Earnings Call: Q4 2017

Feb 14, 2018

Hello, and thank you for standing by for Baidu's 4th Quarter and Full Year 2017 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Sharon Ng, Baidu's Director of Investor Relations. Hello, everyone, and welcome to Baidu's 4th quarter and full year 2017 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 Chief Executive Officer Qi Lu, Baidu's Chief Operating Officer and Herman Yu, Baidu's Chief Financial Officer. After the prepared remarks, Robin, Qi and Herman 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 of the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website. I will now turn the call over to our CEO, Robin Li. Hello, everybody, and thank you for joining today's call. 2017 has been a transformative year for Baxi. We took steps to exit non core business, added new management talents and sharpened our strategic focus to strengthen our mobile foundation and lead in AI. Our shift to make Baidu an AI first company is paying strong dividends. AI continues to be a main driver behind the growth of our twin engine search and feed business. By coupling AI, computing its user data across Baidu's 20 plus apps, many as monthly active users in 100 of minutes, which generate amazing user insight to power Baidu's search and feed algorithm, which, in turn, drive our top line growth and generate cash flow to fund our new AI business, autonomous driving and conversational AI. We had a solid quarter for 4th quarter. Total revenues reached RMB23.6 billion, growing 29% year over year, which is a meaningful acceleration from the first half of twenty seventeen. Baidu's 4th quarter revenue was driven by the robust growth of our feed revenue as well as strong traffic demand, particularly coming from e commerce companies. In December, we signed a strategic partnership with Huawei to cooperate in areas of technology, product and content. Baidu will support Huawei in the development of AI powered smartphones and make available our mobile apps such as our flagship Baidu App and Baidu Maps, which are gradually upgraded with AI features such as Baidu voice assistant, intelligent search and augmented reality. Our comprehensive partnership with Huawei is at a new level of strategic cooperation, and we hope to form comprehensive partnerships with other smartphone players in the future. By working with handset makers at the outset of product design, we hope to enable a new generation of AI powered phones, which will significantly improve user experience, especially when combined with Baidu AI enabled mobile apps. I would like to point out that mobile Baidu has been rebranded as Baidu App. The rebranding reflects Baidu App as the main channel to experience Baidu Services. When we launched Mobile Baidu several years back, the app was considered an extension of our PC services and the mobile channel to access Baidu search. Today, the Baidu app is the main channel to access Baidu's twin engine of 3rd gen feed and the container that offers the best Baidu experience. Our new AI business, we launched the DuerOS 2.0 in November at our annual conference, Baidu World, and last month announced Apollo 2.0 at the Consumer Electronics Show in Las Vegas. Baidu's autonomous driving platform, Apolong, has received great industry recognition, and we have formed strategic partnerships with industry heavyweights such as Intel, NVIDIA, and NextE and Renaissance. For Baidu's conversational AI platform, we continue to focus on growing the adoption of DuerOS at a rapid pace. Last November, we released our first first party showcase hardware, the Ribbon Edge Smart Speaker, which received industry accolades, including the Best of CES 2018 by The Wall Street Journal and one of the Best Gadgets of CES 2018 by Wired. We now have over 130 Duo OS partners, who together have released over 50 DuerOS powered smart devices and we are excited to see the DuerOS install base and usage grow very rapidly. 2017 has proven to be a very year for Baidu. We look forward to continuing our momentum in 2018. I'll now turn the call over to Qi to go through our business progress. Thank you, Robin. On our core business front, we remain very focused on strengthening our foundation for the long term, particularly through leveraging AI technologies to improve the user experience for search, speed and our flagship Baidu App, formerly named Mobilebyte. For search, we are making steady progress on improving Baidu's search experience and expanding the scope of search with richer content such as video, especially the coverage of our top one results whereby we satisfy our users' intent with the first search result has reached 30% of queries in Q4. We have also made strong progress in improving the coverage and the quality of video content for search. With 15% of our search page views returning high quality videos, up from 11% in the previous quarter. Note that in order to fully leverage the strong growth of video content, we introduced a more stringent quality measurement standard for quality video coverage starting