Earnings Call: Q4 2012

Feb 5, 2013

And thank you for standing by for Baidu's 4th Quarter and Full Year 2012 Earnings Conference Call. At this time, all participants are in listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. And if you have any objections, you may disconnect at this time. Now I would now like to turn the meeting over to your host today's conference Victor Singh, Baidu's Investor Relations Director. Hello everyone, and welcome to Baidu's 4th quarter and full year 2012 earnings conference call. Baidu's earnings release was distributed earlier today, and you can 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 risk 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 law. Our earnings press release in 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 Faidu'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. In many ways, the atmosphere over the last year with the whole industry shifting into the mobile space fuels a lot like the early days of the internet. This is a huge change and we are feeling energized by the opportunities before us. The mobile and cloud based products we are developing are our best and most creative work to date. And I'm incredibly excited about the innovation that's coming out of the Baidu campus. This is the kind of atmosphere in which Baidu thrives This is a great time I'm more convinced than ever that we've got the right recipe for success. We want to give users the best experience across desktop and mobile devices, integrate with the cloud and push out the most exciting new technology With this ingredients in place, Baidu is in a great position to lead the next stage of China's internet Innovation. Of course, there is a lot of work ahead of us as we transformed Baidu for a new world of mobile. But we are off to a great start. Our internal tracking shows Baidu a clear market share leader with around 80,000,000 daily active users for our flagship web search product on mobile. We expect this trend to continue as Baidu search results become more and more location sensitive and personalized. In time of disruptive change, having killer app is key. And Baidu's LBS and MAPS services continue to be stars. Installations of the Baidu Maps app grow over 50% quarter over quarter in Q4. And ours is now the clear number 1 maps app in China with over 3,500,000 daily active users. On top of this organic growth, we are expanding partnerships with the handset makers to drive more pressing installations and usage We are turning the low usage map service into a high usage LBS platform to solve people's problems. By integrating data and information from our own verticals and from a whole range of third parties like Sofang in real estate, in travel and New Oriental in education to name a few. Baidu now has the most comprehensive data set of any LBS service provider with a huge database of merchants and other useful local information. And with more coming on board all the time, users will want to use us daily instead of weekly or monthly. A real breakthrough this last quarter was Baidu voice assistant built on self developed voice recognition technology with the highest accuracy in Mandarin Chinese of any system on the market today. Our voice assistant give users fast intuitive and accurate responses from their device. This is more than just a wise activated search. Wise commands are a key functionality. Now, I can add my device, singer song of Andy Lau for me, show me TVs at under RMB3000. Or where is the nearest bank of China? I can add that voice assistant set an alarm to wake me up at 6 am tomorrow morning or to show me the holiday schedule for the upcoming Chinese New Year break. And one assistant is fully integrated with all our vertical services. Baidu Postbar and Baidu Knowles as well. And our image recognition technology continued to become more sophisticated as well. Today we have the world's most comprehensive index of official images and increasingly powerful image matching technology with an ever widening range of applications from finding information to mobile commerce. We are just in the initial stages We are rapidly fulfilling our vision for image recognition to be just as effective and input better as text. For Indeed voice. In terms of client side software, we launched an updated version of our mobile browser in Q4, which is seeing excellent uptake. The new version is 30% faster and includes better categorized content. The browser combines unrivaled speed with very efficient data compression, both of which were big factors in securing the deal we signed recently with Fran's telecom orange in the Middle East and Africa. The exciting work we've been doing in mobile also extends to our strategically important verticals in areas such as online video and travel. As we've said, ITE is well established as a top player in the market. It's a leading position in terms of user time spent We're very encouraged by the progress it has made in the mobile space, traffic and app installations are both growing exponentially. The IT app has already hit over 100,000,000 downloads and 40, 32% of its traffic is now from mobile. And as content costs have stabilized, nice brand by brand advertisers. So we are very optimistic about the future