Earnings Call: Q1 2013

Apr 26, 2013

Earnings release

By the hash key. Recording completed. Hello, and thank you for standing by for Baidu's First 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. I would now like to turn the meeting over to your host for today's conference, Victor Singh, Baidu's Investor Relations Director. Hello, everyone, and welcome to Baidu's 1st Quarter 2013 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 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 20F. Baidu does not undertake any obligation to update any forward looking statement, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non GAAP financial measures. Our press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures. And is available on our IR website at ir. Baidu.com. As a reminder, this conference is being recorded In addition, a webcast of this conference call will also be available on Baidu's IR website. I will now turn the call over to Baidu's CEO, Robin Lee. Hello, everyone, and thank you for joining today's call. We made a good start to the year with solid progress on our suite of mobile products as well as exciting new innovations and enhancements to existing functions. As we outlined last quarter, our focus for the year ahead is to push forward with aggressive investments in mobile. We are dedicated to providing the best user experience across image device and through image input method. And I'm confident we are on the right path to achieving that. We've made substantial advances in our market leading mobile search and map offerings as well as our comprehensive suite of apps like browser, personal cloud storage and travel to name a few. We also introduced a new approach to desktop search harnessing semantic intelligence and advanced mission learning to enhance user experience in ways, elaborate on later in the call. While we may stabilize on the user front, Trashin, with key customer accounts, have also been very encouraging. The fact that these customers keep coming back to us even in this competitive environment is testimony to the breadth and flexibility of the Baidu Marketing platform. We also made good headway with the crucial work of educating our customers to the potential in mobile channels and customers are now really starting to awaken to the possibilities. Moving on to highlights for the quarter. Q1 saw us further to meet our leading position in mobile search. Daily active users of Baidu mobile search grow over 25% from the end of at 2012 to over 100,000,000 today. It is one of the most frequently used mobile services on the market. The fast growth of our mobile search represents the efforts we put into delivering a superior user experience Just that speed was critical to our success in PC search in the early days delivering faster results is of paramount importance for us on mobile. The latest and joint version of our mobile search apps versus 4.1 now leverages our CVT5 engine, supporting HTML5 into the kernel of our mobile browser, along with some other technical improvements that we launched this quarter. This means results now load 30% faster than previous versions. Baidu Momo Search has LBS information embedded and is fully supportive of video content and Flash, thus eliminating the need for separate native apps. The Baidu Search app also supports voice and image based search. I'll speak more about the advances we've made in this area in a moment. Our leading position in mobile search holds a lot to the excellence of our map and LBS capabilities. Expectations of search results are dramatically different, depending whether you are sitting at your desk or searching on a smartphone while on the go. Our ability to integrate mass and allow LBS to deliver a richer or use for set of results is one important differentiator for Baidu. The latest version of Baidu Maps which we rolled out recently for Android and iOS offers better LBS categorization and a new navigation upgrade. This new version is already very popular and the new features we've added make for a more accurate search and after decision making and action. For instance, if I want to search for the nearest Thai restaurant, I get read from address, a click to call phone number, user reviews, average price, directions on how to get there, real time traffic situation, and information on adding special offers, thereby. And the option to book a table right away. RMAT has an open API and we continue to add partners to build out our LVS platform. This platform already includes features like hailing a tab, booking a hotel room, and even finding group buying deals in your immediate area. Useful features like this make Baidu math a gateway for local search. We have also continued to raise the bar on desktop search with a new format of results for many categories of curves, We incorporated semantic intelligence into our search algorithm to enhance results. We have built a knowledge graph. We not only understand exactly what the users look at looking for, but also can draw relationships between related concepts using content integrated from Baidu's vertical searches. As Baidu knows, Baidu Postbar bilingual encyclopedia and 3rd party content providers. With this new structured format, We both resolved the user's initial query directly on the search page and help the user discover new information quickly and the Italy. For example, if I search for Lakers basketball player, Cobywine, In addition to the search results on the left hand side of the page, I get a box on the right hand side with a summary that includes is Bao, photos and links to other basketball players who competed players in the London 2012 Olympics MVPs and other players that might be interested in. The technology required to deliver a superior user experience on mobile devices is also highly sophisticated. And Baidu has leveraged our R and