Earnings Call: Q2 2012

Jul 24, 2012

Earnings release

Hello, and thank you for standing by for Baidu's 2nd 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 Sen, Badeau's, Investor Relations Director. Please go ahead. Hello, everyone, and welcome to Baidu's second quarter 2012 earnings conference call. Buddu's earnings release was distributed earlier today, and you can find a copy on our website as well as on newswire services. Today, you will hear from Robin Lee Baidu's Chairman and Chief Executive Officer and Jennifer Lee Baidu's Chief Financial Officer. After their prepared remarks, Robin and Jennifer will answer your questions. Before we continue, please note that the discussion today will contain forward looking statements made under the Safe Harbor provisions of the U. S. Private Securities Litigation Reform Act of 1995. Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public filings with the SEC. Including our annual report on Form 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. And is available on our IR website at ir. Baidu.com. As a reminder, this conference is being recorded In addition, at whatcast of this conference call will be available on Baidu's IR website. I will now turn the call over to Baidu's CEO, Robin Lee. Hello everyone and thanks for joining today's call. I am 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 of our 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 the 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. This effort are driving clear results. We are also building strong momentum with small and medium sized enterprises in lower tier markets. In the 2nd 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're also now partnering with local governments in 14 regions around China on educational programs that encourage SMEs to embrace online marketing. And 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, but we are optimistic about the future of e Commerce. And due to the performance based nature of Baidu's marketing platform, large successful e commerce players spending on Baidu, bringing very strong. To cover the macro headwinds, we are also proactively developing new traditional industry categories left food and beverage. The traditional advertisers have large potential and have started to adopt Baidu's platform in marketing campaign. On the monetization front, we made solid progress this quarter and I'm 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 behaviors. So customers now can target their particular interest groups such as people who frequently travel overseas or pet owners. In the past quarter, we also upgraded advanced the free switch match, one of our Phoenix Match matching options. This upgrade leverages our vast cash 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 customer's location, limitations, and keywords with the user search query and IP address. Just recently, we also introduced the biggest upgrade in 5 years to our brand link product. Traditionally, brand advertisers have used these areas to display basic information like logos and links to their corporate websites. After this major revamp of brand links, advertisers can turn this area into a specially customized and unified for their brand. They can embed pictures and videos, micro box accounts, and even advance the 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 result page. On the user front, mobile continued to grow very well, and we are really charging ahead to build a truly frictionless experience for mobile users. Our platform allows users to efficiently access the underlining 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 app and even get local information just by speaking into their phone. The accuracy of our voice search technology is unmatched. And we are already we've already rolled out some core functions based on it. For example, if a user says, I'm asset Baidu campus, the system will instantly tag them on Baidu Campus and provide a map of the neighborhood. As the user says, I want to come up, the program will instantly start the call. Users can even use voice to search meeting apps and of course, search the web. I'm also very pleased to say that users who search the web on their mobile 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 platforms for the mobile platform, and we can now serve up huge amounts of dynamic information, apps and other services to mobile phones. Likewise, our personal lives to homepage is now completely iOS friendly and has been optimized for users on the go. We are working hard to make to that end, in Q2, we rolled out an updated addition 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. And we continue to build important partnerships that InSure Baidu is the gateway of Troy for mobile Internet users just as it is for desktop users. As you all have heard, users will be able to choose Baidu as did the bump search on Apple IOS VI. Naturally, users 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 user 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 and we upgraded the real time traffic function which is now much more accurate and has some more user friendly display formats. And 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 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 on our website here in sectors like travel, group buying, real estate information and so on. One reason that Baidu stands haven't showed us about 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 Net Disc service has been installed millions of times while still in beta testing. And by the users can now also leverage BCS to access their photo on their images from anywhere and 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 $9,000,000 in Q1 to $20,000,000 by the end of June. And 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. And 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 ITE continues to thrive and our strong support is clearly driving results. As you know, online video is a very competitive space, but the high quality of IGE's content is a key differentiator over competitors. User numbers showed encouraging growth in the quarter. With 250,000,000 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, ITevents second in China in this important metric. Overall, the 2nd quarter demonstrated how our aggressive investments 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 7th annual Baidu World Forum, which will be held on September 3rd in Beijing. This is an opportunity for Baidu to bring together some of the best independent work, industry experts and our developer partners to share our strategic initiatives and discuss China Internet's twin. 