here. Junior is also positioned as a market leader in an area that is seeing some very exciting roles. It was the most popular travel app on the market last year with over 24,000,000 downloads. According to CNNIC's annual report. The same report showed around 20% of internet users in China booked a travel online in 2012, which is over double the figure from 2011. This includes train tickets, air tickets, hotel rooms, and package tours, all of which Junar enjoys a strong positioning. And with mobile booking penetration rates under 6% their still huge room for growth here. Turning now to the customer front. We added over 100,000 customers in 2012 to bring us to a pool of almost 600,000 on the Baidu platform. The vast majority of these customers are still coming to terms that are shifted to mobile. At present, Only a small fraction of merchants have optimized the mobile websites. And we see it as our job to help them develop the right infrastructure, resources and know how to convert Although there is a lot of work ahead on this front, we are confident in the potential for growth. But as I have said before, it will take a couple of years to close this gap. We also continue to make exciting progress with large customers. Most recently, our sales team has been rolling out a new model of corporation in important industry verticals, like the leading insurer, Ping An, English model, the customer allocates budgets for a joint project with us and we, in turn, open our platform to make certain data resources available in order to facilitate more seamless cooperation and better marketing ROI. Our strategic partnership with Ping An is developing new products to reach China's fast growing legion of car owners. We all look to replicate this model with pioneer with Ping An with other leading players in traditional industry verticals like finance, FMCG, retail, and Automotive. In turn, the close working relationship we are establishing with this leading vertical players should create more opportunities in these key sectors. As I said earlier, 2012 was a year of transition as we entered a new period of really exciting opportunity in the mobile 13 as we aggressively market our suite of products and increase our ability to monetize mobile search. Alongside this, initiatives like the Institute of Deep Learning, our first research lab launching this year will enhance our ability to innovate and develop cutting edge new products. By deploying the knowledge and resources we have at our disposal, I'm confident that the future opportunities will outmatch anything we've ever seen. We are just getting started. With that, I'll now turn the call over to Jennifer for a look at our financials. Thank you, Robin. For the fourth quarter. I'd like to share a few highlights with you before turning to our financial results. As Robin laid out in his prepared remarks, this is a transformative period for the industry. The opportunity is enormous we are fully focused on growing our business. 2012 saw us launch many great products that we've integrated seamlessly into the Baidu ecosystem. In 2013, we'll continue to invest we'll be stepping up promotional efforts to drive installation and usage of our products. M and A efforts will continue to complement our disciplined approach to investment and channel building. As you all have seen, we completed the IT transaction and consolidated their financials on December 1st. All the line items in our P and L now reflects this consolidation. I will now take you through the highlights of our Q4 and full year financial results. All monetary amounts are in RMB unless otherwise noted For the fourth quarter, total revenues were year on only 54% from 2011. During the 4th quarter, I do had approximately 406,000 active online marketing customers, a 31% increase from the corresponding period in 2011 and a 4% increase from the previous quarter. Revenue per online marketing customer for the fourth quarter was approximately 15,500, a 8% increase from the corresponding period in 2011 and a decrease of 3% from the previous quarter. For the full year 2012, active online marketing customers increased by 22% and revenue per online marketing customers increased by 26% over the full year of 2011. Traffic acquisition cost as a component of cost of revenue in Q4 was 607,000,000 or 9.6% of total revenues compared to 7.9% in the corresponding period in 20 11 8.6% in the third quarter of 2012. Tax as a percent of revenue for the full year 2012 was 8.7%, up from 8% for 2011, which primarily reflects the increased revenue contribution of contextual ads and how 1 to 3 promotions through our network. The Baidu Union Network continues to be an important driver of Baidu's overall revenue growth. We expect partnerships dynamically and use them as a percent of revenue to continue increasing over the medium term. Bandwidth cost and depreciation cost as a percent compared to 4.3% and 4.8% in the corresponding period in 2011. In 2012, bandwidth and depreciation cost as a percent of revenue increased to 4.8% and 4.9%, respectively, compared to 4.3% and 4.5% respectively in 2011. The increase was mainly due to increase in network infrastructure capacity. We expect to see more bandwidth cost in 2013 as we sustain