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. 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 first 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 measures to the unaudited most directly comparable GAAP measures. Is available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. 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 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 every device and through every input method. 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, Baidu Wangpan, and Qunar, to name a few. We also introduced a new approach to desktop search, harnessing semantic intelligence and advanced machine learning to enhance user experience in ways I'll elaborate on later in the call.
While we made strides on the user front, traction 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've 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 cement our leading position in mobile search. Daily active users of Baidu Mobile Search grew over 25% from the end of 2012 to over 100 million today. It is one of the most frequently used mobile services on the market. The fast growth of our Mobile Search reflects the efforts we've put into delivering a superior user experience.
Just as 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 Android version of our Mobile Search App, version 4.1, now leverages our T5 engine, supporting HTML5 is 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 Mobile 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 these areas in a moment. Our leading position in mobile search owes a lot to the excellence of our map and LBS capabilities.
Expectations of search results are dramatically different depending on whether you are sitting at your desk or searching on a smartphone while on the go. Our ability to integrate maps and LBS to deliver a richer, more useful 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 more accurate search and faster decision-making and action. For instance, if I want to search for the nearest Thai restaurant, I get restaurant address, a click-to-call phone number, user reviews, average price, directions on how to get there, real-time traffic situation, and information on any special offers there might be, and the option to book a table right away.
Our map has an open API, and we continue to add partners to build out our LBS platform. This platform already includes features like hailing a cab, booking a hotel room, and even finding group buying deals in your immediate area. Useful features like this make Baidu Maps 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 queries. We incorporated semantic intelligence into our search algorithm to enhance results. We have built a knowledge graph. We not only understand exactly what the user is looking for, but also can draw relationships between related concepts using content integrated from Baidu's vertical searches, Baidu Knows, Baidu Post Bar, Baidu Baike, and third-party content providers.
With a new structured format, we both resolve the user's initial query directly on the search page and help the user discover new information quickly and easily. For example, if I search for Lakers basketball player Kobe Bryant, 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 his bio, photos, and links to other basketball players who competed in the London 2012 Olympics, MVPs, and other players I 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&D capabilities to stay far ahead of the pack. We've made a serious commitment to ensuring that our best ideas become reality over the coming years. Part of this is our investment in advanced machine learning.
The Institute of Deep Learning is focused on just that. deep 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 categorizing images, or making just inferences from examples, like in the search on Kobe Bryant 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 raw computational power today, but very obvious application for both users and customers. Two such applications are in voice and image recognition. These are two of the most natural interfaces, and user demand for this input method is increasing quickly. Our efforts here have already yielded impressive results.
Voice-based search queries are increasing very rapidly, keeping up the very fast acceleration we saw in 2012, while voice queries grow tenfold. Image-based search is growing quickly, too, and the accuracy of these searches is literally improving day to day as our systems learn. In voice search, we are the market leader in measuring recognition accuracy. In image search, our recognition rates 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 Baidu's mobile search app will deliver the information they're looking for instantaneously. deep learning not only helps us deliver a better search experience, it benefits monetization, too. deep learning will help our customers select more effective keywords and will drive higher ad relevance through better contextual awareness.
The upshot is that our push into this important area of artificial intelligence will drive 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 search engine marketing campaign in the current quarter, ensuring that our customers are 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 roll out this joint business plan model with other large customers in important verticals such as auto, online travel, and FMCG. Joint business plan or JBP is a deep collaboration between Baidu and our customers. We collectively form 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 JBP 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 APIs 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-based paid links in real time as well. Baidu'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 headway 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 methods. 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 increase usage of our own mobile products and continued to invest in R&D. We completed the iQIYI transaction last December and have consolidated a whole quarter of iQIYI financials into our P&L. The line items in our P&L reflect this consolidation. iQIYI's Q1 consolidation had 3-4 points impact in our Q1 operating margin. For the rest of the year, we expect this 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 in infrastructure and R&D. We will push marketing and promotional efforts 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. Let me go through some of the financial highlights for the first quarter 2013. All amounts mentioned are in RMB, unless otherwise noted. For the first quarter, total revenues were RMB 6 billion, representing a 40% increase year-on-year. During the first quarter, Baidu had approximately 410,000 active online marketing customers, a 28% 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 RMB 14,500. 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 RMB 610 million, a 10.2% of total revenues, as compared to 7.8% in the corresponding period in 2012 and 9.6% in the fourth quarter of 2012.