D capabilities to stay far ahead of the pack. We've made a serious commitment ensuring that our best ideas become reality over the coming years. Part of this with our investment in advanced machine learning. The Institute of Deep Learning is focused on just that. This learning is about using Neural Networks to create sophisticated machine learning models capable of performing the kinds of tasks that human brains do well, but machines generally don't. Understanding spoken language, for example, or describing and the tenant writing images or making just inferences from examples. Like in the search on Poppy brand, I just mentioned, While the theory behind deep learning has existed since the 1980s lack of computing power, limited efforts to put it into practice. Not only do we have the role computational power today, but very obvious application for both users and customers. Two such applications are in voice and image recognition. This 2 of the most natural interfaces and user demand for this input method is increasing quickly. Our efforts here have already yielded impressive results. VoiceBase to search queries are increasing very rapidly, keeping up a very fast acceleration we saw in 2012, while voice credits grow tenfold. Image based research is quickly is growing quickly too. And the accuracy of the searches is literally improving day to day at our system blur. NY search, we are the market leader in Mandarin recognition accuracy. In image search, our recognition displayed are also the highest and our facial image index is the most comprehensive in the world. Users can now photograph a barcode, a QR code, person, a book, or a piece of text they want to translate, and Naidu's mobile search ad will deliver the information they're looking for in extending. Deep learning only help us deliver a better search experience and benefits monetization too. This learning will help our customers select more effective keywords and will drive higher ad relevance through better potential awareness. The upshot is that our push into this important area of artificial intelligence well to add business results for our customers and for us. Alongside the work We are doing on user functionality. We continue to expand our customer base and deepen the relationships we already have with our existing customers. Baidu is playing an active role in helping our customers to leverage mobile by educating them about the mobile channel and providing them with tools to build and optimize mobile landing pages. We will accelerate this process as we kick off our nationwide as we search engine marketing campaign in the current quarter, ensuring that our customers up to speed on the mobile opportunity. This education process will happen over time but so far the momentum is encouraging. At the same time, we've been looking at ways to expand our engagement with a select number of our large customers whose broad range of advertising needs can be served on the Baidu platform. I mentioned last quarter, the partnership with Ping An, the leading insurer And we now brought out this joint bin's plan model with other large customers in important verticals such as auto, online travel and FLLOMCG. Joint based plan or JBT is a deep collaboration between Baidu and our customers. We collectively formed a joint task force to optimize online marketing campaigns on the Baidu platform. By figuring ways to better utilize the full scope of our products from P4P to branding to contextual ads. We've already gotten great feedback from customers on this and we see good potential. Besides the JDP model, we have enhanced our system to go deeper and work more closely with some key B2C e commerce accounts as well. By leveraging the API they open to us. We can see their discounts and promotions delivery and payment requirements and product availability in real time, allowing us to dynamically modify their text and replaced paid links in real time as well. Midu's contextual ads business has been growing well too. We made a number of upgrades this past quarter. Our most recent version of the ad serving platform provides a better customer experience and targeting algorithms. With better monetization capabilities, we've been able to significantly expand the volume of high quality media inventory for our branding advertisers as well. We're really optimistic about the headwind we've made so far this year. The investments we are making in product innovation are having a clear impact on user experience across different devices and input testers. And with the Baidu platform becoming more intuitive and integrated by the day, We are equally focused on strengthening relationships with our customers to help them achieve the highest returns possible through our platform. Now I'd like to hand it over to Jennifer for our financial highlights. Thank you, Robin. As Robin laid out in his prepared remarks, we made solid progress and delivered healthy financial results. In Q1, we ramped up our promotional efforts to drive installations and the increased usage of our own mobile products and continue to invest in R&D. We completed the ITE transaction last December and had consolidated a whole quarter of ITE financials into our P and L. The line items in our P and L reflect this consolidation. IT's Q1 consolidation had 3 to 4 points impact in our Q1 operating margin. For the rest of the year, we expect this late impact to be largely consistent with the Q1 level. Looking ahead, we'll continue to invest and position ourselves for the opportunities ahead We will continue to invest to drive product adoption, particularly in mobile. We'll continue to leverage the Baidu Union Network. These initiatives will continue to be important investment themes. Now let me go through some of the financial highlights. For the first quarter of 2013. All amounts mentioned are in RMB unless