investment in network infrastructure and also the contribution from ITE consolidation. Content cost was included in operational costs previously and mainly consists of amortization of licensed content costs from copyright owners or content distributors and cost of self produced content. With the IT consolidation, we have separated this line item. Content cost as a component of cost of revenue in Q4 were $120,000,000, representing 1.9% of total revenues. Compared to 0.6% in the corresponding period in 2011. Total content costs for 2012 were RMB215 1,000,000, representing 1% of total revenues compared to 0.5% in 2011. This increase in content cost was largely attributable to the consolidation of ITE as said before. Selling general and administrative expenses in Q4 was RMB792 1,000,000, an increase of 52% year on year. Total SG and A expenses for 2012 was $2,500,000,000, a 48% increase from 2011. Mainly due to increased headcount related expenses, marketing expenses related mostly to mobile products and the consolidation of ICE. 2013 will be an important year to position Baidu's many great products, particularly in mobile We will look to aggressively drive installation and usage. In Q1, we will our marketing efforts during the Chinese New Year period to promote our mobile products. These expenses are necessary and will be closely monitored for effectiveness over the corresponding period in 2011, primarily due to increased headcount. Total R and D expenses for 2012 were RMB 2,300,000,000, a 73% increase from 2011, reflecting our continued emphasis on investing in top R and D talent. Share based compensation expenses, which were allocated to related operating costs and expense line items. Increased in aggregate to 67,000,000 in the 4th quarter from 47,000,000 in the first corresponding period in 2011. FPC expenses for 2012 increased to 40% over the 2011 level. We plan to put greater emphasis on SBC to attract and incentivize key talent. Operating profit for Q4 was RMB2.8 billion, a increase of 24% over Q4 twenty eleven. Operating profit for the full year 2012 increased 46% from 2011. The 1 month consolidation of ITE negatively impacted our overall operating margin by a little over one point. Loss from Equity Method Accounting was RMB122 1,000,000 in Q4 20 12 and RMB294 1,000,000 in 2012 versus 8,000,000 in Q4 twenty eleven and seventy nine million dollars in the whole year of 2011. This increase mainly reflects the loss pick up from Baidu's cash investment in ITE for the month of October November 2012 and other invested entities. Having consolidated IQI in December, we will not be incurring any more loss pickups related to this investment going forward. Other income was RMB381 1,000,000 in Q4 and RMB455 1,000,000 in the 2 in the whole year of 2012 versus RMB21 million in Q4 of twenty eleven and RMB78 1,000,000 in the whole year of 2011. This increase mainly reflects a one time gain for fair value adjustment arising from the ITE transaction. Total headcount as of December 31, 2012, was approximately 2900, a increase of 4800 versus the end of twenty R and D and the consolidation of ITE's 1000 employees were the main drivers of this increase. In the fourth quarter, headcount increased by roughly 2200 sequentially. In 2013, we'll continue to increase headcount with more emphasis on R&D expansion. Income tax expense was $540,000,000 for the 4th quarter, the effective tax rate for the 4th quarter was 16.2% compared to 16.5% in Q4 twenty eleven. For the full year, our effective tax rate was 13.2% compared to 15.2% in 2011. The year over year decrease the effective tax rate was mainly due to recognition of tax benefits obtained in 2012 for the year before. For 2013, we expect our effective tax rate to be in the mid to high teen levels. Net income attributable to Baidu for Q4 was RMB2.8 billion, a 36% increase from the corresponding period in 2011. Basic and diluted earnings attributable to Baidu per ADS for the fourth quarter of 2012 amounted to $8 $7.99, respectively. Net income attributed to BOP to Baidu for the full year increased by 58%. Net income attributable to Baidu, excluding share based compensation expenses, a non GAAP measure for Q4 was RMB2.9 billion, a 36% increase year on year. Basic and diluted earnings attributable to Baidu per ADS Excluding share based compensation expenses, both non GAAP measures were 8.19 and 8.18 respectively. Net income attributable to Baidu excluding share based compensation expenses for the full year increased by 57%. As of December 31, 2012, the company had cash, cash equivalents, and short term investments of KRW32.5 billion Net operating cash inflow and capital expenditure for the fourth quarter of 2012 were respectively. Full year net operating cash inflow and capital expenditures were In 2013, we plan to sustain spend. Now let me provide you with our top line guidance for the first quarter of 20 13. We currently expect total revenues for the first quarter of 2013 to be between RMB5.89 billion and six rmb0.08 billion, which would represent a 38.1% to 42.6% year over year increase. I do wish to emphasize that this I will now open the of this conference call you. And the first question comes from the Hello, good morning. Thank you for taking my