Hello, thank you for standing by for Baidu's second quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there'll be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Victor Tseng, Baidu's Investor Relations Director. Please go ahead.
Hello, everyone, welcome to Baidu's second quarter 2012 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our website as well as on Newswire services. Today, you will hear from Robin Li, Baidu's Chairman and Chief Executive Officer, and Jennifer Li, Baidu's Chief Financial Officer. After their prepared remarks, Robin and Jennifer will answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20-F.
Baidu does not undertake any obligation to update any forward-looking statements except as required under applicable law. Our earnings press release and this call 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 be available on Baidu's IR website. I will now turn the call over to Baidu CEO, Robin Li.
Hello, everyone, thanks for joining today's call. I'm pleased to report a strong set of results for the second quarter, in spite of an uncertain macroeconomic environment and some tough comps with a blockbuster quarter a year ago. This is a testament to our unrivaled ability to understand the needs of our customers and users, and to design and execute winning programs to meet those needs. One of the real highlights this quarter is our success in growing our customer base. This has been an important priority for Baidu, and we are making solid progress here. In top-tier markets, we have taken a number of steps to optimize our sales process, including establishing call centers, improving our CRM systems, and implementing better incentive systems for our sales staff. These efforts are driving clear results. We are also building strong momentum with small and medium-sized enterprises in lower-tier markets.
In the second quarter, we rolled out our annual nationwide search engine marketing campaign. This was by far the most ambitious annual campaign yet, with over 200 events in 190 cities around China. We are also now partnering with local governments in 14 regions around China on educational programs that encourage SMEs to embrace online marketing. We are now offering a number of new SME-friendly services. For example, this quarter, we launched a new tool that helps SMEs transform their desktop website into mobile-friendly formats. This is a free, easy-to-use service that allows SMEs to create mobile and tablet-ready websites in as little as 10 minutes. Already, thousands of small businesses have made use of it. On the large account front, the macroeconomic slowdown in China has put some pressure on our large customer spending and sentiment.
As a result, we have not seen any standout sectors this year that would be comparable to e-commerce in 2011. Following last year's e-commerce bubble, the sector is now consolidating. We are optimistic about the future of e-commerce. Due to the performance-based nature of Baidu's marketing platform, large, successful e-commerce players' spending on Baidu remains very strong. To counter the macro headwinds, we are also proactively developing new traditional industry categories like food and beverage. The traditional advertisers have large potential and have started to adopt Baidu's platform in marketing campaigns. On the monetization front, we made solid progress this quarter, and I am pleased to note that contextual ads performed particularly well. New improvements to our contextual ad technology allow customers to target their ads towards more focused micro markets based on user demographics and behavior.
Customers now can target their particular interest group, such as people who frequently travel overseas or pet owners. In the past quarter, we also upgraded advanced phrase match, one of our Phoenix Nest matching options. This upgrade leverages our vast cache of user data to allow customers to reach broader, more targeted audience in more sophisticated ways. The system is now better at integrating data such as customers' location limitations and keywords with the user search query and IP address. Just recently, we also introduced the biggest upgrade in five years to our Brand Link product. Traditionally, brand advertisers have used this area to display basic information like logos and links to their corporate website. After this major revamp of Brand Link, advertisers can turn this area into a specially customized mini site for their brand.
They can embed pictures and videos, micro blog accounts, and even advanced functions like user registration areas and dynamic data. For example, a company like Louis Vuitton can now use this area to display branded video ads and interactive information on the search results pages. On the user front, mobile continued to grow very well. We are really charging ahead to build a truly frictionless experience for mobile users. Our platform allows users to efficiently access the underlying information, content, apps, and services they want through as many mobile operating environments as possible. One of our most innovative new initiatives here is our powerful new voice search experience. This is designed to enable smartphone users to search the web, activate apps, and even get local information just by speaking into their phone.
The accuracy of our voice search technology is unmatched. We've already rolled out some core functions based on it. For example, if a user says, "I'm at the Baidu campus," the system will instantly tag them on Baidu campus and provide a map of the neighborhood. If the user says, "I want to call Mom," the program will instantly start the call. Users can even use voice to search native apps and, of course, search the web. I'm also very pleased to say that users who search the web on their mobiles, either through voice technology or through traditional way, are now being served results powered by our box computing technology. We are optimizing our open data and open application platform for the mobile platform, and we can now serve up huge amounts of dynamic information, apps, and other services to mobile phones.