otherwise noted. For the first quarter, total revenues were RMB 6,000,000,000, representing a 40% increase year on year. During the first quarter, Baidu had approximately 410,000 active online marketing customers a 288% increase from the corresponding period in 2012 and a 1% increase from the previous quarter. Revenue per online marketing customers for the first quarter was approximately RMB1400 a 9% increase from the corresponding period in 2012 and a decrease of 6% from the previous quarter. Traffic acquisition cost as a component of cost of revenue in Q1 was 610,000,000 dollars, a 10.2% of total revenues, as compared to 7.8% in the corresponding period in 20 12 and 9.6% in the fourth quarter of 2012. The increase mainly reflects increased contextual ad contribution and how 1 to 3 promotions through our network. The Baidu Union Network is the important part of Baidu's overall revenue growth. We'll continue to leverage our network to further extract more growth. As a result, we expect tax as a percent of revenue to continue increasing over the medium term. Bandwidth and depreciation cost as a percentage of revenue in Q1 were 6.8% and 5.6 percent, respectively, compared to 5.2% 5.4% in the corresponding period of 2012. The increase was mainly due to a increase in network infrastructure capacity as well as the consolidation of IKE. Content cost as a component of cost of revenue were RMB96 1,000,000 representing 1.6% of total revenues, comparing to 0.7% in the corresponding period in 2012. And 1.9% in the previous quarter. Content costs are mainly contemplated to the IT business, Selling, general and administrative expenses in Q1 were RMB848 1,000,000, an increase of 77% year on year, primarily due to an increase in marketing expenses, particularly for mobile related campaigns. As we stated last quarter, 2013 is an important year to aggressively promote Baidu's great products particularly in mobile to drive installation and increase usage. We'll continue to invest in marketing spend in Q2 along side our search engine marketing campaign. These expenses are necessary and will be closely monitored for effectiveness. R and D expenses in Q1 were RMB811 1,000,000, an increase of 83% over the corresponding period in 2012. Primarily due to an increase in the number of R And D personnel. Share based compensation expenses which were allocated to the related operating costs and expense line items increased in aggregate to RMB111 1,000,000 in the first quarter from CNY35 million in the corresponding period in 2012. The increase was a result of more share being granted to employees. Share based compensation will continue to be in emphasis to attract and incentivize key talents. Operating profit for Q1 was 2,200,000,000 an increase of 6% over Q1 2012. Total headcount as of March 31, 2013, was about 22,000, roughly 900 more than the previous quarter, primarily due to the addition of R&D personnel. Income tax expense was 389,000,000 for the first quarter. The effective tax rate for the quarter was 16.2% compared to 15.1% in Q1 of 2012. Net income attributable to Baidu for Q1 was RMB 2,000,000,000, an 8% increase from the corresponding period in 2012. Basic and diluted earnings attributable to Baidu per ADS for the first quarter of 2013 amounted to 5.89 and 5.88, respectively. Net income attributable to Baidu, excluding share based compensation expenses, a non GAAP measure for Q1 was 2,200,000,000, a 12% increase year on year. Basic and diluted earnings attributable to Baidu per ADS Excluding share based compensation expenses, both non GAAP measures were 6.20 and 6.20 respectively. As of March 31, 2013, the company had cash, cash equivalents, cash, and short term investments of KRW 33,800,000,000. Net operating cash inflow for the first quarter of 2013 was RMB 2,200,000,000. Capital expenditures for the first quarter of 2013 were 468,000,000. Now let me provide you with the top line guidance for the second quarter 2013. We currently expect total revenues for the second quarter to be between 7 point 37,000,000,000 and RMB 7,550,000,000, representing a 35.1% to 38.4% year on year increase. Please note this forecast reflects Baidu's current and preliminary view and is subject to change. I will now open you. And your first question comes from the line of Dick Wei of JP Morgan. Please ask your question. Hi, thank you for taking my question. Can management give more color on the some of the major cost items and outlook as well? For example, in terms of the R and D, how is the headcount trending for Q1? And what's the rest of the year? And also, on the SG and A front, where are we in terms of marketing? Are we just ramp it up in Q1. We'll have much more marketing preinstallation in the second quarter and rest of the year. And, what about maybe the other items since you have a bigger jump? Is it bandwidth costs? Are we by, I guess, bandwidth historically has been more of a step function. So I wonder if you are at one of these step function, jump up during the quarter. If you can give more color, that would be great. Thank you. Good morning, Dick. In terms of the overall expense picture, we have consistently been investing in the similar various, I mean, in the same investment areas, namely in infrastructure, in R&D, And we have said very clearly that this year, we will put a big emphasis on sales and marketing, promotional expenses to push our products through the systems and to make sure that the users adopt our great products. If you look at the line items on the P and L, we have said in the past that the bandwidth and depreciation trend has pretty much been established. The sales and marketing expenses is an emphasis and R and D has been a consistent theme for us to invest. I think if you want to extrapolate out the Q1 expense picture, when you look at the Q1 year on year, percent of revenue