questions. My question is on IQIYI. What is the can management talk about the had on Iqiyi consolidation into the financial numbers, I guess first of all, I'm not sure if you can share about the revenue contribution and was it booked on the other revenue or other services line And also, some of the, cost item, for example, bandwidth costs was up, like, 25% sequentially. Was it due to IT as well? And then lastly, Jennifer mentioned about this 1% impact in operating margin. Was it on a 1 month basis or was it more on the 3 months or on an annual ongoing basis? Thank you. As I just stated, in the Q4 of 2012, we completed the IQI transaction and IT's financial beginning on December 1 was consolidated. So the 4th quarter financial reflects 1 month consolidation of the results of ITE. Specifically to your question, ITE's revenue contribution to the top line in comparison to the large scale of our business is very small. However, in terms of category, it does have 2 categories. And one is most of their revenue is online marketing revenue as would be included in our general, category of online marketing revenue. There's also our other revenue, that you would see in this Q4, P and L. This is basically related to some of the copyrights that he is allowed to redistribute some of the content to other players. And this is not categorized as online marketing revenue. And you would get a glimpse of the quality of the categories of the revenues from ITE. Overall, the contribution is very small. Bandwidth cost to your question, does impact the overall sequential increase for Q4. If you look at our bandwidth sequential increases over the past few quarters that give you the idea of the magnitude of Baidu's own business how that has been migrating and there has been additional increase because of the IT consolidation. Having said that, I would say majority of the sequential bandwidth increase is because of Baidu's own business, not ITE. I bandwidth as a single item for IT, of course, as you can appreciate for online video business is a meaningful item. And going forward, as we look at bandwidth, as I said, we will continue to invest in infrastructure and with bigger Silver Farms and more traffic that needs to be handled, you should continue to expect bandwidth to increase over the next year, over 2013 and on top of that would be the impact of ITE as well. I hope that gives you a glimpse of, of the bandwidth in itself. The 1% I mentioned about the impact for Q4 is a 1 month impact of ITE. So if you could if you want to refer that to get a full glimpse of the whole quarter, I think you can do the math on your own. And that would be indicative for GE's overall margin impacted to the to the Baidu whole book. And your next question comes from Alicia Yap. Please ask your question. Good morning, Robin, Jennifer and Victor. Thanks for taking my questions. My question is regarding the ARPU. So can you explain or clarify the reasons why the ARPU for the quarter experienced a slight sequential decline, was that mainly due to challenging economic environment or was that related to available a new alternative player and how should we estimate this trend going forward? Will the high single digit growth of ARPU is more reasonable going forward instead of the double digit previously? Thank you. Hi Alicia. As you would have observed the trend over the past few quarters, we've been very successful in adding the number of customers to our platform. Most of the addition, was developed in the SME Business, the small, medium size businesses And our sales force has been very effective in executing that focus for our workforce this year. Many of the additions because there are small businesses and particularly developed in second 3rd tier cities, their spending power, is not as it used to be. If you recall, in 2011, we did benefit significantly from tremendous growth in the large customers account. And so the year on year ARPU number would be somewhat affected by that. Having said that, you are also aware that the whole industry, including our customers, are migrating over to are seeing the transition to mobile. And so our sales force, our focus in 2013 is to ensure that we provide the right service and support to our customers, current customers to continue to help them get the kind of desired ROI. They're looking for a and also educate them about the benefit of mobile platform going forward. So that is basically the liver for the ARPU trend and it will continue to be very focused on delivering high quality service to these SME customers. Okay. So can I follow-up on that? So with the more focus of the sales force driving to the mobile platform, will that, you know, also kind of indicate a little bit lower ARPU given mobile maybe a little bit lower conversions? The ARPU, Alicia, the ARPU is based on the combination of desktop search and mobile search. So I would not think of that to mobile would necessarily negatively impacted the ARPU it's overall, it should be incremental to the customer spending. Okay, great. Thank you. I'll get back to the queue. And your next question comes from Chi Sang. Please ask your question. Just a couple of things. I'm wondering now if you folks have firmly have ChiI firmly in control, I'm