Likewise, our personalized homepage is now completely iOS friendly and has been optimized for users on the go. We are working hard to make sure we provide users with the best tools for their mobile experience. To that end, in Q2, we rolled out an updated edition of our mobile browser. It's already being rated a top performer for speed and functionality versus competing browsers, particularly for handling HTML5-based content. We are confident that the Baidu browser is one of the best on the market. We continue to build important partnerships that ensure Baidu is the gateway of choice for mobile Internet users, just as it is for desktop users. As you will have heard, users will be able to choose Baidu as the default search on Apple's iOS 6. Naturally, users are increasingly relying on their smartphones to search for local information.
We estimate that last quarter, 20% of our mobile searches from high-end smartphones were related to local information, which is far higher than the rate we've seen on desktops. To meet our users' needs for local info, we've been working hard to build out new location-based offerings centered on Baidu Maps. For example, we rolled out a new GPS navigational service. We upgraded the real-time traffic function, which is now much more accurate and has a more user-friendly display format. On the back end, we are working to build up our database of local information by partnering with more app providers and vertical sites while also extracting local information from the web. I'm confident that we have more local, location-based information than any other map provider in the market.
The Baidu Maps API is also open to other websites who have such a need, both on desktop and on mobile. We are working with lots of valuable partner websites here in sectors like travel, mobile buying, real estate information, and so on. One reason that Baidu stands head and shoulders above every other company in the mobile space is our unparalleled cloud computing infrastructure. Our Personal Cloud Storage service, or PCS for short, which we launched last quarter, is one of the pillars of this strategy. Over the last few months, we have been working hard to integrate it into more of our applications and services and to promote this to our users. Our NetDisk service has been installed millions of times while still in beta testing. Baidu users can now also leverage PCS to access their Photo Wonder images from anywhere, in any device.
The ability to sync up with Baidu Album through PCS is a great selling point for Photo Wonder. User numbers for the mobile app have more than doubled from nine million in Q1 to 20 million by the end of June. We are working on building PCS integration into many third-party developers' apps and our own products, such as Baidu Music. We are now partnering with more than 10,000 third-party developers to integrate PCS functionality into their apps. We are working with major handset producers to offer fully integrated cloud storage to their phone users. I'd also like to quickly highlight that iQIYI continues to thrive. Our strong support is clearly driving results. As you know, online video is a very competitive space, but the high quality of iQIYI's content is a key differentiator over competitors.
User numbers showed encouraging growth in the quarter, with 250 million monthly unique users at the end of June. The total time spent on the platform on a monthly basis is demonstrating good growth trajectory. According to both iResearch and comScore, iQIYI ranks second in China in this important metric. Overall, the second quarter demonstrated how our aggressive investment in deepening customer engagement is enabling us to attract more customers to Baidu and to increase more of our customers' budget on Baidu. Going forward, we will maintain our focus on working closely with customers to understand their needs and leveraging our unrivaled user reach to create the best possible results for them. Finally, I'm excited to tell you about our seventh annual Baidu World Conference, which will be held on September 3rd in Beijing.
This is an opportunity for Baidu to bring together some of the best entrepreneurs, industry experts, and our developer partners to share our strategic initiatives and discuss China internet trends. I look forward to seeing many of you there. Now let me turn the call to Jennifer.
Thank you, Robin. Hello, everyone. We were pleased to sustain a robust pace of top and bottom-line growth from last quarter as we continued our aggressive investment strategy. We devoted a lot of resources this quarter to strengthening our core infrastructure needs, building our customer base, and investing in key areas like mobile. This is a transformative time for the internet in China. Our robust investment strategy will be key to achieving long-term sustainable growth and strengthening Baidu's position at the heart of China's internet ecosystem. Now, I'd like to go through our financial results for the quarter with you. All amounts are in RMB, unless otherwise noted. For the second quarter, total revenues were CNY 5.5 billion, representing a 59.8% increase year-over-year.