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, and 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 5.5000000000, 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 2nd quarter was approximately 15,500, a 34.8% increase from the corresponding period in 2011 and a increase of 16.5% from the previous quarter. Traffic acquisition cost as a component of cost of revenue in Q2 was RMB454 1,000,000 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 network 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, and we see tremendous room to grow this relationship further. To drive incremental revenue like contextual ad business, we expect the TAC as a percent of revenue to gradually increase over the long term, as stated before. Bandwidth and depreciation costs as a percent 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. Solving general and administrative expenses in Q2 were BRL588 1,000,000, a 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 and D expenses in Q2 were CNY 546,000,000, an increase of CNY 82 point 7% over the corresponding period in 2011, primarily due to increased headcount, reflecting our continued strategic investments in RMB talent. Share based compensation expenses, which were allocated to related operating costs and expense line items, equity to RMB 54,000,000 in the 2nd quarter RMB 35,000,000 in Operating profit for Q2 was RMB 2,800,000,000, an increase of 51.5 percent over Q2, twenty eleven. Total headcount as of June 30, 2012 was about 17,400 roughly 900 more than the previous quarters. Income tax expense was $235,000,000 for the 2nd quarter. Effective tax rate for the 2nd quarter was 7.9% compared to 14.9% in Q2 twenty eleven. As you will include income tax for 1 of our subsidiaries at a non preferential tax rate in 2011. This subsidiary has obtained a high and a new technology enterprise tax license this quarter, Accordingly, we reversed the provision in 2011. Net income Attributable to Baidu for Q2 were RMB2.8 billion, a 69.8% increase from the corresponding period in 2011. Basic and diluted earnings attributable to Baidu for 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 RMB2.8 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 30, 2012, the company had cash, cash equivalents and short term investments of RMB 18,300,000,000. Net operating cash flow for the second quarter of 2012 was RMB 3,000,000,000. Capital expenditure this quarter were $722,000,000. Now let me provide you with our top line guidance for the 3rd quarter of 2012. We currently expect total revenues for the third quarter of 2012 to be between RMB6.245 1,000,000,000 and a RMB6.41 1,000,000,000, which would present a 49.6 to 53.5% year on year increase. I do wish to emphasize that this forecast reflected by Duke's current and preliminary view, which is subject to change. I will now open the call to questions. Operator, please go ahead. It'll also be fair to all callers who wish to ask questions. We will take one question at a time from each caller. After your first question has been And our first question in queue comes from the line of Dick Wei calling from JP Morgan. Please ask your question. Good morning. Thank you for taking my questions. My first question is on mobile. I wonder what is the management view in terms of mobile traffic conditioner? Or is it cannibalizing some of the PT traffic? And in addition, maybe if management can comment on some of the monetization schedule and advertising format, such as the shared, click to call, and also how is the advertiser generally looking at small bowel, I would think that would be helpful. I think we believe that mobile traffic is largely, incremental to, desktop search traffic And 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, if they will do the search, if they don't have a mobile phone, they probably forgot that the information needs before they reach to a desktop computer. So we think the mobile traffic is largely incremental to the current desktop traffic. But having said that, I would have to say that mobile Internet is very early stage. There are a lot of similarities between the mobile, internet now. And, desktop internet many, many years ago when we didn't have enough amount of information or education. Available for users to search. So we would expect the, mobile traffic will have many, many years of hyper growth going forward. And speaking of monetization, again, We think this is an 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 we when this kind of activities, more material to our marketing platform. The next question in queue comes from the line of John Chow calling from Macquarie. Please ask your question. Thank you very much. Good morning. Firstly, congrats on pretty solid results in a fairly 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 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, for the shareholders. Thank you very much. Hi, Jun. The VIE structure has been around for over a decade. And as you know, most overseas listed Chinese companies operate under similar structures could enable them to list a board. Abroad. I do mainly utilize VIE structure to hold its license to operate in China. We ensure that as that as much of our economic value resides with the WUFI entity as possible, we have contractual agreements set up and, oversight provided to these VIE entities and all the controlling power actually, besides with the Wuxi. And the economic interest is mostly allocated to almost all the sum of interest of the VIE is allocated to move the all the 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. So we have mechanics and the daily operations to ensure that, there is minimum exposure, to BIE. If you read our 20 F, we provide sufficient disclosure and much coverage on the VIE and hopefully that gives you the ability to 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 safeguard the investors' interest and the long term future of the company. And fundamentally, you know, we don't see there's any particular, government policy change per se in the near term but this has been the structure that has been in place and it's working. And if I do, it's doing everything to protect it with the shareholder interest, And I hope that our covenant structure, our track record, our disclosure that we have provided if the investor kind of comfort. And the next question comes from the line of Alex Yao calling from Deutsche Bank. Please ask your question. Hi. Good morning, everyone, and, congrats on a very, solid quarter. My first, I have a two questions. Number 1 is a Can you comment on the growth