wondering if you can talk about your strategy going forward, whether it's sort of increased monetization potential or increase, your, your library? And secondly, you know, clearly you guys are focused more on M and A this year. Following the debt deal, the first thing we did was consolidate and take control of GE. I was wondering if you can give us a bit of idea of sort of transactions might make sense for you this year. As it relates to mobile, client software, things of that nature? Thank you. Yes. For the DD, we obviously think that it's it's important to us and it's also growing very quickly in terms of consumer time spent, the video, and we We think we need to have a better control on that. So we will, for one thing, we will continue to address being left in the video space to make sure that IT will continue to be successful. In terms of, strategic areas, I basically covered a lot of them during the prepared remarks, There are verticals that we like a lot of videos 1 and travel is another we are also looking at other or all kinds of verticals and continue to evaluate that would make sense for us to, to gain more, strategic hold. But, overall, for the company, I think, for 2013, mobile is probably the most important strategic area for us. Thank you. And your next question comes from Joanne Schorr Please ask It seems there's no response from that line. Santia Meng. Please ask your question. Thank you. I have a question on mobile can management give more color on the percentage of revenue coming from mobile for right now and also any guidance of what we should expect for 2013. And if mobile CPC lower than on the PC side, what is the percentage of mobile CPC as a percent of, of, PC cost per click? Thank you. We have mentioned in the past that the whole industry is going through a transition, to mobile. It's a very exciting time for us all But having said that, the user's, habit and even our customers are continuing in that pace, in that phase that of migration, there hasn't been meaningful revenue that's contributed from on the mobile and we're even efforts on our side. And I think today, a lot of the efforts is on the user side. And going forward, I think a mobile affords tremendous opportunity because it does affords more accurate information for search engines and it allows our customers to target their potential customers more effectively and accurately. But today, it's too early to come in on the CPC trend or even the digitization power. It's very exciting. It's very promising, but as we said, the whole transition, will take a couple of years to be close the gap. Hi, good morning, everyone, and thank you very much for taking my question. My question is about the mobile internet development in 2015. What are the key goals or targets you want you would like to achieve in 2013? And what are the resources that are necessary to achieve these targets? Thank you. There are basically 2 goals. For our mobile strategy, the 1st and foremost is, obviously, mobile search. We wanted to make sure that, users have the best, experience in mobile search I do. So we have been aggressively investing in this area to make sure the mobile search will continue to to be the main gateway to internet for most offset users going forward It's, in the very early stage of development, we are adding a lot of new features to our mobile search almost on a weekly basis, if not on a daily basis. When I said early, I can give you an example mobile search is pretty much like mobile search this year. It's pretty much like 1990 9 for desktop search. On average, it took more than 2 seconds to to return search results, for desktop search, at that time, today is the same for mobile search. And even for this kind of slow response speed, consumers are moving quickly the mobile device, to get information. So we are very encouraged and excited, and we feel we need to invited to make sure we have the best search experience for our users. In addition to search, we are also investing in a mobile ecosystem. We are, building all kinds of tools, and service capabilities for all kinds of app developers so that they can quickly build up functionalities and serve their targeted customers. We believe by fostering a healthy and and large and in the fast growing mobile community, more content when more content more information, more data and more services become available, on the mobile internet, people will become increasingly the independent Baidu services. So we are investing in that front too. And your next question comes from Good morning. Thank you for taking my question. I have a couple of very quick ones. Just for your IKE revenue contribution for your Q1, I was wondering, do you have a number you can give to us? Much of revenue from Archie you have embedded affecting for your Q1 revenue guidance? And just following up on on Robin's comments on on mobile just a minute ago, would you be able to share with us now sort of roughly what kind of a a traffic contribution from mobile and or, sort of, year over year quarter over quarter, rapid growth in mobile switch per Thank you. In terms of the IT remedy contribution, as I said, with the backdrop of the overall Baidu Platform Business, it's business is really very material in