During the second quarter, Baidu had approximately 352,000 active online marketing customers, an 18% increase from the corresponding period in 2011, and a 9.7% increase from the previous quarter. Revenue per online marketing customer for the second quarter was approximately 15,500, a 34.8% increase from the corresponding period in 2011, and an increase of 16.5% from the previous quarter. Traffic acquisition cost as a component of cost of revenue in Q2 was $454 million or 8.3% of total revenue, compared to 7.9% in the corresponding period in 2011 and 7.8% in the previous quarter. The increase mainly reflects improvement in contextual ad performance. The Baidu Union is important for us. We have more than 600,000 Union partners now, making this the largest publishing network in China. We manage these relationships dynamically and will continue to drive contextual ad business growth. We are benefiting from these partnerships.
Our Union partners are benefiting too. We see tremendous room to grow this relationship further. To drive incremental revenue like contextual ad business, we expect TAC as a % of revenue to gradually increase over the long term, as stated before. Bandwidth and depreciation costs as a % of revenue in Q2 were 4.4% and 4.6%, respectively, compared to 4.3% and 4.2% in the corresponding period of 2011. The increase was mainly due to an increase in network infrastructure capacity. Selling, general, and administrative expenses in Q2 were $588 million, an increase of 55.6% year-on-year, primarily due to an increase in personnel and marketing-related expenses. For the coming quarter, as Robin has mentioned, we have a lot of exciting new products and features that we will look to invest resources to promote.
R&D expenses in Q2 were $546 million, an increase of 82.7% over the corresponding period in 2011, primarily due to increased headcount, reflecting our continued strategic investment in R&D talent. Share-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to $54 million in the second quarter, from $35 million in . Operating profit for Q2 was $2.8 billion, an increase of 51.5% over Q2 2011. Total headcount as of June 30th, 2012, was about 17,400, roughly 900 more than the previous quarter. Income tax expense was $235 million for the second quarter. Effective tax rate for the second quarter was 7.9% compared to 14.9% in Q2 2011. As you will recall, we recorded income tax for one of our subsidiaries at a non-preferential tax rate in 2011. This subsidiary has obtained a high and new technology enterprise tax license this quarter.
Accordingly, we reversed the provision in 2011. Net income attributable to Baidu for Q2 was $2.8 billion, a 69.8% increase from the corresponding period in 2011. Basic and diluted earnings attributable to Baidu per ADS for the second quarter of 2012 amounted to 7.87 and 7.86 respectively. Net income attributable to Baidu, excluding share-based compensation expenses, a non-GAAP measure for Q2, was $2.8 billion, a 69.3% increase year-on-year. Basic and diluted earnings attributable to Baidu per ADS, excluding share-based compensation expenses, both non-GAAP measures, were 8.02 and 8.01 respectively. As of June 30th, 2012, the company had cash equivalents, and short-term investments of $18.3 billion. Net operating cash flow for the second quarter of 2012 was $3 billion. Capital expenditures this quarter were $722 million. Let me provide you with our top-line guidance for the third quarter of 2012.
We currently expect total revenue for the third quarter of 2012 to be between RMB 6.245 billion and RMB 6.41 billion, which would present a 49.6%-53.5% year-on-year increase. I do wish to emphasize that this forecast reflects Baidu's current and preliminary view, which is subject to change. I will now open the call to questions. Operator, please go ahead.
The question and answer session for this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the queue again after your first question has been addressed. To queue to ask a question, please press *1 on your telephone keypad and wait for your name to be announced. Our first question in queue comes from the line of Dick Wei calling from J.P. Morgan. Please ask your question.
Hi, good morning. Thank you for taking my questions. My first question is on mobile. I wonder what is the management view in terms of, is mobile traffic additional, or is it cannibalizing some of the PC traffic? In addition, maybe if management can comment on some of the monetization schedule and advertising formats, such as click-to-call, and also how is the advertisers in general looking at mobile ROI versus PC, that would be helpful. Thank you.