The increase mainly reflects increased contextual ad contribution and Hao123 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 TAC 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% respectively, compared to 5.2% and 5.4% in the corresponding period of 2012. The increase was mainly due to an increase in network infrastructure capacity as well as the consolidation of iQIYI. Content cost as a component of cost of revenue were RMB 96 million, 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 related to the iQIYI business.
Selling, general and administrative expenses in Q1 were RMB 848 million, 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 alongside our search engine marketing campaign. These expenses are necessary and will be closely monitored for effectiveness. R&D expenses in Q1 were RMB 811 million, an increase of 83% over the corresponding period in 2012, primarily due to an increase in the number of R&D personnel. Share-based compensation expenses, which were allocated to the related operating cost and expense line items, increased in aggregate to RMB 111 million in the first quarter from RMB 35 million in the corresponding period in 2012.
The increase was a result of more shares being granted to employees. Share-based compensation will continue to be an emphasis to attract and incentivize key talents. Operating profit for Q1 was RMB 2.2 billion, an increase of 6% over Q1 2012. Total headcount as of March 31st, 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 RMB 389 million 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 billion, 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 RMB 5.89 and RMB 5.88 respectively.
Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure for Q1, was RMB 2.2 billion, 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 RMB 6.20 and RMB 6.20 respectively. As of March 31st, 2013, the company had cash equivalents, and short-term investments of RMB 33.8 billion. Net operating cash inflow for the first quarter of 2013 was RMB 2.2 billion. Capital expenditures for the first quarter of 2013 were RMB 468 million. 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 RMB 7.37 billion and RMB 7.55 billion, representing a 35.1%-38.4% year-on-year increase. Please note this forecast reflects Baidu's current and preliminary review and is subject to change. I will 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 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 Dick Wei of JPMorgan. Please ask your question.
Hi. Thank you for taking my question. Can management give more color on some of the major cost items and outlook as well? For example, in terms of the R&D, how is the headcount trending for Q1 and the rest of the year? Also, on the SG&A front, where are we in terms of marketing? Are we just ramped it up in Q1? We'll have much more marketing pre-installation in the second quarter and rest of the year. What about maybe the other items, since you have a bigger jump? Is it bandwidth cost? I guess bandwidth historically has been more of a step function, so I wonder if you are at one of the step function jump up during the quarter. If you can give more color, that would be great. Thank you.
Morning, Dick. In terms of the overall expense picture, we have consistently been investing in the same investment areas, namely in infrastructure, in R&D. 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 users adopt our great products. If you look at the line items on the P&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&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 revenue % change compared to last Q1, this trend is the change, in terms of the revenue %, for each expense line item is pretty indicative of what you should expect for the remainder of the year. Each quarter, there will be variations, things like marketing campaign that could call for quarterly changes of SG&A revenue %. For the whole year, the Q1 year-on-year step-up is pretty indicative for the whole year.
Okay. Got it. Great. Thank you very much.
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 million daily active users. Can you elaborate a little bit more detail? Are these users coming mainly from your Baidu Palm app and the Baidu App? Does it include the user coming from the third-party mobile browser and also the default search box on the Android phones? In relations to that, can you share what type of behavior and what type of keywords are the most common for these active users that you have been monitoring? Thank you.