rate between number of pipe clicks versus the CTC? And how would you envision the growing mobile search with change the both pattern of these 2 operating metrics. And then number 2 is, can you give us some comments on the, revenue growth momentum it's a large account and SME in the quarter, then give it a much. I'll take the first and third one. Alex, thank you for your questions. For Q2, we had a pretty solid revenue growth. And 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. And for monetization, it, it, 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 said, helped on the revenue growth these, 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. And in terms of large and the small, business growth, I, you know, I actually highlight this quarter for the for Q2 in particular, we have seen strong momentum on the SME side. There's a lot of good work that we have put into the system, starting last year, in including improving sales process, developing tools to help the customers have better experience using our platform and all that, you know, good things. And we carried out the national, marketing campaign this quarter, and that was bearing a very good fruit. So our SME business is growing robustly. And I think one of the benefit we have is we have a very diversified, customer base. And, it it, you know, so the the whole Baidu platform is much more resilient in this environment. And of course, our Salesforce execution effort did a great contribution to the performance. Large advertisers, as we are, 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, products offerings and services. And at the same time, our new industries, new customers that we try to develop and, as Robin mentioned, some new sectors, such as food and beverage, we're seeing good progress and traction So 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 or something had to do with mobile, Alex? Regarding the 2 core operating metrics that the, paid pay the click growth and the CTP growth, how would you envision the, growing mobile search will trend across both pattern on these 2 metrics. Is the CTP going to be, affected by the mobile search? Yeah. Okay. As you know, that the money valuation capabilities for mobile is not as good as desktop search at this time. So the CTC understandably is slower on the mobile platform. But like I mentioned before, We think that the mobile, Internet is in its, early stage, beyond just not enough, amount of, applications or work data or content that's available for, users to search So users are not as dependent, upon search on mobile as they do on the desktop yet. So going forward, when the users increasingly rely on their mobile phone to get information, we think the monetization will follow. And the next question from the line of Alicia Yance calling from Barclays. Please ask your question. I have a question that is that is finally good to see the contextual assets picking up more meaningfully this quarter. So can management share your view that how China contacts your ads market to grow in the next few years? And what are some of the industry that are more receptive to the contextual apps currently? Thank you. I think, I've mentioned this, for some time now, contextual ad business is a focus for us and the team has been doing good work over the past year or, or, or if not more. It started from a very small base and it's, has been consistently taking traction. And, in the past, I think, you know, because of the base is small, we you wouldn't feel, you wouldn't see that through the tax percent of the revenue. As the the business is gaining momentum the team continues to roll out, improve the product, technology and services to our customer. It is growing very nicely, and we're very encouraged by this sector growth. In terms of customer adoption, there's a wide range of customer that can adopt this. The large customers, obviously, like this, because, it serves their brand needs. And our SMEs small and medium sized businesses also like the contextual app because of the improved product feature to better target and give them better ROIs. So we are seeing good adoptions of our customers, both on the large customer side as well as the SME. Because this, as you, as you just noted, you know, 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 that we can implement, to improve the product. And it's it's a virtual as a circle. You know, our product gets better. Customer's acceptance is better. And there's more feed, better information that's made available to us and we can continue to improve on that. So we I think there's 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. Hi, good morning. Thank you. Just a couple more questions regarding on the mobile. I know the I know the market share measurement on the mobile quite different than how people measure a PC market share for search. Per click or per revenue basis, do you know what your market share is in search? Because I know by now it's being done on a bit per second, which is not exactly comparing apples to apples here. And second of all, when you look at the demand environment from 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. 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, the market share distribution amount of the search players But what we know is that our mobile traffic continue to grow at very high speed at least the triple digit growth. And we believe that it's more important to look internally on 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 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 we have like 90% of the market share that doesn't mean much to us. And on the mobile advertising front, I mentioned before that, there are not enough content and app, yet on the mobile platform, that, that can make the user still dependent upon 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. In the 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. And on our side, there are a lot of things we can do And we are also, trying by our partners to help our customers to establish this kind of mobile friendly enrollment so that they can advertise, the mobile more. So it's really, the early stage and people are talking a lot of different things and we're just trying to form a enrollment that's mobile friendly, then the performance should be okay. Next question comes from the line of Yu Jin calling from CICC. Please ask your question. And thank you for speaking with my pleasure. So, I'll have the overmanned person for the management. So the question is about Elgin, about mobile is not true. How how while the management's reading about it, you do not