Hi, Dick. We believe that mobile traffic is largely incremental to desktop search traffic. If you think about the search activities, the information needs for users are usually very short-lived. If they have a mobile phone on hand, they will do the search. If they don't have a mobile phone, they will probably forgot the information needs before they reach to a desktop computer. We think the mobile traffic is largely incremental to the current desktop traffic. Having said that, I would have to say that mobile internet is in its very early stage. There are a lot of similarities between the mobile internet now and the desktop internet many years ago when we didn't have enough amount of information or application available for users to search. We would expect the mobile traffic will have many years of hyper-growth going forward. Speaking of monetization
Again, we think this is in the early stage of mobile Internet. We are in no hurry to aggressively monetize our mobile traffic. We are indeed exploring a lot of different mechanisms on the mobile advertising front, including click-to-call, and we will report to you back when this kind of activities are more material to our marketing platform.
The next question in queue comes from the line of Jin Yoon, calling from Nomura. Please ask your question.
Thank you very much. Good morning. Christy, congrats on pretty solid results in a pretty challenging macro environment. My question is on VIE. As you know, this topic has resurfaced recently. I was wondering if you could provide a little bit of color on some of the VIE structures that you have and some of the plans you may have going forward to continue to strengthen your VIE structure in terms of providing the protections or securities for the shareholders. Thank you very much.
Hi, Jin. The VIE structure has been around for over a decade, and as you know, most overseas listed Chinese companies operate under similar structures to enable them to list abroad. Baidu mainly utilize VIE structure to hold its license to operate in China. We ensure that as much of our economic value resides with the WFOE entity as possible. We have contractual agreements set up and oversight provided to these VIE entities, and all the controlling power actually resides with the WFOE. Economic interest is mostly allocated to almost all the economic interest of the VIE is allocated to WFOE. All operating cash flows are all at the holding company level, and large majority of our assets, cash position, and all that are all at the holding company level. We have mechanism and the daily operations to ensure that there is minimum exposure to VIE.
If you read our 20F, we provide sufficient disclosure and much coverage on the VIE, hopefully that gives you the kind of comfort. We do have consistently operated with a very transparent and good corporate governance practice, and we have a number of independent board members to ensure that minority investor interests are protected. We ensure that the relationship we have with our holding company, between the holding company and the VIE, is structured in a way that safeguards the investors' interest and the long-term future of the company. Fundamentally, we don't see there's any particular government policy change per se in the near term.
This has been a structure that has been in place and is working, Baidu is doing everything to protect the shareholder interest, I hope our governance structure, our track record, our disclosure that we have provided gives the investor the kind of comfort.
The next question comes from the line of Alex Yao, calling from Deutsche Bank. Please ask your question.
Hi, good morning, everyone, congrats on a very solid quarter. I have two questions. Number one is, can you comment on the growth rate between number of paid clicks versus the CPC? How would you envision the growing mobile search will change the broadcasting of these two operating metrics? Number two is, can you give us some comments on the revenue growth momentum between large accounts and SMEs in the quarter? Thank you very much.
I'll take the first and the third one. Alex, thank you for your question. For Q2, we had a pretty solid revenue growth, as Robin highlighted in his statement, there are numerous things that we are doing to counter this macro environment headwinds. Some of the things we implemented related to monetization improvement. For monetization, it delivers clicks as well as some pricing in the system. For Q2, what we have experienced is both metrics, the clicks as well as ACP, has helped on the revenue growth. Both metrics are moving in a very healthy state, and there are much more work that we will continue to do to make sure that we deliver the kind of ROI to our customers. At the same time, there is a healthy level of pricing in the system.
In terms of large and small business growth, as we highlight this quarter, for Q2 in particular, we have seen strong momentum on the SME side. There is a lot of good work that we have put into the system starting last year, including improving sales process, developing tools to help the customers have better experience using our platform, and all that good things. We carried out the national marketing campaign this quarter, and that was bearing a very good fruit. Our SME business is growing robustly, I think one of the benefit we have is we have a very diversified Customer base. The whole Baidu platform is much more resilient in this environment. Of course, our sales force execution effort did a great contribution to the performance.