Alicia, the mobile search comprises of a number of different channels. The fastest-growing is Baidu's Search App or Baidu Palm, which is a previously used name for the Baidu Search App. It's the strongest growth driver. We also draw traffic from third-party partners, including third-party browser products, Android operating systems default search, when they came out from the manufacturer. Another important source is the web-based search. People going to a browser, either typing the baidu.com domain name or through some kind of bookmark. They find ways to use Baidu search. That tells us it's really a fundamental need for Internet users, even on the mobile phone. What we learned from the query from the app is that mobile users tend to use longer queries than PC, because phone is perceived as some kind of communication device, so users tend to use more verbal language to do the search.
This poses both a challenge and an opportunity for Baidu. Technically, it's more difficult for a search engine to understand natural language. That's also an opportunity because we are obviously the strongest in artificial intelligence and natural language understanding. We can do a much better job on the mobile search than anyone else. Once we do a better and better job, I think users will increasingly dependent upon Baidu to find information. Right now, mobile search or the whole mobile Internet is in its early stage, and consumers, in most cases, cannot tell the quality difference. Many competing products. That's why channel and distribution at this time is very important. As time passes by, I think our search product quality will stand out, and consumers will want to come to us actively and more frequently.
I see. Can I follow up on if we just wanted to break down on your Baidu Palm or your Baidu Search App, what are the users out of your 100 million active users?
These are very dynamic components, and I don't want to break down each different channel. The industry and the products, it's evolving very quickly. What I can tell you is that the Baidu-native app is the fastest-growing at this time.
Okay.
Think also provides the best search user experience because we have better control on the native apps.
I see. Okay, great. Thank you.
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 internet. How would this differ to the quality of landing page on PC internet, and how would such a difference affect user behaviors such as time spent on 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. When users do a search on the mobile phone, click on an ad or land on a customer's website, that site was just a PC site. The fonts are small, you have to constantly zoom in, zoom out, and move around to find information. It's very unfriendly to mobile phone users. That's the situation for a majority of our customers. For those customers who do have a mobile site, it's not optimal either. Sometimes they are just designed only for the 2G, for the really slow internet connection and small screen phones with very limited features. For those who are more savvy to mobile internet, they utilize a lot of mobile-specific functions like the click-to-call function.
Like, they share enough information to other sources, send information to other apps. Obviously, the font will dynamically adapt to different size of mobile phone screens.
Thank you for the insightful answer. Can I follow up with one question? What's your solution to address this issue, and how long do you envision this will be solved so the content on mobile internet user will be as friendly as those on the PC, and the user will behave similar to their behavior on PC?
Yeah, that's right. We are working very hard to help the transition from PC to mobile. When we talk to many of our customers, they now start to realize that mobile is really coming and more and more targeted consumers, their targeted consumers, use mobile to try to find their product and services. They don't know how to do it. 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 test the different kind of screens, to utilize our storage capabilities, our computing power, and we write program tools for them to automatically convert the PC-centric website to a mobile-friendly website. Then they can start to optimize the mobile site from the converted version.
During this year's nationwide marketing campaign, we emphasized very much the mobile-friendly site to our customers and the potential customers. I think it will take up to 2 years for our customers to get up to speed. I talked about this transition at the end of last year, and I thought if you count 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.
Your next question comes from the line of Philip Wan 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 growth rate, 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? Thank you.
I think we do have a pretty established pattern in terms of the quarterly growth. Typically, sequentially, our Q2 you would see the biggest sequential growth. Given the sequential growth at this level, you're looking at about between 23.5%-26.5%. I think if you mirror that kind of trend over last year, this is pretty consistent. Obviously, as Baidu has grown phenomenally over the years, we do have a very large base to operate. In looking at the rate of growth 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%. Given the mid-range about close to 25%, I think this is a reasonable sequential range that we're looking at. Many things are going on.
I think in this 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, our overall pool of service, and we are working very closely and engagingly with the large customers. The customers do appreciate our platform, 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 we can better address their needs and to their potential customers. Many things are going on, and I think our customers really believe in us and are working with us. 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 competitor, Qihoo, is starting to monetize their search traffic? Just want to get a sense in terms of competition. Thank you.