in Q4. Even more importantly, last November, we successfully launched their appall account, xiong.co, a new platform for mobile web content that is designed to link the content from other platforms and deliver a significantly upgraded mobile search experience. By enabling social tools such as user clicking to follow, business broadcasting features, transaction tools such as payment and the content management tools. The initial adoption has been very strong. Over 25% of searches within Baidu App returning content from barefoot account publishers. For feed, while making strides in improving the core foundation across the board, in Q4, our product quality continued to improve. As a result, the daily content distributed by feed grew over 20% in Q4 over the prior quarter. We continue to deepen user engagement with total daily time spent on the Baidu app growing approximately 30% year over year. Video content has been a key growth driver, not only as a part of Vee, but also as part of our overall mobile product matrix. Specifically, the percentage of video content distributed in feed has grown to 40% on average in Q4, up from 14% a year ago. We continue to improve our Baijiahao platform, which connects content from self media publishers with our 3 d users. We saw the number of content creators grow from over 200,000 at the beginning of last year to 1,000,000 currently. We also provided content creators with cutting edge AI tools through the launch of a content creator AI platform, which helps automatically review material for edits, intelligently splice video into images and more. Our flagship Baidu app, which offers the best Baidu product experience, continues to grow strongly, driven by the twin engines of search and feed. We released the Baidu App Version 10.0 at Baidu World in November with a much improved user experience, featuring smoother navigation and content viewing, expansion of enriched content such as video, user generated content, political channels and live social sharing to name a few. In addition, we are trailblazing to fully leverage AI capabilities to drive more and a faster pace of product innovation, such as a brand new text to speech version of the Baidu app. On the advertising front, we continue to make steady improvements to advertising product offerings and ad to drive sustained growth in search and feed monetization. For example, we have seen strong adoption of dynamic ads. Dynamic ads can be used in search and feed and help our customers reach the right users on our platform by showing users highly relevant, personally tailored ads, driving significantly high conversion rates. Dynamic ads have been widely adopted by our customers in transaction driven verticals with structured product catalogs. In Q4, we drove high adoption in existing verticals, such as e commerce and travel and expanded dynamic of assets to new verticals, including autos and the real estate with strong results. We are in the early innings of dynamic ads and see very promising opportunities ahead. We know that the ultimate angle for our customers is leads conversion at scale on platform. In the second half of last year, we introduced optimized cost per click or OCPC on the merged search and feed ad platform. Customers can give us their budgets and the cost per conversion and our ad platform will optimize search and feed traffic to deliver the highest number of conversions that fall within their budgets. For example, in the online gaming vertical, customers can set a budget and target price per download. Our ad platform intelligently optimizes bid price and other criteria for both search and the feed traffic to guarantee as many app downloads as the budget allows. The technology is a combination of efforts dating back to 2013 that entails the use of big data and proprietary machine learning modeling on converging trackings and traffic analysis. Overall, we're working hard to strengthen our value proposition to advertisers, offering the ability to obtain leads conversion at scale through the breadth of advertising platform, which includes search, feed and the various forms of display ads through innovative ROI enhancing ad formats, which includes dynamic ads, action ads, augmented reality ads and through constant upgrades we make to our technology and a data driven ad platform, of which OCPC is a prime example. Bin Jia and the new Oriental Xindongbang are 2 such advertisers who use the range of ad products to reach their users they see. Tianjia, one of the largest real estate focused chains in China, leverages Baidu search ads, feed ads, brand soap, dynamic ads, mobile canvas ads and image and video ads to promote brand and services. Baidu's AI technology powers user targeting, knowledge graph, look alikes and more. It is fundamental to delivering dynamic, customized search and feed ads that significantly improves Lianjia's lead conversion. Baidu delivers on average over 5,000,000 high quality traffic daily to Lianjia, a scale which is multiple times that of any other advertising channel. New