signed the MOU on acquisition of 91. We're still in the process to reach a definitive agreement. Once we do have the agreement signed and the picture much clearer, we will be obviously sharing more details with you.
Your next question comes from the line of Chi Tsang of HSBC. Please go ahead.
Thank you very much for taking my question. I was interested sort of in your earlier comments about improving monetization on both mobile as well as desktop. I was wondering specifically as it relates to the desktop business, what improving monetization might suggest in terms of both CPC growth as well as sort of paid clicks. I think a lot of investors are very concerned about what's happening on the desktop side. If you can give us a little bit more color about that'd be very helpful. Thank you.
Our monetization improvement really has been solid and strong on both the PC front as well as mobile front. In the PC front, in particular, this quarter, we see strong CPM improvements, and the CPM improvements is mainly delivered by the number of clicks that we drive rather than CPC. We see that as a pretty positive development continues to be driving higher ROI and really more desired results for our customers' spend. That basically is the main driver, is the number of clicks.
Your next question comes from the line of Alicia Yap of Barclays. Please go ahead.
Hi. Good morning, Robin, Jennifer, and Victor. Thanks for taking my questions, and congratulations on the solid results and guidance. My question is regarding your 3Q guidance. As a re-acceleration of the growth mainly come from the continued faster growth of mobile revenue. Could you share with us among the advertiser, which verticals or industry actually have shown stronger adoptions to mobile search right now? If you can also share with us mobile query traffic contribution to the total queries right now? Thank you.
Regarding to the mobile, what we have seen is that those verticals that heavily rely on Baidu platform, which is generally pretty much performance driven, have been adopting the mobile strategy or optimizing the landing page quite aggressively. You see that customers from the healthcare, from education, they have been making the mobile-friendly website, and we are very pleased that those large spenders almost all have a mobile-friendly website. In terms of mobile traffic and CPM growth, I think this is the very early stage of mobile search. Both traffic and monetization have a lot of potential going forward. Over the past quarter, I think both metrics have grown very significantly, and we do expect that kind of growth will continue. Does that answer your question?
Let's keep moving. Operator?
Your next question comes from the line of Thomas Chong of BOCI. Please go ahead.
Hi, good morning, Robin and Jennifer and Victor. Congratulations on a solid quarter. My question is about, can you guys tell us about the number of daily active users for your mobile web search in the second quarter? I remember it is about CNY 100 million in the first quarter. My second question is regarding the transition. I remember management has talked about the two years transitional period. Is there any change in your view that mobile search monetization capabilities come faster than your expectation? Thanks. I will get back to the queue.
Okay. Regarding to the daily active user, we mentioned it surpassed CNY 100 million during the last quarter. I would say that this quarter we also saw very significant growth in terms of daily active user. I would rather not to report this number quarter after quarter. We just see very significant growth in terms of mobile traffic and mobile monetization. As for the transition period, two year is a rough estimate. Exactly how fast the monetization capability improves or how fast the page view grow, it's both decided by the market condition and by our investment in these areas. We do not want to over monetize the mobile search traffic at this time.
Our priority is placed on improving user experience for our mobile search to deliver faster, more relevant results to our users and also to convert or help convert many of the PC-friendly content into mobile-friendly content. That would be our priority. I think part of the reason that mobile revenue grow very significantly during the last quarter is because our customers are increasingly having a really smartphone-friendly mobile website.
Your next question comes from the line of Andy Yeung of Oppenheimer. Please go ahead.
Oh, hi. Thank you for taking my question. I have two quick questions. One is in term of your advertisers, what's the percentage of customer have beginning to advertise on your mobile platform? A quick question is regarding PC query volumes. There's a lot of concern regarding PC query growth may decline. Can you give us some color on what's the trend in the PC query volume?
A super majority of our customers are advertising both on the desktop platform and the mobile platform. What's the second part of the question?
On the PC query volume. Overall, as you know that we look at our search service to the users holistic perspective. Overall query volume has been having solid growth. Ultimately, is we're serving the user's information needs through different devices. Ultimately, it's a search need, and it's supported by our strong technology platform that offers the simple and comprehensive answers to the users. We haven't really segregated your PC versus mobile volume. As you can understand, really the tremendous growth is on the mobile side. PC is not obviously as exciting as mobile, but overall volume is very solid growth.
Your next question comes from the line of Alex Yao of JPMorgan. Please go ahead.
Hi, good morning, everyone, and thank you very much for taking my question. My question is about the impact from your integrated mobile bidding system on your mobile monetization key metrics such as CPC and coverage, et cetera. Can you comment on this? Thank you.