change, compared to last Q1, this trend is the change in terms of the percent of revenue for each expense line item is pretty indicative of what you should expect for the remainder of the year. So each quarter, there will be variations, things like marketing campaign that could call for quarterly changes of SG and A percent of revenue. But for the whole year, the Q1 year on year step up is pretty indicative for the whole year. And your next question comes from the line of Alicia Yap of Barclays. Please ask your question. Hi, good morning Robin, Jennifer and Victor. Thanks for taking my questions. I actually have questions on the comment for your mobile search product that you comment 100,000,000 daily active users. Can you elaborate a little bit more detail? Are this user coming mainly from your Baidu palm app and the Baidu search app, let's say include the user coming from third party mobile browser and also the default search box on the Android phones. And in relation to that, can you share what type of behavior and what type of keywords are the most common for this active user that you have been monitoring? Alexian said, the mobile search, comprises of a number of different channels. The fan model is growing its Baidu search apps or chat Baidu, which previously used the name the Baidu search ads. It's the strongest growth driver, but we also, draws traffic from 3rd party partners, including 3rd party browser products, Android operating systems, default search, when they came out from the manufacturer. And another important source is that web based search, people, go into a browser, either typing the baidu.com domain name or some kind of, through some kind of bookmark, they they find ways to use Vaidu Search. That tells us it's, really, a fundamental needs for Internet users, even on the mobile phone. What we learned from the query from that is that mobile users tend to use longer queries. Than PC because form is perceived as some kind of communication device. So users tend to use more verbal language, to do the search. This imposes both a challenge and an opportunity for Baidu. It's technically more difficult for a search engine to understand natural language, but that's also an opportunity because we are obviously the strongest in artificial intelligence and natural language understanding. So we can do a much better job, the mobile search than anyone else. And once we do a better and better job, I think users as well, increasingly dependent upon Baidu to find information right now mobile search or the home mobile internet is in its early stage and consumers in most cases cannot tell the quality difference of many competing products And that's why the panel and distribution at this time is very important. But as time passed by, I think our product, our search product quality will stand out and consumers will want to come to us, actively and, more frequently. Can I follow-up on, so if we just wanted to break down on your Baidu palm or your Baidu search what are the user out of your 100,000,000 active user? This are very dynamic, you know, component and I don't want to break down each different channel, the industry and the products is evolving very, very quickly. What I can tell you is that the Baidu app, the Baidu native app it's the fastest growing at this time. Okay. Also provide the best user experience because we can we have better control on the Navy Labs. And your next question comes from the line of Alex Yao of Deutsche Bank. Please ask your question. Hi. Good morning, everyone, and thank you very much for taking my question. My question is, on the quality of landing page on mobile inter net, how would this differ to, the quality of landing page on PC Internet And then how would such a difference affect the user behaviors such as a time span, the landing page or the traffic to transaction conversions? Thank you. Well, the reality is that most of our customers do not have a mobile, specific landing page. So when users do a search on the mobile phone, click on an app or land on a customer's website. That side was just a PC side. The files are small. You have to constantly zoom in, zoom out and move around the digital find information. It's very, unfortunately, to mobile phone users. That's the situation for majority of our customers. For those customers who do have a mobile site, It's not optimal either. Sometimes they are just designed out before the 2G for the really, you know, slow internet connection and small, screen phones with very limited features. And for those who are more savvy to mobile internet, they utilize a lot of you know, mobile specific, functions, like, click to call function, like the share information to other source and send information to other apps and some of the, obviously, the fund will then actually adapt it to different size of mobile phone screens. Thank you for the insightful answer. And can I follow-up with one question? What's your solution to address this issue? And how long do you envision this will be softer? So the content on mobile internet user will be a as friendly as those on the PC and the user will behave similar to the behavior on TC? Yes, that's right. We are working very hard to, to help the transition from PC to mobile, because when we come to many of our customers, they now start to realize that mobile is really coming and more and more targeted consumers, their targeted consumers, if mobile to try to find their product and services, but they don't know how to do it, that they don't have the technical capability to come up with a really mobile friendly, website. We have been working on building all kinds of tools to help them to speed that up. We come up with tools for developers to to test the different kind of screens to utilize our storage capabilities, our computing power and we write a problem to us for them to automatically