Oriental, one of the largest private educational service providers in China, partners with Baidu to bring leads to that platform. New Oriental has been a long standing customer of our search ads has been an early adopter of feed ads. Over the past year, New Oriental increased their feed marketing budget 6 fold. With its unique blend of entertainment and technology DNA. In December, according to iResearch, iQIYI's PC and mobile app daily average active users reached 76,000,000 and 158,000,000 respectively. Monthly time spent on iQIYI's mobile app grew to 408,000,000,000, 22% higher than December 2016. Next, I'll talk about our progress on AI enabled new businesses. For Apollo and our autonomous vehicles business, we made a big stride in Q4, especially with the launch of Apollo 2.0 at CES, which provides an unprecedented set of capabilities for simple urban road autonomous driving to our developers and partners. This elevates the Apollo ecosystem into new level, where we began an accelerated pace, which we would call China's speed of productization and commercialization of autonomous vehicles. Over the past quarter, we announced commercial volume production of L4 minutei buses in 2018 and several commercial volume production of passenger vehicles in 2019 2020. The Apollo ecosystem is growing rapidly now with over 90 partners. Furthermore, our portal has been designated by China's central government as the national autonomous driving platform. For DuerOS, our conversational AI platform, we launched DuerOS 2.0 at Baidu World in November with much elevated platform capabilities and a series of new innovative DuerOS powered products at the CES. More importantly, the DuerOS ecosystem is growing rapidly. We have teamed up over 130 partners and have released over 50 DuerOS powered and branded hardware products on the market, including televisions, speakers, smartphones, storytelling toys, white goods, appliances and the car dashboard. And as a result, the overall Duos install base of devices and aggregate users and usages are growing at a very rapid pace. On our other AI enabled business, the ABC Intelligent Cloud Business continues its rapid growth in Q4, particularly in key verticals such as media, financial services and mobile phone OEMs. Our financial services business also grew healthily and substantially improved its core capabilities in both consumer credit loan as well as asset management. We have also made good progress in establishing a new operating structure that will enable the FSG business to further innovate and pursue bigger opportunities. Overall, we're pleased with our progress and we look forward to continuing our work in 2018. With that, I will turn the call over to Herman to go through the financials. Thanks, Chi. Hello, everyone. Welcome to Baidu's Q4 2017 call. Let me go through the financial highlights. All monetary amounts are in renminbi unless stated otherwise. Q4 was a great quarter for Baidu. Our total revenues grew 29% year over year to RMB23.6 billion, which exceeded the high end of our guidance. Non GAAP operating income reached RMB 5,800,000,000 up 104% year over year. Adjusted EBITDA reached RMB6.9 billion or 29 percent of total revenues and was up 78% year over year, illustrating the operating leverage potential of our financial model as we simplify and align Baidu's businesses around AI. Let me give you more color on our financials. During the quarter, we saw strong revenue growth coming from feed and as a gateway to online traffic Baidu benefited from the high season e commerce activities. Our mobile revenue reached 76% of total revenues and compared to 65% for the same period last year. Baidu's online marketing services revenues in the Q4 grew 26% year over year to RMB20.4 billion, And we had approximately 460,000 online marketing customers in Q4, up 2% year over year. Revenue per online marketing customer was RMB44300, showing a healthy increase of 25% year over year. Other services revenues in the Q4 were up 53% year over year to RMB3.1 billion mainly as a result of robust growth iQIYI membership and fees for our financial services business. Total revenues in 2017 reached RMB84.8 billion, up 20% year over year. Online marketing revenues were RMB73.1 billion, up 13% from 2016. We had about 775,000 online marketing customers in 2017, down 21% from 2016 as we rebuild our search business. Revenue per online marketing customer was approximately 93,500, up 43% from 2016. Other services revenues in 2017 were up 94% year over year to RMB11.7 billion, mainly as a result of robust growth in IT membership and fees for our financial services business. Moving on to cost of sales. Cost of sales in the Q4 was RMB11.4 billion, up 18% year over year. Cost of sales in 2017 was RMB43.1 billion, up 22% from 2016. Content cost in 2017 was up 70% year over year to RMB13.4 billion mainly due to increased content purchasing by iQIYI. In 2018, we expect content costs to step up at a similar pace to 2017. We plan to continue to invest in self produced content and high quality