Large advertisers, as we were saying, for this particular quarter, the sentiment, because of the macro environment, we do feel the sentiment of conservatism among the large customers, and their spending is somewhat contained, compared to the robust startup performance that we saw last year. Having said that, we are doing numerous things to counter this situation. We want to service our customers with more richer product offerings and services, and at the same time, new industries, new customers that we try to develop. As Robin mentioned, some new sectors such as food and beverage, we're seeing good progress and traction. Obviously large customers growth this year is no comparison to last year, but it still remains very solid and we're doing many things to continue to grow this sector.
What's the second, the unanswered part?
The mobile, something had to do with mobile, Alex?
Regarding the two core operating metrics with the paid click growth and the CPC growth, how would the increase in the growing mobile search will change the growth pattern on these two metrics? Is the CPC going to be affected by the mobile search?
Yeah. Okay. As you know that the monetization capabilities for mobile is not as good as the desktop search at this time. The CPC understandably is lower on the mobile platform. Like I mentioned before, we think the mobile internet is in its early stage. There are just not enough amount of applications or data or content that's available for users to search. Users are not as dependent upon search on mobile as they do on the desktop yet. Going forward, when the users are increasingly rely on their mobile phone to get information, we think that the monetization will follow.
The next question comes from the line of Alicia Yap calling from Barclays. Please ask your question.
Good morning, Robin, Jennifer, and Victor. Thanks for taking my questions. I have a question that it's finally good to see the contextual ads is picking up more meaningfully this quarter. Can management share your view that how China contextual ads market to grow in the next few years? What are some of the industries that are more receptive to the contextual ads currently? Thank you.
Hi, Alicia. I think I've mentioned this for some time now. Contextual ads business is a focus for us, and the team has been doing good work over the past year or if not more. It started from a very small base, and it has been consistently taking traction. In the past, I think, because of the base is small, you wouldn't see that through the TAC percent of revenue. As the business is gaining momentum, the team continues to roll out improved product technology and services to our customers. It is growing very nicely, and we're very encouraged by this sector growth. In terms of customer adoption, there is a wide range of customers that can adopt this. The large customers obviously like this because it serves their brand needs.
Our SMEs, small and medium-sized businesses, also like the contextual ads because of the improved product features to better target and give them better ROIs. We are seeing good adoption of our customers, both on the large customer side as well as the SME. As you just noted, we're only starting. I think there's still a lot of room for us to continue to develop the contextual business. It is only really beginning, and even from our end, we see much continued improvement we can implement to improve the product. It's a virtuous circle. Our product gets better, customers' acceptance is better, and there's more feed, better information that's made available to us, and we can continue to improve on that. I think there is a lot of room for us to continue to develop this sector of business.
The next question comes from the line of Jin Yoon calling from Nomura. Please ask your question.
Good morning. Thank you. Just couple more questions regarding on the mobile. I know the market share measurement on the mobile is quite different than how people measure a PC market share for search. If you look at it on a pure cost per click or per revenue basis, do you know what your market share is in search? Because I know right now it's being done on a bits per second, which is not exactly comparing apples to apples here. Second of all, when you look at the demand environment for mobile, are your customers coming to you and saying, they want to just advertise just purely on mobile and looking for a different pricing structure or a different TAC structure for just for the mobile? Or are we too early in the process to even think that way? Thanks.
Well, the answer to your first question is, we don't know. We don't know the exact market share for us and for the competition. It's like the desktop search 10 years ago. You don't really have any reliable data on the market share distribution among all the search players. What we know is that our mobile traffic continue to grow at a very high speed, at least a triple-digit growth. We believe that it's more important to look internally on this metric in the early stage of mobile internet. Regardless of our relative market share, we think it's more important for us to help form a user behavior that's so much dependent on search on the mobile platform. If they try to do search for everything they need, then we will become a winner.
If they don't do that, even if we have 90% of the market share, that doesn't mean much to us. On the mobile advertising front, I mentioned before that there are not enough content and apps yet on the mobile platform that can make the user so dependent on them yet. That also includes the advertisers' mobile-friendly websites, too. If they don't have a mobile-friendly website or content or apps, the ROI for them on the mobile platform will not be as good. Different type of customers require or expect a different kind of performance on the mobile platform. In most cases, they need to do their work to make their sites more mobile-friendly and get a better sense on how they measure the performance.