Yeah. The mobile monetization has made very significant progress over the past quarter, which means that both coverage, CPC, click-through rate are growing. In addition to that, like I mentioned, we are helping our customers to come up with better landing pages. We sometimes force them to place those click to call button or call back button, those kind of features to help customers to get a better ROI. As I said before, the priority here is to really improve the user experience. We believe that having those kind of call back button or click to call button really helps the user. When we have a very dominant position in mobile information search, and we will be able to monetize the mobile traffic better. Right now, the focus is still on the user experience side.
Your next question comes from the line of Piyush Mubayi of Goldman Sachs. Please go ahead.
Thank you for taking my question. Could you help add some color to your mobile revenue number of 10% in terms of where you were a year ago, where you were a quarter ago, and also, if possible, give us a sense of what percentage of search traffic is originating on mobile. Might I clarify if tablets are included as mobile, or do you consider them PC? Thank you.
Mobile revenue when include tablets, roughly quotable over a year ago. That will help you to understand the growth. I don't think we have those detailed numbers in hand.
Yes. Mobile revenue over in the last year wasn't really the focus. As you know, over the past year to two years, the mobile usage really started to take off, and there has been constant improvement on our product side to improve on the search experience. I think only over this quarter that we reported, we're very pleased to see mobile now contributes more than 10% of our total revenue. Part of that is also has to do with the bidding platform that we made it much simpler for our advertisers. In terms of the mobile traffic, we have not made it a regularly reported item, but mobile traffic obviously is growing. The last time that we reported on that was that 20% of our total traffic, and it continues to grow.
When we say mobile traffic, I mean mobile revenue represent more than 10%, that can mean including tablets or without tablets. Based on both criteria, mobile revenue exceeded 10% over the second quarter.
Your next question comes from the line of Ming Zhao of 86Research. Please go ahead.
Hi. Thank you very much. Jennifer, if I look at your TAC increase by almost CNY 300 million quarter-over-quarter, marketing expense increased by about CNY 200 million quarter-over-quarter. What's the percentage of those would you attribute to the mobile side? Should we expect any step up on the mobile spending given these two items? Thank you.
On TAC, yes. There has been sizable step up and as I mentioned, predominantly it's related to contextual business as well as our Hao123 promotion. I do see included in TAC, the mobile revenue related to TAC. It has increased also in proportion as a reflection of our mobile revenue growth. That's not the main driver, quarter-over-quarter as you see the Q2 TAC number. For sales and marketing expenses, the sequential increase, I would say, is mostly driven by promotional expenses, that's a split between the national marketing campaign as well as the promotional efforts that we made predominantly for our mobile products. The national marketing campaign, I would say, is partly to develop the customer, these customers are, of course, contributing to both on the PC side as well as the mobile side.
Predominantly, a lot of the marketing efforts, the spending is related to mobile products. The main spenders would be our search box and map products, we are also doing offline map promotion for users to really understand the full value propositions that can really made available on our map platform. As I mentioned in the prepared remarks, I do expect the sales and marketing expense continue to edge up as a percent of total revenue.
Your next question comes from the line of Muzhi Li of Citigroup. Please go ahead.
Thank you for taking my questions. I would like to ask about the CPC trend over the past quarter, how does the CPC trend between mobile and the PC split, like what percentage of differences between the two? Finally, will the company disclose the mobile revenue in the future? Thank you.
On the CPC, as I mentioned, overall monetization capabilities improved on both the PC and mobile side. Mobile CPC is not up to the PC CPC level, but it continues to increase in comparison. As more customers are using the mobile platforms, the bidding itself will get more engaged and drive partly the CPC higher. That's really a reflection of customers' acceptance of the mobile advertising platform. Continue the progress on CPC, but also back to the earlier comment I made, that's not the main driver of the overall CPM improvements, though.
Your next question comes from the line of Feng Jiang of Brean Capital. Please go ahead.
Thank you for taking my questions. First one is actually regarding your 3Q guidance. Just wonder whether you could give us a little bit more color because it's a very strong guidance. Try to get a sense how much of impact does it come from the consolidation of PPS.tv. Also wonder whether you have factored in a partial consolidation of the likely, the 91 Wireless acquisition. You did really well in second quarter on the mobile side. Just wonder what's the trend we should expect in 3Q, and what's the potential mobile revenue target by year-end?