What we're seeing is customers, as I just mentioned, continues to work very closely. Search market is a competitive landscape, but search is the best product for our customers because it's performance-based. It delivers on the kind of ROI that customers really love. As long as we generate positive ROIs for our customers, they won't stop coming to us. Some of the examples that as we illustrated, a close working relationship with the joint business partner kind of players like Ping An, like players in the automotive, FMCG sectors, e-commerce sectors. These customers, if you look at what they're doing, they're putting their trust to Baidu. They want to be very innovative to drive values and growth for their business. They're working with us to experiment on all kinds of products.
These products are across different platforms, being it PC or mobile, and are across different products that we have, whether it be web search or non-web search. What we're seeing is the customers do believe in the overall value propositions that Baidu constructs for them, and they're working very closely with us. 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. When you buy more traffic, you pay a higher unit price for the traffic you get. Our focus is really to provide the best user experience, make people more dependent and rely on Baidu to find the information. Therefore, when we have more inventory, we can provide more value to our advertisers and customers.
Great. Thanks for the comment. Very helpful.
Your next question comes from the line of Jiong Shao 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 the philosophy 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 from here. Thank you.
I think, we have stated in the past very consistently, as we manage our business, internet space is exciting. It has a lot of opportunities, and particularly at this juncture, mobile holds tremendous opportunities, and it calls for us to invest to position ourselves for the future. We do not specifically, at this stage of the company's life, focus on managing towards a specific margin target. In terms of the investment philosophies that we operate, we target strategically important areas that make sense for us to invest. Once we identify the area, we'll dedicate and allocate resources accordingly. Along the way, we'll make sure that the focus is keen, the execution is tight, and the investment is done with great efficiency and effectiveness. Oftentimes, the products that we invest in the internet industry do not directly yield revenue at the same time period.
You would see margin variations. As we said this year in particular, it is important for us to invest in mobile products. We have developed great products, one of the things that's a little different compared to prior year different investment patterns is that we will aggressively promote our mobile products through the different distribution channels. This is what we're seeing this year. For Q1, you would already have felt what the investment and its implications to the overall P&L picture. This effort is not going to end. We'll continue to invest in infrastructure, in people, that's primarily R&D, as well as in sales and marketing efforts, as I noted.
I think I gave pretty clear indication of what you should expect for this year, that's what we're expecting, this is an 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 Leung of Varit Research. Please ask your question.
Hi, good morning. Just following up on the second quarter guidance, I was wondering if you could provide some detail on how much of iQIYI revenues are included in the guidance. Thank you.
We do not separately, even for the actuals, we do not separately report on the sub-units that we consolidate into our overall financial results, because it does not really come across as material to the overall picture. For iQIYI specifically, back to your question, I think it is not driver of the Q2 revenue sequential growth, nor the lagger. It is low material impact to us overall, so I cannot separately identify what that contribution is.
Sure. Maybe can I ask a follow-up on the iQIYI-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 in how much you're spending?
There will be differences quarter-on-quarter. iQIYI in the online video business, it is dependent on its content, and depends on the timing of quality content and the timing of when it's aired. It does vary quarter-over-quarter. You see a little bit of differences between Q4 and Q1. In Q4, there were some year-end catch up for iQIYI. Q1, I think there is just one quarter. Some of the phenomenon you're seeing in the online video is quarter-over-quarter, there will be big variations of content cost. From our perspective, Q1's content cost represents about 1.6% of revenue. That overall should slightly trend up.
Okay. Thank you.
Your next question comes from the line of Chi Tsang of HSBC. Please ask your question.
Good 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, how you feel about your mobile inventory right now. Thank you.
You mean the mobile CPC?
Yes, mobile CPC.