convert the PC centric website to a mobile friendly website, then they can, you know, start to optimize the mobile site from the converted version, during our this year, nationwide marketing campaign, we emphasize very much the mobile friendly side to our customers and the potential customers. I think it will take up to 2 years for our customers to get up to speed, to get them. I talked about this transition you know, at the end of last year and I thought if you come from there, it would be around 2 years the whole industry is undergoing a transition and I believe that transition will last about 2 years. Thank you very much. And your next question comes from the line of Philip Wen of Morgan Stanley. Please ask your question. Thanks Robin and Jennifer for taking my question. My question is about your top line guidance. Which implies a further decline, in terms of full price, even with a relatively easier comp from last year. Was that due to the change of competitive environment or is there any structural change to the search business overall in China? I think, you know, we do have a pretty established pattern in terms of growth. And given the sequential growth at this level, you're looking at about between 23.5percentto26.5percent. I think it'd be mirror that kind of a trend over last year This is pretty consistent. Obviously, as Baidu has grown phenomenal over the years, we do have a very large base to operate But in looking at the rate of growth, you know, that, that we currently predict, I think it's pretty much in line. If you recall, I think last Q2, the sequential growth was about 28%. And given the mid range about, close to 25%. I think this is a reasonable sequential wrench that we're looking at. Many things are going on. I think in this an uncertain macro environment, we continue to be very encouraged by what we're seeing in terms of our customer base growth. We continue to add customers on our overall pool of service, and we are working very closely and engagingly with the large customers. The customers do appreciate our platform and, and, and it's not only web search, we have a complete set of product offerings to the user that commands tremendous traffic and we're working with these customers to see how can we can better address their needs and to their potential customers. So many things are going on and I think our customers really believe in us and working with us. And I think given the current forecast, it is consistent with prior business trends. Thank you. Just a quick follow-up. Have you heard any initial feedback from your customers given that, your competitors who are starting to monetize the search traffic, just wanted to get a sense in terms of our competition. What we're seeing is customers, as I just mentioned, continues to work very closely. A search market is a competitive landscape, but the search is the best, a product for our customers because it's performance based. It delivers on the kind of ROI that customers really love. And as long as we generate positive ROIs for our customers, they won't stop coming to us. And some of the examples that, as we illustrated, are close working relationship with the joint business partner, kind of players like Ping An, like player in the automotive FMCG sectors, e commerce sectors. These customers, if you look at what they're doing, they're playing their trust 2 by do. They're they want to be very innovative to, drive values and growth for their business. And they're working with us to experiment on all kinds of products. And these products are across different platforms, being a PC or mobile and across different products that we have, whether it be web search or non web search. So what we're seeing is the customers do believe in the overall value propositions that I do construct for them and they're working very closely with us. So we're very encouraged by that, and it is really our job to service them. Let me just add that search business has always been inventory bounding, not demand bounding. I think customers always want to buy more traffic and when you buy more, when you have to, you pay a higher unit price for the traffic you get. So it's our focus. It's really provides the best, is their experience, make people more dependents and rely on by due to fine information. Therefore, when we have more inventory, we can provide more value to our advertisers and customers. Great. Thanks for the comment. Very helpful. And your next question comes from the line of gianxiao of Macquarie. Please ask your question. Good morning. Thank you for taking my question. My question is on the investment and on the margins. You mentioned earlier that the increase in spending in the first quarter sort of step function and going forward should be somewhat consistent. I was just wondering, just a philosophical of the management strategy with respect to investments and spending. Is that you want to go after the right market regardless of the expenses? Or you feel like, okay, 37% operating margin that's a new norm and now seasonality is on your back for the rest of the year. You should see margin expansion and sort of next year, even better. Just sort of want to get your overall perspective on your margin trajectory, sorry, from here. I think, if we have stated in the past and very consistently, as we manage our business, internet space is, is exciting. It has a lot of opportunities and particularly at this juncture, mobile holds tremendous opportunities and it costs for us to invest to position ourselves for the future. So we do not specifically, at this stage, on the company's life, focus on managing towards a specific margin target, In terms of the investment philosophies that we operate, we target the strategically important areas that makes sense for us to invest. And once we identify the area, we'll dedicate and allocate