comparison. You do know that we do have the IT and we also have the and these companies, we don't separate disclose because of the materiality test is not met. So that gives you an idea. I mean, they're not that much different per se in terms of revenue contribution. And, therefore, you know, the the the overall, guidance that you're seeing predominantly is Baidu's main business through the maintenance like that. For the mobile traffic, it's obviously growing at a much faster rate than the overall search market. So mobile search will represent an ever larger percentage of our total search traffic. But I figured it probably does not make sense for us to report this number quarter by quarter, the strategic direction is quite obvious. I think I will update you when the the mobile search traffic, overtake that top search one day. And, I think that will happen sooner rather than later. We just think that there is a lot of room for improvement for the mobile search technology as well as for the overall mobile infrastructure speed cost of the bandwidth all kinds of supporting technology, browser technology, operating system technology, all this kind of things well. Become better and better well. So customers or users will have searched more on their mobile device And also, there are other form of product or services that's closely related to mobile search. For example, the voice assistant product I talked about, although a lot the request are not really search, but, there will be a very large percentage of the whilst assistant traffic, based on search. So consumers will have a lot more way to to look for information or to search for information on the mobile, we will, gradually consolidate all kinds of the traffic and make the overall search experience better and hopefully we can better monetize that in the future. And your next question comes from Jin Yoon. Please ask your question. Yes, good morning. Just a couple of things. Can you talk about your traffic acquisition costs in the quarter? We saw pretty significant sequential increase. First of all, how much of that is due to one time costs or seasonality versus what's occurring. 2nd of all, with the traffic acquisition cost, how much of the increase is really coming from the likes of competition or from likes of mobile. Now, that's my first question. My second question has to do with what, comments that Robin made earlier saying that, mobile is not I think you said that mobile is not impacting ARPU. Can you clarify that Given the fact that mobile has lower CTC, why wouldn't it have an impact on our Thanks. Hi, Jean. On the traffic acquisition costs, you did observed that in Q4, the tag as a percent of revenue has stepped up. As I said earlier, the increase sequential increase is mainly due to contribution of contextualized business as well as promotion for our products, such as how 1, 2, 3. This is not seasonal. This is intended, as said, for a few quarters now, that, we are leveraging this union network to grow new business such as contextual business at the same time to also dynamically managing starting. We are stepping up our tag, as I indicated before, you should continue to expect that the tag rate is managed dynamically, and we are very ready to take advantage of this network to promote our products. As well as grow new business. Very little of the tag is related to mobile as we said earlier. Mobile monetization is really in this very early stage And therefore, the TAC number that you're seeing has very little to do with mobile business. Jean, just to give you a more information on the mobile impact on ARPU. I think ARPU is, decided by a number of factors including our customer's budget, our inventory or traffic, click through rate, and CPC. But it is not negatively impacted by mobile, obviously, probably positively impacted although it's not obvious right now, but it should become obvious going forward. In terms of inventory or traffic, I think that mobile traffic is incremental to desktop search traffic or it actually adds more inventory for our search traffic. The CPC is lower. Right now, it's roughly half of the desktop search CPC, but click through rate is not necessarily lower. So if you combine all this kind of in Rations, IOC, ARPU is not necessarily going to be negatively impacted by mobile. And your next question comes from Andy Young. Please ask your question. My question is about your investment and MA strategy. Given your strengths, your financial strength and your goal to view ecosystem. Can you give us some color on your organic growth and M and A strategy? How do you manage division of labor opportunities to strategies? As I said before, M and A is important element to complement our organic growth. We have the leading market position in Search Technology and that is our core competency. As the whole industry is looking into mobile, I think it great to have the resources and ability and see the kind of innovative efforts in the industry that if I do can invest in So Robin mentioned earlier, our key strategic focus for 2013 is mobile. So if we our launching M and A efforts that would follow our overall strategy. We have also in the past invested in key verticals. And so you can see that our M and A strategy is