licensed entertainment content to support iQIYI. On the fee side, we plan to ramp up our content offering to support the fast growth of Baijiahao or BHJH account. Moving on to operating expenses. SG and A expenses in the 4th quarter were RMB3.6 billion, up 9% year over year. SG and A expenses in 2017 was RMB13.1 billion, down 13% from 2016, mainly due to the cutback in promotions from Baidu deliveries and OTOO initiatives. With promotions from Baidu deliveries and OTOO initiatives bottoming in 2017, we expect SG and A in 2018 to rise on a year over year basis as we ramp up the promotion of our flagship Baidu app and our planned app releases. The magnitude of our channel and other promotional spending increase will depend on our ability to find marketing resources that can generate positive ROI over the lifetime of new app users. Since marketing revenue derived from a new user is spread over several quarters, while related channel and promotional costs are expensed in the quarter that they occur, successful promotion of Baidu apps may temporarily cause our margin to decline in the quarter of heavy marketing spending. R and D expenses in the 4th quarter were RMB3.7 billion, up 25% year over year. R and D expenses in 2017 was RMB 12,900,000,000, up 27% year over year, mainly due to an increase in personnel related costs. In 2018, we expect R and D expenses to continue to rise, perhaps at a pace higher as we plan to step up our investment in AI initiatives. Share based compensation, which is allocated to related costs and expense line items in the 4th quarter was RMB 977,000,000 compared to RMB632 1,000,000 in the corresponding period in 2016. Share based compensation in 2017 was RMB3.2 billion compared to RMB1.8 billion in 2016. Operating profit in the 4th quarter was RMB4.8 billion, up 118% year over year. Non GAAP operating profit was RMB5.8 billion, up 104% year over year. Operating profit in 2017 was RMB15.7 billion, up 56% from the corresponding period in 2016. Non GAAP operating profit in 2017 was RMB18.9 billion, up 60% from 2016. Other loss net in Q4 was RMB294 1,000,000 compared to other income net of RMB1.8 billion the corresponding period of 2016. Other income net in 2017 includes investment gain from the disposal of Baidu deliveries, while other income net in 2016 included investment gains resulting from exchanging Uber China shares for DDs. Income tax expense in the 4th quarter was RMB 929 1,000,000 compared to RMB401 1,000,000 in the corresponding period of 2016. Q4 2017 effective tax rate was 18% compared to 9% last year, the decrease of which was mainly due to tax refund received as a result of newly granted preferential tax licenses for certain PRC subsidiaries in 2016. Income tax expense in 2017 was RMB3 1,000,000,000 compared to RMB2.9 billion in 2016. Effective tax rate in 2017 was 14% compared to 20% in 2016. The decrease in effective tax rate in 2017 was primarily due to non taxable investment gain. For 2018, we expect our effective tax rate to be in the high teens. Net income attributable to Baidu for the Q4 was RMB4.2 billion diluted EPS was RMB12. Non GAAP net income attributed to Baidu was RMB5.2 billion and non GAAP diluted EPS was RMB15. Net income attributed to Baidu in 2017 was RMB18.3 billion, up 57% from 2016. Diluted EPS in 2017 was RMB52. Non GAAP net income attributed to Baidu was RMB22.3 billion, up 68% from 2016. Non GAAP diluted EPS was RMB64. Adjusted EBITDA in the 4th quarter reached RMB6.9 billion or 29 percent of total revenues and was up 78% year over year. Adjusted EBITDA in 2017 was RMB23.3 billion or 28 percent of total revenues and was up 48% year over year. As of December 31, 2017, Baidu had cash, cash equivalents and short term investments of RMB100 1,000,000,000 500,000,000. Our net operating cash flow and capital expenditures were RMB10 1,000,000,000 and RMB1.2 billion, respectively. Total headcount as of December 31, 2017 was about 39,300, down 14% year over year. Turning to Q1 2018 guidance. Let me first talk about ASC 606, which is a new revenue accounting standard taking effect on January 1 this year. ASC 606 requires Baidu to report revenues on a net basis, excluding value added taxes. For fiscal 2017, our online marketing revenues would have been approximately 5.8% lower on a net basis. For Q1 2018, we expect revenues net of VAT to be between RMB19.86 billion and RMB20.97 billion, representing a 25% to 32% increase year over year or a 6% to 11% decrease on a sequential basis. This forecast is our current and preliminary view subject to change. I would like to open the call, operator. The question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, Our first question comes from the line of Wendy Huang from Macquarie. Congratulations on the site results and guidance. I just wonder if you can give some color on your newsfeed revenue target for 2018? And also can you give us some update on your volume production target for the minibus collaboration with Kinglong? Thank you. Hi Wendy, let me answer the first question and then Qi