Mobile CPC is growing very nicely. On the mobile front, both the traffic and CPM are growing very quickly. On a combined basis, the revenue contribution from mobile is growing 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. 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, they will be able to get better and better ROI on mobile. Having said that, the CPC on mobile is still lower than the CPC on PC. In terms of inventory, the mobile traffic contribution is still less than the contribution from PC, but that is, again, growing very quickly and relatively because less customers are fine-tuned for mobile internet.
The mobile inventory is relatively easier to get than PC inventory at this time.
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 cost, under cost of services, as well as R&D under operating expenses. Just wondering if these two items have something to do with the consolidation of iQIYI, and if so, any color on how we look at these cost items going forward will be helpful. Secondly, just a quick follow-up on Robin's answer about mobile, just like minutes before. You seem to mention that right now the CPC growing pretty rapidly. You did not mention much about click-through rate.
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 big rooms 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 R&D expense line items, the primary driver for these two line items are the Baidu business. Obviously, iQIYI's consolidation would add up to the overall expense, but they're not the main driver. For the operations cost, I think included in there also are some intangibles amortization that is related to some of the investments we do. I think these line items have a pretty established trend, particularly as the overall SG&A's picture is in the picture as well. The expense related to that line item has established a pattern. For R&D, it's primarily because of Baidu's investment in our R&D. As I 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 are kind of unfamiliar with the mobile search product, so they would naturally click whatever is shown on the first screen of the search results. The click rate could go up and down, but when you combine with the CPC and the ROI for the customers and the willingness of our customers to place their promotional messages, the mobile traffic is very encouraging. We 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 mobile search more and more.
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 that.
Got that. Thank you.
Yeah.
Your next question comes from the line of Jin Yoon of Nomura. Please ask your question.
Hey, good morning, everyone. Just are you guys forcing advertisers to allocate both money to the desktop as well as mobile? If so, how much of that is incremental, and what should we expect mobile to be a very material percentage of total revenues? Furthermore, if that's the case, what do you expect is going to happen to the overall CTRs and CPCs? I guess, a final question to that is the mobile search mature enough where you could do that now? Or just the timing of it, why now, I guess? Just a quick follow-up question after that is just what should we expect for SBC or SBCs going forward? We saw a 3x jump on a quarter-over-quarter basis. Should we expect that to reoccur every first quarter going forward, or how should we be modeling that? Thanks, guys.
We are encouraging all of our customers to allocate a certain amount of budget on mobile, because we really believe that is the trend and that is where their targeted consumers are moving into. We are not forcing them to do so. They still have the option not to advertise the mobile traffic. Right now, the overall CPC is lower because the CPC on mobile is lower than the CPC on PC. It is a transitioning period that the CPC on mobile keep going up and up. Eventually, we think the overall impact would be incremental.
Jin, was your second question related to SEC? I didn't hear that clearly.
Yeah. Just, we saw a 3x jump on a quarter-over-quarter basis, I believe. I'm just wondering, is that just a one-time thing, or should we expect that first quarter going forward, and just kind of how we should be modeling for that?
Yeah. If you look at the details in the published financial reports, you can see the breakout of the SBC expenses. Investing in R&D talent has been a consistent theme, we are increasingly using share-based compensation as a lever to incentivize our people, as well as to keep our top talents. We will continue to use this as a very important tool. You should expect, I mean, this is not a one-time. You should expect that to keep going up.
Got it. Great. Thanks, guys.
Your next question comes from the line of Ming Zhao of 86Research. Please ask your question.
Hi. Thank you for taking my question. I just have a quick question on iQIYI. Is there any update you can provide us on it? I know there's been rumor or news in the market on. Thank you.
I didn't quite get the question.
Okay. My question is about iQIYI.
I was wondering if you could give us some update about the business in the quarter, heading to the second quarter, and is there any other strategic operation around it? Thank you.
Oh, 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. iQIYI is our answer to that. We will continue to support iQIYI to grow. Right now, it's still burning money, but we think that longer term, this will become a profitable business. We will continue to support the video business as a very important direction for Baidu. We obviously do not comment on any specific rumors. I just can tell you that we like the video business and we will continue to invest.