really to enhance our core competency to capture, the main verticals to help with the ecosystem build up as well to invest in innovative companies, which help us position ourselves in the new industry involvement. So that is basically how we manage our M and A initiatives. I just want to emphasize that acquisition is not our main growth strategy. We have a lot of growth room for growth for our organic traffic, our own products, and we are also aggressively investing in building new products and technologies. Mobile will cut off, I mean, acquisition will complement this kind of effort, but it's not going to be the main growth driver. And your next question comes from Piyush Mubayi asked your question. Good morning. Could I just ask about desktop search trends? Both from a revenue perspective as well as actual search perspective? Desktop search has been soft during the past quarter and we expect that while that trend will continue for the coming year. You may know that the new PC shipment last year actually had a decrease over 2011, and we are not so optimistic out the new PC shipments this year either. So desktop search will continue to be a very important way for people to find information, but the real growth side is on mobile. I I think it's important to note that ultimately, we're providing search and information services, regardless of the end user devices that's coming from. We do see queries from coming from a wide range of new devices and that continues to fill the overall usage of internet and the people taking advantage of search engine services. And your next question comes from Eddie Leung. Please ask your question. Good morning. Thank you for taking my questions. My question is more on IQI. Could you comment on the content investment trends in 2013 as we have heard different stories about the content cost trend in the industry. So I just want to get an idea on the investment amount as well as the content cost trend in the industry. Thanks. Hi, Adi. With the consolidation of IT, we've separated the content cost, the line item. It is the important cost component for the online video business. And I think for some of the publicly listed companies, you know, they provide a indicative trend in terms of content. And I think the market do have does have an expectation on, you know, how that looks like. And for us, I think the content, I think, you know, historically that has been mixed together with the operational expense line operational cost line item in I think if we look at the, those two line items together, as you look into 2013, its Q4 level, but probably give you a indicative line level, going into 2013. So specifically, what I was saying is, up operational cost line item in the content cost line if you look at that together, the Q4 level should be indicative, not necessarily meaningful to single out the content cost line item because Creduced overall cost base is so huge. Next question comes from Vincent Ling. On the cheese content costs. I see that in Q4, the content cost is 1,000,000. Is is that just for 1 month? If I were to think about extrapolating that, or do I think about, the 215,000,000 that it spends over the whole of 20 health? The $120,000,000 majority of that is IT related. You would see that before the IT consolidation, we do have some content cost, and this is related to some of the data you know, music and stuff like that, that, you know, we do acquire. I think, that is a 1 month's impact, but the 120,000,000 is not all because of GE. Got it. Thanks. And your next question comes from Moseli. Please ask your question. Hi, thank you for taking my question. I would like to ask the management to give some guidance for the margin trends going into 2013 and how will how should we model the, sales and marketing and the R and D expenses into the future? Thank you. All right. Okay. As you know, we have been investing and, I've indicated that very clearly earlier that in 2013, we have many great products that we look to aggressively promote through the different kind of channels. The SG and A expense as percent of revenue in Q4, you would have already seen some of the efforts, taking in shape. And historically, you have seen SG And A expenses scale with the fast growth of our business. In 2013, as we aggressively promote our readily great products, I would not expect the SG and A line to further scale. And that's on the SG and A expenses. On R and D, as I said earlier, that has been our focus in terms of investment and that focus will continue to carry. We do plan some count increases. And if we look at 2013, predominantly that kind of human resources investment will be focused on R&D. And the Q4 R and D expense as a percent of revenue be relatively largely indicative, for you as you look into, the years out. And your next question comes from Catherine Leung. Please ask your question. Hi, thank you taking my question. My question is on the mobile monetization. I understand that you're testing mobile Phoenix Nest. And so I'm curious what are the main factors determining when you will officially launch the system? And how would you expect advertisers to allocate budgets after this is officially launched as we've about the proportion of traffic coming from