The PPS.tv transaction was closed in Q2. In the Q2 number, there was about a one-month inclusion of the PPS.tv financial. Q3 sequentially, it would, of course, have the full quarter's consolidation, including PPS.tv. Sequentially, there is a small increase of contribution from PPS.tv. PPS.tv overall and together with iQiyi, is really a very small component of our total revenue contribution. The main business continues to grow solidly, and these investments we're making are also performing well. On your question for mobile revenue contribution, we would report back when we have really meaningful material progress on this front. We will not likely make this a regularly reported item, but we will update everybody the progress we're making promptly.
Yeah. Right now we prefer to do this kind of more qualitative description about mobile trend and mobile revenue because I think there is no widely accepted standard for what's mobile search. Does that include tablets? What about Android pad and mobile revenue from non-search products? There are lots of moving pieces. As we form our strategy in mobile and going forward when we have a better definition and a better track record of mobile-related revenue, we will certainly give you more quantitative numbers.
Your next question comes from the line of Scott Kessler of S&P IQ. Please go ahead.
Hi, thanks a lot. I was wondering if you could talk about your video monetization strategy. I have a follow-up. Thanks.
I think it's very straightforward. Video has a lot of users. The video viewing time or media time is very long and growing faster than the general internet usage. The main monetization is through advertising, mostly those video commercials. It's very easy to move the TV commercial content to the video platform. I think the monetization method is quite straightforward.
Your next question comes from the line of Gina Chen of TH Capital. Please go ahead.
Hi, good morning. This is Gina Chen on for Tian Hou. I was just wondering if you could just kind of give more color on what the % of search traffic is from mobile. Thank you.
Like I said before, we will not report the mobile traffic percentage every quarter when there's a significant change in terms of percentage. For example, if one day the mobile traffic goes over 50%, we'll certainly let you know. For those regular quarter-on-quarter changes, we prefer not to report the exact numbers.
Your next question comes from the line of Wendy Huang of Standard Chartered Bank. Please go ahead.
Thank you for taking my questions, congratulations on the progress you made on the mobile side. I have two questions. One is a follow-up question on the CPC on mobile and PC. Can you clarify whether you are still seeing the CPC increase on the PC side? Also, I noted that in some other countries, the CPC of mobile and PC actually already become quite similar. Do you expect in the long term, China market, the mobile CPC can reach the level that of the PC level? Also, my second question is regarding your mobile internet blueprint. You are promoting your mobile map starting from the second quarter, also you're already the number 1 in the mobile search, and you just announced the MOU regarding the mobile app distribution platform.
What are the other areas in the mobile footprint that you expect to strengthen in the next 12 months? In particular, what will you do with your mobile browser? Also, when will you launch maybe the in-app search? Thank you.
Well, that's a lot of questions. The CPC on mobile is still lower than PC right now. Like I said, all of the monetization metrics for mobile has been growing very quickly. In terms of tablet or iPads, to be specific, the cost per click is higher than that of PC already for Baidu. Longer term, we are optimistic that the CPC on mobile could catch up that of PC, because of the smaller screen and users have better attention on the mobile sponsored links. Regarding to the mobile internet blueprint, the so-called blueprint, I kind of mentioned that there are four strategically important directions we are aggressively investing in. Search, of course, would be the first one, the mobile app distribution, map or LBS, and video are both growing very quickly. We are aggressively investing in all of the four strategic areas.
Your next question comes from the line of Irene Yu of CICC. Please go ahead.
Morning. Thank you for taking my questions. My question is in regard of the mobile advertising. Did you see or will you see any cannibalization between your PC search and your mobile search feeding system? How will you see the competitive landscape going forward as Tencent has already launched its mobile ads application?
Yeah, regarding to mobile advertising, search is very unique in the sense that advertisers or customers can never buy enough amount of traffic. It's not a budget allocation problem, it's more of a supply-demand problem. There are always not enough supply for search traffic, be it desktop or mobile. That's why we pretty much focus on improving the user experience, get users what they want or what they're looking for through our mobile search services, desktop search services, and other related services. In this sense, we are not much competing for customer budgets. We are more competing on the user base and traffic growth.
Your next question comes from the line of Alicia Yap of Barclays. Please go ahead.
Hi. Thanks for taking my follow-up questions. Just quickly, regarding your mobile revenue, I wonder whether you have any revenues come from your app distribution, currently your app store, and any revenue shares come from some of the mobile games. Thank you.
Yeah. There are already revenue coming from the app distribution, but very small. We also have mobile games. Through our mobile app distribution capabilities, we monetize the distribution capability mainly through mobile games. That's, of course, been growing very fast over the past quarter.
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. Good day.