use it, but the new mobile is not. So far, according to the 3rd party we started, has that, mobile users, by 90% of time, online applications, 70% of time spend on browser facing services. So we'll then change and, to, use that care, and so, to waste the air, what a kind of driver, a side of the drive, a user to spare more time, you know, on your part of Valdez. So from Humana and from the front side. Secondly, it's a part of Northbound shift. So my feeling is, to do that, the most of time when people do search the announcement, our search partners, but on mobile side, besides, the response, it has been, diagnosed with users and more often, they will cut them also by, for example, some applications, you need to wait through the webinar. So please send our social paper services so that, looks like some of the first query. So my question is, is how the management, we will get about 2% when it's possible with mobile Internet, second, how people use mobile and we're highly appreciated if that's relevant. You can also share some of the company's candidates to to cooperate with potential changes. So I will regarding to your first question, Yes. 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 data 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, but as the, the internet became larger and larger, more content and, but that became more diversified than 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 user as well, become more, well spent more time on the browser or even applications, to me, there's no, fundamental difference between a application Nanda, a browser based content. So we aren't actually seeing much wins that the more and more services become web based app, that the backend is basically content on the cloud side. Even for all kinds of native applications, I think we can come up with better ways, for users to to search for apps. Right now, the main stream model for apps, if app store they are not really friendly or fair to those less used apps and 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. So whatever they're looking for, if there's a content behind the browser or or applications, we'll be able to find that for our users. And by doing that, our users will well spend more time with us or more dependent on the case we 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 So, not only we can build a better query based or bot based search experience for our users, we can do, more, in the sense that in a lot of cases, before the user, even typing we already know what they used in 1 hand. We can deliver that to them. If you remember, last year, when we rolled out the new personalized home page, that was the main, drive, behind it. So, for the mobile, it's the same thing. In a lot of cases, we know what the user wants, even before, in our sheet has in my query. And, we Again, we are developing all kinds of technologies to make that experience better and better for our users. Wanna 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. I think, the 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. So it is true that when it comes to SME, doing promotional, work with us, their ad budget is no comparison to these large advertisers. So if you, you, you can say, you know, none of these, advertisers are spending less. They're all increasing their spending is that the s it's just that the SMEs are doing more of the work, compared to the large, customers if we use 2011 as a base. So both are growing, but SME is the main driver and SME has a smaller budget. And the next question comes from the line of Ravi Saracy calling from Citi Investment. Please ask your question. Congratulations on a, on a solid quarter to the 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 is about a fit. Was wondering if you had an update on that figure or some color around that. You also mentioned that, you were in pre installed on 8% of branded Android handset. I was wondering again if you've had an update on that as of the end of Q2. And the final question related to those, that, the amount of revenues that can pay away for hardware and ecosystems for that reinstall, and you can give any color of what that number might be in between dollars or $0.25 of loan to net revenues and how you account for it, is that a stock acquisition costs or do you state revenue after that number? Thank you very much. I'll answer the first 2 and, Jennifer will answer if it's a pet question. For the mobile search percentage, as I mentioned before, the mobile traffic, mobile search traffic continue to grow at skyrocket rates. So as a percentage of the total search traffic mobile continue to, increase. But we are not going to disclose this number quarter by quarter, the overall trend does not change. If there's a change, we will, of course, let you know. On the preinstallation, of 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, it is, the arrangements with these players is a revenue sharing arrangement. So 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, but the nature of the work is we do advertising work, we will record the total revenue, and we will treat the sharing part as tech. 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. Do you see any operating tricks that you can share with us, about the popularity of Baidu Map. And then, I would also like to get, any guidance of the tax rate for the full year given the lower tax rate in the bank quarter? About my do math, we have a dominant market share on the desktop and we continue to, to enhance the features we think that LBS will become, very important part of the mobile internet life. So we have been aggressive in pushing the Baidu, map service on the mobile. We have seen commendance amount of growth on the mobile platform. And, going forward, we will try to integrate more services on to the Baidu Labs service. So, well, really become an LV ad servicing set up just a map service. There are a lot of things to be done on that front. And, Eddie, on your tax question, yes, basically what happened in tax was, we, we, we were accruing at a higher base last year. So if we were using the, favorable rate last year's income would be higher. And this quarter, Q2, just for, conservative principle, since once we get the license, we'll recognize the tax benefit, and there is kind of a catch up of last year's, higher accrual and we reversed that this this quarter. The overall, tax rate for the year, I have provided a guidance earlier, in the, in the year. The whole year, we're looking at close to mid teens, that protects, rates that we expect. And the next question comes from the line of Ming Zao calling