will answer the second question. With regards to our feed, as I mentioned in our prepared remarks, Q4 was one of the main drivers for our revenue growth and we're seeing a sequential growth of over 20%. And in 2018, our plan is baked in at a sequential growth of at that rate. With regard to? Quarterly, each quarter sequential growth will be like around 20% for each quarter in 2018. Yes. In the Q4, we saw that sequential growth and currently for 2018, we plan to grow at that kind of rate. Okay. Thank you. Okay. Let me answer the second part of your question, which is the planned L4 minutei bus volume production with our partner Ping Long Bus. First of all, the volume production schedule for the product to be on the market is second half of this category. That's number 1. Number 2, we're already seeing very, very healthy inbound interest of early bookings for that product. That's limited. Number 3, what I will emphasize here is the accelerated pace of our business opportunities, especially in this particular category, L4 vehicle. The key is to think about L4 with lower speed and in a more constrained environment. Once you have that specific, all of a sudden, you will have much, much more commercialization, productization opportunities. L4 minutei bus commercial production for this year is a strong first step, but the inbound interest from our partners will have similar or different capital outlook or think about logistics. For example, a logistic vehicle doesn't have to drive at a high speed. It can drive at a certain limited hours, let's say, from midnight to 4 am, in a constrained plan set of routes. So the overall is we're super, super happy and excited about the pace of commercialization, prioritization of our autonomous driver platforms. You can think about Pinglong minibus in 2018 is the 1st step of many such and more expanded opportunities for our Our next question comes from the line of Alicia Yap from Citigroup. Please ask your question. Hi, good morning, Robin, Doctor. Lu and Herman. My question is also related actually related to the autonomous partnership and also the delivery of the vehicles. Specifically for these L4 buses with Kinglung, should we start to assume some service fee that Baidu able to generate starting second half this year? And in terms of other OEM partner, what would be the monetization potential once the delivery happens later in the 2019 and the 2020 level? And then separately on the housekeeping questions, on the sequential decline in the online marketing customer, what was the reason for that? And how will the trend going into 2018? Thank you. Okay. Let me take the first part of the question. With regard to the auto platform, essentially our business model, We've been super clear from the get go what's our business model, which is our business model is will be selling services, a suite of expanding set of services that's essential to power autonomous driving vehicles of different types. For example, HD Maps is the 1st service that we're commercializing, and we are building a sales pipeline with inbound set of commercial opportunities. On that parallel, you can think about Apollo and Android is very from business model perspective, very similar. Android OEM, let's say Samsung, can take Android free to build the phones, but you have to use Google search services, which is Google monetized as their primary vehicles for monetization. And here for Apollo, this phase of Apollo is very similar. HD Max is our first services, but we have more and more services that's been planned and in development. So over time, we see just the services alone over the coming years will be growing to a very material and significant revenue source for the company. Having said that, the key caveat to this market will take time to build. We are focusing on building the health of the ecosystem, elevating the technological capabilities, ensuring more and more partners embrace our platforms and over time sustainably, healthily build up that business. And lastly, I will say is the Apollo platforms, Apollo Ecosystem preserves many different options of future business model expansions. So overall, we are super bullish about long term economic earning capabilities. I will emphasize long term, emphasize our focus on building a healthy ecosystem at this stage. Let me answer your second and with regards to sequential drop of our customers. So during the quarter, we started to wind down a local express business, which is you can search for example for local restaurants and so forth. That business is probably 1% of our revenue, but it has customers in the tens of thousands. So I don't think that that is meaningful from a total customer perspective. I think it's more meaningful as a pattern that we have throughout all of 2017 is look at where our core businesses are and at those that are not as relevant to our total core business, we started to tune back the budget so that we can focus on businesses that are focused in AR. Thank you. Can I ask what is the local express? Is it related to