resources accordingly along the way, we'll make sure that the focus is the kin, the execution is tight, and the investment is done with great efficiency and effectiveness. And the whatever oftentimes, the product that we invest in the internet industry do not directly yield revenue at the same time period. So you would see margin variations As we said this year in particular, it is important for us to invest in mobile product. We have developed a great product And one of the things that's a little different compared to prior year for investment patterns is that we will aggressively promote products, mobile products, so the different distribution channels. So this is what we're seeing this year. For Q1, you would already have a felt, what are the investment and its implications to the overall P and L picture. And this effort is not going to end. Will continue to invest in infrastructure, in people that's primarily R And D as well as in sales and marketing. Efforts as I noted. So I think I'll give pretty, pretty clear indication of what you should expect for this year and that's what we're expecting. And this is the important year for us to invest to position ourselves well for the future. Thank you very much for the comments. Your next question comes from the line of Catherine Leon of Arete Research. Please ask your question. Hi, good morning. So just following up on the 2nd quarter guidance, I was wondering if you could provide some detail on how much of IQI revenues are included in the guidance. Thank you. We do not separately, even for the actuals, we do not separately report on the on the subunits that we consolidated into our overall financial results because it does not really come across as material to the overall picture. For I see specifically back to your question, I think what, you know, it is not driver of the Q2 revenue sequential growth, Northern Lager, well, it is, you know, low material impact to us overall. So I, I, I, I, I can, separately identify what's that contribution is. Sure. And maybe can I ask a follow-up on the related content costs? If we look at the content cost growth trajectory, should we benchmark to some of the listed video players and how much they're spending on content or is there some reason that we should expect a very wide divergence and how much you're spending? There will be differences quarter on quarter. IT in the video online video business, it is dependent on its content. It depends on the timing of quality content and the timing of what is aired. It does vary quarter over quarter. There You see a little bit of differences between Q4 and Q1. In Q4, there were some year end catch up, some for, for IKE. And the Q1, I think, you know, there is, just 1 quarter Some of the phenomenon you're seeing in the online video is quarter over quarter, there will be big variations of content cost And from our perspective, Q1's content cost represents about 1.6% of revenue that should overall should the slightly trend up. And your next question comes from the line of Chi Singh of HSBC. Please ask your question. Morning. Thanks for taking my question. I was wondering if you can give us a little bit more color on in terms of mobile, perhaps sort of the growth of mobile traffic I'm curious about sort of CPC, how that's sort of tracking and how that's growing. And also sort of inventory thing, how you feel about sort of your to the mobile, inventory right now. Thank you. You mean the mobile CTC? Yes. Mobile CTC. Uh-huh. Yes. Mobile CTC is growing very nicely. On the mobile front, both the traffic and CPM are growing very quickly. So on a combined basis, the revenue contribution from mobile is growing very, very quickly. It's just come off a very small base. So right now, it's still relatively small, as a percentage of total revenue. But we are very confident that this part will continue to grow and as our customers learn how to utilize the features provided by mobile phones and mobile internet, then I'll be able to get better and better ROI on mobile. Having said that, the CPC on mobile is still lower than the CPC PC. And in terms of inventory, it's still, the mobile traffic contribution is still less than the contribution from DC. But that is, again, growing error quickly. And relatively because, less customers fine tune for, mobile, internet, the mobile inventory is relatively easier to get than PC inventory at this time. And your next question comes from the line of Eddie Leung of Merrill Lynch. Please ask your question. Thank you for taking my questions. Just two quick follow-up questions. The first one is on some of the cost items in the first quarter. I noticed that there was quite a bit of increase in operational costs and cost of services as well as R&D, under operating expenses. So just wondering if, these two items have something to do with the consolidation of IT And if so, any color on how we, look at these cost items going forward will be helpful. And then secondly, just a quick follow-up, on Robin's answer about a mobile, just like a minute before. They seem to mention that right now, the, CBC growing pretty rapidly. You did not mention, but about click through rate. So wondering, whether, the technologies, at the moment, could, give pretty good click through rate on the mobile side at a similar level as on PC or there is still your backrooms for improvement? Thanks. Eddie, good morning. For your first question, on the two line items for operations cost within cost of revenues as well as the R and D expense line items. The primary driver for these two line items are the Baidu business Obviously, IT's consolidation would add up to the overall expense, but they're not the main driver. For the operations cost, I think, we included in there also are some intangibles amortization that is related to some of the investments we do. This, I think, this