On our side, there are a lot of things we can do, and we are also trying very hard to help our customers to establish this kind of mobile-friendly environment so that they can advertise on the mobile more. It's really the early stage, and people are talking a lot of different things, and we're just trying to form an environment that's mobile-friendly, then the performance should be okay.
The next question comes from the line of Yu Jin, calling from CICC. Please ask your question.
Good morning, Robin, and thank you for keeping my patience. I have an open mind for the management. The question is also about mobile internet, too. What is the management feeling about the internet users, how they use mobile internet? So far, according to the third-party sources, has that mobile users spend 80% of time on applications and only 20% of time spent on browser-based services. Will that change? With that change, what kind of drivers that will drive users to spend more time on browsers from demand and from the supply side? Secondly, it's about mobile apps. My feeling is, on PC side, most of time when people do search, they launch out of search bars. On mobile side, besides the search bars, it seems that most users, more often, they will happen elsewhere.
For example, some applications integrating [audio distortion] different social media services. That looks like the amount of search queries. My question is, how the management view this above two trends, why some people use mobile internet, second, how people use mobile apps, and we highly appreciate it if the management can also share some of the company strategies to cope with those potential changes. I will stop here. Thank you.
Regarding to your first question. At this time, users spend a lot of time on applications and probably less time on browser. Again, I think that's due to the early stage nature of mobile internet. That's also like in the early stage of desktop internet. There are only a few of the websites that the users frequently go, as the internet became larger and larger, more content and websites became more diversified, users spend a lot of time on the long tail. I think that will be true for mobile internet, too. Over time, when there are more mobile-friendly data or content available, users will spend more time on the browser or even applications. To me, there's no fundamental difference between a application and a browser-based content.
We are actually seeing a trend that more and more services become web-based apps. The back end is basically the content on the cloud side. Even for all kinds of native applications, I think we can come up with better ways for users to search for apps. Right now, the mainstream model for apps is App Store. They are not really friendly or fair to those less used apps, therefore, it's not good for this ecosystem. We are developing all kinds of technologies that allow our users to find information or apps or services from one search box. Whatever they're looking for, either the content behind the browser or applications, we'll be able to find that for our users. By doing that, our users will spend more time with us or more dependent on the gateway Baidu.
On your second question, I think mobile search will be different from desktop in the sense that we have more information about the user, about the location, and a lot of contextual information that's available. Not only we can build a better query-based or box-based search experience for our users, we can do more in the sense that in a lot of cases, before the user even typing a query, we already know what the user want, and we can deliver that to them. If you remember last year when we rolled out the new personalized homepage, that was the main drive behind it. For the mobile, it's the same thing. In a lot of cases, we know what the user want even before he or she types in a query.
Again, we are devising all kinds of technologies to make that experience better and better for our users.
As a reminder to participants, please ask one question at a time and re-queue to ask any further questions. I want to move to the next question from the line of Catherine Leung, calling from Goldman Sachs. Please ask your question.
Hi. I was wondering whether we should interpret the deceleration in the average revenue per customer growth on a year-on-year basis as reflecting more of the large customers spending less or more of the SMEs naturally lowering the average spend. Thank you.
Catherine, I think our ARPU continues to grow at a healthy rate. This year, in particular, the SME has been a very strong driver in terms of revenue growth. That is different in 2011. It is true that when it comes to SME doing promotional work with us, their ad budget is no comparison to the large advertisers. You can say none of these advertisers are spending less. They're all increasing their spending. It's just that the SMEs are doing more of the work compared to the large customers, if we use 2011 as the base. Both are growing, but SME is the main driver, and SMEs has the smaller budget.
The next question comes from the line of Ravi Sarathy, calling from Citi Investment. Please ask your question.
Congratulations on a solid quarter in a tough environment, and thank you for taking my call. My question. Another question on mobile, if I may. I recall in the last quarter, you mentioned that mobile as a share of total search queries was about six. I was wondering if you had an update on that figure or some color around that. You also mentioned that you were pre-installed on 80% of branded Android handsets. I was wondering again if you had an update on that as of the end of Q2. The final question related to those was that the amount of revenues that you pay away to the hardware ecosystem for that pre-install, if you could give any color as to what that number might be, is it 20% or 25% of mobile-related revenues, and how you account for it.