Okay. Thank you.
Your next question comes from the line of Thomas Chong of BOCI. Please ask your question.
Hi. Good morning. Thanks for taking my question. I have a question regarding your mobile strategy. Which area in mobile internet do you consider Baidu is better to invest rather than building on its own? Thank you.
Mobile is in its early stage. There are all kinds of different apps and products, technology coming out on the market. My philosophy is that whenever we can buy, we prefer buy to build, because that will save us time. 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 own for all search, for all the core businesses. If there's anything that can help enhance our strategic position in searching or help to grow the overall ecosystem, like how to help our customers to come up with more search-friendly, mobile-friendly websites, that sort of things, we will be happy to take a look.
I see. Thank you.
Your next question comes from the line of Gene Munster of Piper Jaffray. Please ask your question.
Good morning. Jennifer, you talk about you've been in this investment phase for a little bit, and this next year to be an investment phase. 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 look at your investment plan over the next couple of years, do you see that starting to slow down? That you'll basically start to see enough benefits in the next year that you won't have to be spending as much in 2014? Thanks.
I think, as I mentioned earlier, we are facing significant opportunities in the mobile space, that's why we're deploying a lot of resources, whether it's talents 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 investment. It does not necessarily coincide at the same time, when you incur expenses, you generate a kind of revenue. Obviously, as we invest, we want to make sure that we position ourselves well, we will have revenue generation capabilities going forward. 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.
We want to really be the key player to host content, to help users do storage, to help really manage the huge database that has to be our core technical competency. There are fewer players in the country that can do that, we're in the early stage to invest in infrastructure. When you look at R&D talents, we have been growing, particularly R&D talents, very fast over the past few years. It's hard to imagine that we'll continue that pace as fast as it used to be. Over time, I think as we look at the people-related matters, that has been the case for sales, we have slowed down hiring on sales and putting our emphasis on R&D. We have a very clear focus on where we are going and what we need to do and how to allocate resources towards that.
Sales and marketing is a very special item for us at this juncture because we have products that we need to aggressively push. I think we are at an advantageous position because 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 objectives to generate huge success and revenue growth potential, therefore return to the shareholders. This is basically the cycle we're running the business. The industry itself continues to evolve, it's hard to say this year, next year, when it will end. I think it is a continuing theme, I think when the time comes that we feel we're well-positioned, I think all parties will be happy to see that.
I just want to recap that exactly how aggressive we invest really depends on how much growth potential we see in the future. We will aggressively invest if there's significant growth opportunities ahead of us. The revenue growth and the investment pace may not go head to head quarter by quarter. 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 a good couple of years, it's really an industry-wide 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 the right strategy. Thank you.
Thank you.
Your final question comes from the line of Eric Wen of China Renaissance Securities. Please ask your question. The line of Eric Wen is open. 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 two years of transition since last year, can we understand that the mobile-related investment will also last until 2014? Or do you see that will go on into 2015? What are some of the sectors and verticals you are looking into for potential M&A opportunities or strategic moves? Thank you.
Well, let me clarify on that. At the end of last year, I said we were entering into a two-year transition period. That transition period is not really about investment. It's really about landscape change or revenue opportunities. We will continue to invest in 2015, 2016. We'll continue to invest. We hope that after the transition, the search business will be back on track. The monetization capabilities for mobile traffic will be on par or even better than PC search. That's what I meant by transition.
Okay. Follow-up on that, what is the optimal mix of mobile search versus PC-based search? Would that be 15%-20% of total revenue for mobile?
During what kind of period?
Right. That's my question. Is that going to be 15%-20% in three years? How do you see that? Thank you.
I'm not going to give you exact guidance on the percentage, three years down the road. Like I said, the monetization capabilities for mobile is growing very quickly. After the transition period, the monetization capability should be on par with PC.
Okay, 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 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, and you may now disconnect. Good day.