line item has pretty established a trend, particularly as the as the overall GE's picture is in the picture as well, the expense related to that line item is has established the pattern. So R and D is primarily because of Baidu's investment in our R and D pattern. And as I've noted, this has been an investment theme for us for a couple of years and that trend will continue to carry going forward. Okay. On the click through rate, we do not track that very closely because it's not really a problem on the mobile screen. It's very small and ad would occupy a lot of space, people, kind of, you know, aren't familiar with the mobile search product. So, they would naturally click whatever is shown on the first screen of the search results. So the click rate could, tilt up and down, but, when you combine with the CTC and the the ROI for the customers and the willingness of our customers to place the their promotional messages, the mobile traffic, it's very encouraging they have seen a lot of improvements on that. That's why the CPM and the traffic are going very quickly and, customers are adopting the multiple search more and more, more so from this point of view, again, the limiting factor is how fast they can come up with a mobile friendly site or mobile friendly service. It's not about inventory. It's not about click through rate or cost per click. It's not bad. And your next question comes from the line of Xin Yoon of Nomura. Please ask your question. Hey, good morning everyone. Just, is there, are you guys, forcing advertisers to allocate both money to the desktop as well as mobile? And if so, how much of that is incremental and what should we expect mobile to be a very material percentage of total revenues? And furthermore, what's going to if that's the case, what do you expect is going to happen to the overall CTRs and CTCs? And And I guess, final question to that is, is the mobile mark, the mobile search mature enough where you could do that now, or just the timing of it right now, I guess. And just a quick follow-up question after that is just which reset for SDS or FDC going forward. We saw 3x jump on a quarter of a basis, quarter over quarter basis. Should we expect that to reoccur every 1st quarter going forward or how we be modeling that? Thanks guys. We are encouraging all of our, customer to allocate a certain amount of budget on mobile because we really believe that is the trend and that is the where they are targeted, consumers are moving into. But we are not forcing them to do so. They still have the option not to, to advertise the mobile traffic Right now, the overall CTC is lower because the CPC on mobile is lower than the CPC PC, but it is the transitioning period, that the CTC on mobile keep going up and up and eventually we think the overall impact would be incremental. And Jean, were your second question related to SEC? I didn't hear that clearly. Yes, just we saw a 3x jump on a quarter over quarter basis, I believe. And I'm just wondering, is that just a one time thing or we expect that, first quarter going forward, and just kind of how we should be modeling for that? Yes. If you look at the details, either published the financial reports, you can see the breakout of the SDC expenses. UMasking and R&D talents has been a consistent theme, and we are increasingly using share based compensation as a lever to incentive as our people, as well as to keep our top talents. And we will continue to use this as a very important tool. So you should expect, I mean, this is not a one time. You should expect that to keep going up. Got it. Great. Thanks guys. And your next question comes from the line of Ming Zhou of 86Research. Please ask your question. Hi, thank you for taking my question. I just have a good question on IGE, Is there any update that you can provide us on it? Any there's been rumor or news in the market? Thank you. I didn't quite answer the question. Okay. So my question my question is about Iqiyi. I was wondering if you could give us some update about the business in the quarter heading to the 2nd quarter? And is there any other strategic operation around it? Thank you. Okay. Online video is a very important vertical for us. Because we see a lot of users come to Baidu to search for video content, Baidu is our answer. To that, we will continue to support IT to grow. But right now, it's still burning money, but we think that longer term, this will become a profitable bins. So we will continue to support the B2Bins that have some very important direction for Baidu. We obviously do not comment on any specific rumors, I just can tell you that we like the video events and we will continue to invest. Okay. Thank you. And your next question comes from the line of Thomas Chung of BOCI. Please ask your question. Hi, good morning. Thanks for taking my questions. Have a question regarding your mobile strategy. Which area in mobile internet do you consider by, do you expect to invest rather than building on its own? Thank you. Mobile is in its early stage. There are all kinds of different apps and our products technology coming. The market. My philosophy is that whenever we can buy, we prefer buy to build because, that will save us time. But, we have our own core business, which is search, it's very hard to buy search, from other players. So we have to, invest to grow our home for all search for all the core businesses. If there's anything that can help enhance our piviction, strategic position in Surgent or how to grow the overall ecosystem like how to, help our customers to come up is more search friendly, mobile friendly websites. That sort of thing, we will be happy to take a look. I see. Thank you. And your next question comes from the line of Jean Munster of Piper Jaffray. Please ask your question. Hey, good morning. Jennifer, you talked about, you've been