from AC6 Research. Please ask your question. M and A or investment. So last year, you acquired the Cunar And this year, we've heard the market speculation that they're going to buy UCWeb. Some of the questions are how likely that is any thoughts along that line. And, Jennifer, if you could provide the full year CapEx, that would be great. Thank you. Well, I mean, we don't comment on this kind of rumors. So I'll just let Jennifer answer the second part of the question. I mean, for CapEx, I also provided a guidance earlier part, in the year, we, this is the year of investment for us. We focused on investing in infrastructure as well as office space. To host more and more of, the talents, particularly R and D. The 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. And the next question comes from the line of Cynthia Mann calling from Jefferies. Please ask your question. Thank you, management, for taking the time. I have one question. The 2Q 12 had a very good control, of, margin, very good controlling cost and, JP margin was up. OP margin was also up about 4 percentage points sequentially. This is mainly due to lower bandwidth and, server costs. And also, S and M, expenses as a percent of sales was also lower. Are these sustainable going into second half? And, is there a clear visibility to the 2nd half economy compared to the 1st half any signs of picking up from your observation in the business? Thank you. Okay. The, hi, Cynthia. Yes, 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. So I think the way to look at our margins if you're doing comparison is to look at the year over year trend. And in terms of year over year planned. I think that it was very managed, you know, that they fared out very well as well. Last year, we had $200,000,000 performance in terms of margins. We benefited from the extraordinary growth, in the e commerce sector, the book buying sector, you know, things, all the good things like that, and, and, you know, that helped on the margin. And we have, made it clear that, we we are in a very robust investment cycle. And, particularly in this time, the formative 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. And we will do so in a very disciplined approach. So as we continue to carry our 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. And we invest of these search business, the revenue and the cash flow that we generate in this future business is very important for us. So we have been doing this, over the past, some time, and we'll continue to do so. The main state continues to evolve, the market opportunity is tremendous. We want to make sure that we carry out our duties or throughout this time and to maximize our opportunities for the future. In terms of second half business outlook, I think, you know, we provide quarterly guidance and the Q3 guidance is a very solid guidance. I think everybody is aware the macro environment is challenging However, I think that because of the beautiful, search product, the performance based nature of our service, we and our execution capability, we want to make sure, regardless the macro environment, we're charging ahead to deliver solid results. And the next question comes from the line of Richard Jay calling from Morgan Stanley. Please ask your question. Yeah. Thanks for taking my call. And Robin, Jennifer, can you comment on your top, stabilizing categories And which areas have been expressed and which area we have been incomedified out? Thank you. The typical top 5 sectors that we report, these, this time is, very consistent. In the top 5 sectors, we have, medical health here, education, machinery equipment, travel, and franchising. And all CTALPA sectors we see very strong growth continuously. And if we were, you know, if if we have to make comparisons, the B2B, sector, such as machinery, is weaker than these B2C sectors, like the others. And the next question comes from the line of Andy Young calling from Oppenheimer. Please ask your question. Obviously, you have will cost to develop new applications, like mobile browser and mobile LVF applications for the customer. At the same time, you also have, made some big investments in 3 year and should not be bought. So from a historical standpoint, how do you design, when to buy the product or services, and when do you design to do it in house? Okay. We, we don't try to differentiate the based on what kind of things to buy and what kind of things to build, in most cases, I would say that I prefer by tribute because we got wealthy lost time, and the last competitive pipeline they just say. 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, the two investments you mentioned that, Junar and achieve, they fall into the category, like, a vertical So we, 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 an important vertical, and we believe we can come out with the equally good or even better quality of content or service we will all consider owning that by even, by either acquisition or by ourselves. And the next question comes from the line of Alan Lyon calling from CLSA. Please ask your question. Hi, good morning. Thanks for the call. My question is related to e commerce search last time you mentioned, they want to develop a more vertical search engine capability. And, in terms of e commerce search, you tell us regarding progress, it seems that that lead time has made a big improvement on the search engine. What about Baidu? Would that be a a major competition against Baidu. And also, if Baidu, does Baidu has any plan to go back to the e commerce 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. Yes. We think we have very good, e commerce search capabilities, that is demonstrated by the loyal, loyal customers or advertisers from the e commerce category. They all spend a lot of money to advertise 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 party 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 We still believe that, users can find the necessary information, from one search box LBS, it's a potentially huge sector. There are lots of things we can do. And like I mentioned, our product and the strategy is centered on by Lumet. We will We are actually adding a lot of information, merchant information, shopping information, selling information, online marketing information, this platform, and we believe it will become more useful to the users and, deliver a better value to merchants going forward. We are now approaching the end of the conference call. I would now turn the call the call back to Robin Lee, Baidu's chief executive officer for 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.