mobile versus desktop? Thank you. Mobile monetization is very orderly as this stage, we are experimenting all kinds of possibilities, like how many ads or promotional links we show on the search result page and how do we display advertising information or even how do we track conversion all of these things are, you know, moving pieces, it's very early for us to give you any guidance on the trends What we know is that mobile traffic continued to grow very quickly. We wanted to build the best user experience 1st. And we will continue to help our customers to, to build up a mobile friendly website or, or, app so that their conversion, well, improve as they ROI improve for our customers, they will allocate more budget to the mobile advertising space. Right now, our customers are not given a choice whether they want their budget to be spent on mobile. Only we're both mobile and desktop or only desktop many of them choose to spend both on mobile and S tops. It's just not many people really understand how to promote their product and services through mobile search or through their mobile site. So there's a lot of work that we need to do to make that a better channel for our advertisers and customers. Question comes from Wendy Huang. Please ask your question. Hi, thank you. My question is many about the desktop search I think in the past 1 year, we have seen Facebook launched a graph search, Google launched knowledge, knowledge search, and also even seen Weibo integrated we need to do the social search. I just wonder what effort will you make on the PC front to defend your market share on the SP and also to improve the user experience as well as the monetization further? Thank you. Yes, that's a great question. We think search is still young. There are a lot of ways we can improve the user experience and there's a lot of ways we can develop a new technology to make the desktop search experience better. Let me give you a couple of the examples for almost like 15, 20 years search result looks like, the same. You have a list of 10 links title, summary, those kind of things. We figured in a lot of verticals, we can give so we can serve the users needs better by giving them different kind of information or different kind of display all the information. That's what the ladder was aimed for, but we figured there are a lot more user requests to come be match with more diversified or versatile way of displaying this kind of information, including things like you just mentioned, you know, knowledge graph, when you when you search for a celebrity name or, a popular place that has a, you know, things like a media entry from Baidu, we can display those structured data in a more direct way to satisfy user's needs. There are also verticals, for those with commercial value such as travel or e commerce, there are much better ways to display information for users instead of just a title and a summary. So we are doing a lot of that in this space and you will find the Baidu search results will look very different, you know, a year from now. And your next question comes from Wallace Chung. Please ask your question. There's no response we'll move on to the next. Richard G. Please ask your question. Thanks for taking my call. And, can you comment on revenue split between your large corporate customer as well as SME, especially I'm also curious to know there are different type of growth rate, especially given the end market start to stabilize. Should we expect a meaningful pickup from your large public customers and in terms of their budget allocation. Hi, Richard. Historically, we have not publicly disclosed the split between SME and large customers But I can tell you, predominantly, majority of our business has been coming from SME and the split that we internally measure has been pretty consistent. There are a lot of efforts and initiatives that we can do on both the SME front as well as the large customers. You do notice that over the 2012 year period, we continue to develop the SME market and that really just shows how tremendous the market potential is and how effective our sales force can be. At the same time, on the large customer side, yes, I think the whole macro environment in 2012 was relatively depressed. But our sales force has been doing many different things with our large customers. The initiative that we mentioned with customers such as Ping An is really to explore not only just web search, but also take advantage of the whole media platform value of Baidu. And so there is last potential that continues to be on our platform that's yet to be exploited. So we are working with a large customer and they are very receptive to the idea of doing online marketing and so that by dudes different kind of user products. And with experiments like that, we can really get to more of the large customers at budget. And so the we do see on both the SME and large customer side. There is a lot of initiatives and a lot of potential for us to continue to grow our business. We are now approaching the end of the conference call. I will now turn the call back to Robin Lee, Baidu's Chief Executive Officer, 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. This concludes the presentation. You may now disconnect.