this investment phase for a little bit in this next year to be an investment phase. Just from a high level, I think the buy side is concerned that this is just going to kind of continue indefinitely. Do you, as you kind of look at your investment plan over the next couple of years. Do you see that starting to slow down that you basically start to see enough benefits in the next year that you won't have to be spending as much in 2014. I think, as I mentioned earlier, we are facing significant opportunities in the mobile space And that's why we're deploying a lot of resources, whether it's talent or infrastructure or marketing efforts to position ourselves. Obviously, when investors look at the margin, it's a combination of the speed of revenue growth as well as investments. It does not necessarily coincide at the same time, but when you incur expenses, you're generating a kind of Obviously, as we invest, we want to make sure that we position ourselves well and we will have a revenue generation capabilities going forward. So this is where we are. If I look at the investment themes of the items that incur significant resource allocation. Infrastructure, we are building the cloud capacity, you know, we want to really be the key player to host the content to help users, do storage, to help really manage the huge database that has, you know, be our core technical competency. And there are fewer players in the country that can do that. And we're in the early space, early stage to invest in infrastructure. And when you look at R and D talent. We have been growing particularly R and D talents very fast over the past few years It's hard to imagine that we'll continue that pace, you know, as fast as it used to be. So over time, I think, as we look at the people related matters, that hasn't been that has been the case for sales and we have slowed down hiring on sales and putting our emphasis on on R and D. So we have very clear focus on where we are going and what we need to do and how to allocate resources towards that. And the sales and marketing is a very special item for us at this juncture, because we have products that we need to aggressively And it is, it is, you know, I think that we are at a, advantageous position. Blood Becca's I think all the businesses that we have done very well over the years have built us the capability to aggressively promote our products and position ourselves for the future. Obviously, we are doing this with the objective to generate huge success and the revenue growth potential. And therefore, return to the to the shareholders. So that's a this is basically the cycle we're running the business there is the industry itself continues to evolve and it's hard to say, this year, next year, 1, it will be end. I think it is a continuing theme. And I think when the time comes that we feel this is, we're well positioned and I think all parties, we'll be happy to see that. Yes, I just want to recap that, exactly how aggressive with a weak investment really depends on how much growth potential we see in the future. We will aggressively invest if there is significant growth opportunities ahead of us, the revenue growth and the investment pace may not go head to headquarterbyquarter, but when you look at a relatively longer time horizon, you will see that the investment should pay off if we execute things, right? When we talk about the transition period for like a few couple of years, it's really an industry wide a trend, we try not to be disturbed by this kind of landscaping shifting, we try to do things that's right, for the longer term for our users and for our customers. That's very helpful. And, I agree that's great strategies. Thank you. Thank you. And your final question comes from the line of Eric Wen of China Renaissance Securities. Please ask your question. The line of Eric, when is open? And your next question comes from the line of Cynthia Meng of Jefferies. Please ask your question. Thank you for giving me the chance. I have one question. On the investment in mobile, there's a lot of discussion by Jennifer and Robin. I just want to follow-up. When Robin said, there are 2 years of transition since last year. Can we understand that the mobile related investment will also, left until 2014? Or will that do you see that will go on into 2015? And what are some of the sectors and verticals you are looking into potential M and A opportunities or strategic moves? Thank you. Well, let me clarify on that. Let me go at the end of the last quarter. I mean, end of last year, I said we were entering into a 2 year transition period. That transition period is not really about environment. It's really about landscape change or revenue opportunities. So we will continue to invest in 2015, 2016, we will continue to invest. We hope that after the transition, the search Venezuela back on track, you know, the monetization capabilities for mobile traffic will be, on par or even better than PC search. That's what I meant by transition. Okay. Then follow-up on that. When do you see what is the like, optimal mix of, mobile search versus PC based search. That'd be like 15, 20 percent of total revenue from mobile? During what kind of period? Right. That's my question. Was that going to be 15%, 20% in 3 years? Or how do you see that? Thank you. I'm not going to give you your exact guidance on the percentage, 3 years down the road, but like I said, the monetization capabilities for mobile, well, is growing very, very quickly after the transition period, the monetization capability should be on par with PC. K. Thank you. We are now approaching the end of the conference call. I'll now turn the call over to Baidu's Chief Executive Officer, Robin Lee, for his closing remarks. 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 and you may now disconnect. Good day. Do you want to listen