Is that a stock acquisition cost or do you state revenue net of that number? Thank you very much.
I'll answer the first two, Jennifer will answer the TAC question. For the mobile search percentage, as I mentioned before, mobile search traffic continued to grow at skyrocket rates. As a percentage of the total search traffic, mobile continued to increase. We are not going to disclose this number quarter by quarter. The overall trend does not change. If there is a change, we will, of course, let you know. On the pre-installation of our search app or our search box, we think we have signed up all the major selling brands on the market in China to pre-install our search services, as well as some of our other applications we have developed.
In terms of revenue share, the arrangement with these players is a revenue-sharing arrangement. If we generate mobile revenue, then we will share a little bit of that with our partners. For each partner, the contractual arrangements can be somewhat different. I won't get into the details, the nature of the work is we do advertising work. We will record the total revenue, we will treat the sharing part as TAC.
The next question comes from the line of Eddie Leung, calling from Merrill Lynch. Please ask your question.
Hi. Good morning, guys. Thank you for taking my questions. Just quickly on two things. Is there any operating metrics that you can share with us about the popularity of Baidu Maps? I would also like to get any guidance for the tax rate for the full year, given the lower tax rate in the bank quarter. Thank you.
About Baidu Maps, we have a dominant market share on the desktop, and we continue to enhance the features. We think that LBS will become very important part of the mobile Internet life. We have been aggressively pushing the Baidu Maps service on the mobile. We have seen a tremendous amount of growth on the mobile platform. Going forward, we will try to integrate more services to the Baidu Maps service. It will really become an LBS service instead of just a map service. There are lots of things to be done on that front.
Eddie, on your tax question, yes. Basically, what happened in tax was we were accruing at a higher base last year, so if we were using the favorable tax rate, last year's income would be higher. This Q2, just for a conservative principle, once we get the license, we'll recognize the tax benefit. There is kind of a catch-up of last year's higher accrual, and we reversed that this quarter. The overall tax rate for the year, I have provided a guidance earlier in the year. The whole year, we're looking at close to mid-teens. That's the tax rate that we expect.
The next question comes from the line of Ming Zhao, calling from 86Research. Please ask your question.
M&A or investment. Last year, you acquired Qunar. This year we heard market speculation that you're going to buy UCWeb. My question is, how likely that is? Any thoughts along that line? Jennifer, if you could provide the full year CapEx, that'd be great. Thank you.
Well, Ming, we don't comment on this kind of rumors. I'll just let Jennifer answer the second part of your question.
Hi, Ming. For CapEx, I also provided a guidance earlier part in the year. This is the year of investment for us. We focus on investing in infrastructure, as well as office space to host more and more of the talents, particularly R&D. We do expect the 2012 CapEx to step up, and if you refer to the 2009, 2010, 2011 change in terms of the year-on-year step-up, that is the trajectory or the trend that you should be expecting for 2012.
The next question comes from the line of Cynthia Meng, calling from Jefferies. Please ask your question.
Thank you, management, for taking the time. I have one question. The 2Q12 had a very good control of margin, a very good control in cost, GP margin was up. OP margin was also up four percentage points sequentially. This is mainly due to lower bandwidth and server costs, and also S&M expenses as a % of sales was also lower. Are these sustainable going into second half? Is there a clearer visibility to the second half economy compared to the first half? Any signs of picking up from your observation in the business? Thank you.
Okay. Hi, Cynthia. Yeah, as you noted, I think we continue to deliver very strong and healthy margins. Sequentially, for seasonality reasons, Q2 is typically higher in terms of ops margin compared to Q1. I think the way to look at our margins, if you're doing comparison, is to look at the year-over-year trend. In terms of year-over-year trend, I think that was very managed, that fared out very well as well. Last year, we had extraordinary performance in terms of margins. We benefited from the extraordinary growth in the e-commerce sector, the group buying sector, all the good things like that, and that helped on the margin.