the normie? Yes. It was part of our Normi business unit. Okay. All right. Thank you. Our next question comes from the line of Gregory Zhao from Barclays. Please ask your question. Hi, management. Thanks for taking my question and congratulations on the strong quarter. First, I have a quick follow-up question to Wendy's question. So for the 20% revenue growth in the newsfeed, do you mean in Q1 2018 and Q2 2018 you both expect a 20% sequential newsfeed advertising revenue growth? That's my first question. The second question is online marketing customers. So your online marketing customers showing a turnaround trend with like 2% year over year growth, so compared to 1 year ago. So just want to understand which business category or segment are you seeing the strongest marketing customer rebound? Thank you. Hi, Gregory. Two questions on fee revenue growth. I think you brought up a good point. As I mentioned earlier, we saw a pretty good fee revenue growth on a sequential basis over the last two quarters. In Q4, it grew over 20 some percent. I would expect that going into 2018, you would be able to see that in the near future. With that said, as you know, historically, when you're looking at our advertising business from Q4 to Q1, you typically have a seasonal change. And from our guidance, you can see that we're actually guiding down on a sequential basis. So you will not expect a fee growth to be growing from Q4 to Q1. But after that, at least in our plan, we expect to be growing at that kind of rate once we pass this seasonal sequential drop. On your question of marketing customers, the growth that we're seeing from different areas, we're seeing from retail. We're seeing from e commerce. We're seeing from games and so forth. Let me add to just what Thomas said. The growth on the customer category, the key from our perspective is to drive the capabilities of our ad platforms. If you look at the dynamic ads, look at the different type of programs such as OCPC, we see substantial increase of budgets, increase by our key customers in e commerce, in auto, in travels, in real estate categories because their ROI increase, their conversion increase and their budget expense. So the key driver will continue to sustain because these are driven by more data, better platform capabilities and richer ad formats, more interactive ad formats. Ultimately, it's a win for advertisers and certainly it's a win for ad platform. Thank you very much. Our next question comes from the line of Juan Lin from 86 Research. Please ask your question. Hi, good morning, Robin, Doctor. Lu and Chen Wen. Thanks for taking my questions and congratulations on a strong set of results. My question is on the partnership with mobile phone manufacturers. So this is an elaborated partnership with Huawei And in which aspect of AI you'll be working with Huawei? And will such partnership benefit you in terms of favorable app increase the installation costs? The second question is on Duo Ads. So Duo Ads is the most advanced NLP platform in China and you have already made great progress in partnering with hardware and manufacturers. Going forward, are you planning to increase investment in content behind the dual ads as some of the audio content such as music has already been dominated by other players? I'm curious what is your decision strategy on this front? Thank you. Okay. So let me take the second part first and then with regard to DuerOS. It is absolutely the case DuerOS is the leading conversational AI platform in China. Our platform scale, our partnership size and our product innovation momentum speaks for itself. The question is about content is indeed a good one. Music content at this stage for speaker product is a key part of the product experience. The key thing I want to point out is the content licensing rights. Up to this point from content labels rights owners that are more distributed through the delivery vehicles, mobile APPs and the website. The content distribution rights for smart devices is a new era. And in many ways, it's up for grabs. Think of that. So we're actively engaging with labels, content producers because we have a leading platform. We have more partners using platform for devices. And we will be able to build out over time a set of strong content rights, access to compelling content through music to offer users to offer to our platform partners and with a good set of economics because this is new era. We are helping rights owners to monetize more through new type of endpoints. So this is different from the traditional mobile app. So this is an important perspective to keep in mind when we think about content for conversational AI devices. And then with regard to partnership with Huawei or other future OEMs, the key to have a context for is the following. AI is such a transformative technology wave that will elevate phone to what we call a new mobile era. Each phone will have increased set of sensing capabilities, optical sensing, audio sensing and also neural computing units, Apple iPhone X and Huawei