We have made it clear that We are in a very robust investment cycle, particularly in this time, the transformative time of the Internet space in China, it's very important for us to make strategic investment for the long-term sustainability of this business. We will do so in a very disciplined approach. As we continue to carry our business, we see much opportunities to continue to drive revenue growth. At the same time, important initiatives like mobile and the cloud are very important areas for us to invest. We invest of these search business, the revenue and the cash flow that we generate in this future business is very important for us. We have been doing this over the past some time and will continue to do so. The landscape continues to evolve. The market opportunity is tremendous.
We want to make sure that we carry out our duties all throughout this time and to maximize our opportunities for the future. In terms of second half business outlook, I think, we provide quarterly guidance. The Q3 guidance is a very solid guidance. I think everybody is aware the macro environment is challenging. However, I think because of the beautiful search product, the performance-based nature of our service, and our execution capability, we want to make sure regardless the macro environment, we're charging ahead to deliver solid results.
The next question comes from the line of Richard Ji, calling from Morgan Stanley. Please ask your question.
Yeah. Thanks for taking my call. Robin Li, can you comment on your top paid listing categories and which areas have you been seeing strength and which area have you seen some slowdown? Thank you.
The typical top five sectors that we report this time is very consistent. In the top five sectors, we have medical healthcare, education, machinery equipment, travel, and franchising. All these top sectors, we see very strong growth continuously. If we have to make comparisons, the B2B sector, such as machinery, is weaker than the B2C sectors like the others.
The next question comes from the line of Andy Yeung calling from Oppenheimer. Please ask your question.
Hi, good morning. Thank you for taking my question. Obviously, you have work on develop new applications like mobile browser and mobile LBS applications for the customer. At the same time, you also have made some strategic investments in Anjuke and Qunar before. From a statistical standpoint, how do you decide when to buy a product or services and when do you decide to do it in-house?
Okay. We don't try to differentiate based on what kind of things to buy and what kind of things to build. In most cases, I would say that I prefer buy to build because that will save us time and give us competitive advantages. It's just in a lot of cases, there are just not good enough applications or services or products for us to buy, so we have to build. For the two investments you mentioned, Qunar and Anjuke, they fall into the category like a vertical. In the previous call, we mentioned this so-called landing page strategy. When people do search on Baidu, they will probably land on another site.
If that site belongs to a important vertical and we believe we can come out with the equally good or even better quality of content or service, we will consider owning that by either acquisition or build by ourselves.
The next question comes from the line of Elinor Leung calling from CLSA. Please ask your question.
Hi. Morning. Thanks for the call. My question is related to e-commerce search. Last time you mentioned that you want to develop a more vertical search engine capability. In terms of e-commerce search, can you tell us regarding progress? It seems that eTao has made a big improvement on their search engine. What about Baidu? Would that be a major competition against Baidu? Also, if Baidu has any plan to go back to the e-com market, will this also affect your LBS strategy, how you're going to work closer with the merchants in order to develop your LBS services? Thank you.
Yeah. We think we have very good e-commerce search capabilities. That is demonstrated by the loyal customers or advertisers from the e-commerce category. They all spend a lot of money to advertise on Baidu, and they just cannot buy enough amount of inventory from us. We continue to try to enhance the user experience for e-commerce related queries.
We have a mechanism called Open Data Platform and Open Application Platform. Related parties with data can submit their data to our platform, and we can show that to our users when necessary. Having said that, I think there are still a lot of room for improvement for the commerce-related search. We have devoted resources, engineering resources, to improve that experience. We do not necessarily need a separate product for e-commerce search. We still believe that users can find the necessary information from one search box. On LBS, it's a potentially huge sector. There are lots of things we can do. Like I mentioned, our product and our strategy is centered on Baidu Maps.
We are actually adding a lot of information, merchant information and shopping information, travel information, all kind of information on this platform, and we believe it will become more useful to the users and deliver a better value to merchant going forward.
We are now approaching the end of the conference call. I would now turn the call back to Robin Li, Baidu's Chief Executive Officer, for his closing remarks.
Well, once again, thanks for joining the call. Please do not hesitate to get in touch with us if you have any further questions. We look forward to speaking again soon.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.