Mate X, all are these indicators of the future direction of this type of new mobile devices. Imagine the future phone will be able to see the environment, we're able to hear at the much, much granular sensitivities. That's a great opportunity for Baidu because Baidu's AI capability in speech recognition, in vision, in 3 d visions, are able to help our OEM customers to build better capabilities, more future interactions such as speech based interactions or vision based interactions such as AR. And that can connect with core battle services such as search and the feed. So there will be opportunities to lower our channel cost and also, more importantly, bring our content services to a set of new interaction modalities, enrich the user engagement. And certainly, that engagement will lead to future monetization opportunity. This is the heavy caveat. This is also very early. We're happy super happy to have a strong partnership with Huawei. But we fully intend Baidu will continue to build out those AI capabilities coupled with our services to bring to more users. And this is a net new opportunities because the mobile phone industry is driven by AI into what we call the new mobile era. The phones will be able to see and hear and offer new modality. One thing also to add, Jun, on your first One thing also to add, Jun, on your first question in terms of content, what we're seeing with DuerOS is not just talking to smart devices on music, you're also seeing usage in other areas, content domains where Baidu has historical strategic advantage. Things like Baidu No, things like Baidu Bar, Q and A stuff, things like video with iQIYI and so forth. So when users are using it's whole wide variety of content, a lot of that Baidu has built to a strong foundation in the past. Thank you. Very helpful. Our next question comes from the line of Karen Chan from Jefferies. Please ask your question. Thank you, management for taking my question and congratulations on a solid set of results. My question is regarding on how we should think about traffic acquisition cost trend going into 2018 as we step up channel marketing asset with handset manufacturers? And secondly, given the accounting treatment change, how should we think about that impacting the overall growth and operating margin? Thank you very much. Hi, Karen. Two questions. First one is on TAC. I think when you look at TAC bidding in the past few months and you've seen that there's been a fierce competition. And in the past, we focused on profit margins when we're bidding for TAC. I think with our gross margin higher due to our scale advantage, we're considering on an opportunistic basis to put more emphasis on incremental profitability. So on the one hand, we think there's an opportunity for tech when we focus more on profitability than on margin. On the other hand, we believe ultimately, strategically, it's more important to grow our the Baidu app, our flagship app. So we're also focusing on growing our overall channel costs where we see a positive ROI. With regards to ACS 606 revenue recognition or revenue accounting change where we're now going to be reporting 2018 net of value added tax. Obviously, when you have a lower base of revenue when you're excluding tax, our margins should be improving as a result of that revenue accounting standard change on an apples to apples basis. But when we're looking at the overall margin of 2018 compared to 20 17, As I said in the prepared remarks, there are 3 areas that could potentially cause our margin to be lower and we'll have to look at that closer as we approach each quarter. Number 1 is the content cost. We think that in addition to funding the great content that iQIYI produces and also the ones that they license by jahao, BJH accounts were starting to beef up that ecosystem. Secondly, on the marketing cost and promotional cost, which we talked about. And lastly, R and D, we're probably going to grow at a similar pace to 2017, potentially higher as we look for opportunities to increase our investment for AI. Thank you very much. Our next question comes from the line of Ming Xu from UBS. Please ask your question. Good morning, management and congratulations for the strong quarter. So I have two questions. First is how should we think about the competition in feed business and video business, particularly on the content side? Secondly is how should we think about the margin of the fee business? And then how should we how does it compare with the core search business? Thank you. Yes, this is Robin. Let me ask this question. For the feed, think we consider it a part of the total service package for the Baidu app, which means the search plus feed is a win engine, so search for all kinds of things. The interest will be respected not only in the search results, but also in the feed content. So our feed is more personalized, more relevant to the users and has been growing very, very quickly as you can tell from our financial results as well as our traffic results from 3rd party research firms. And for video, iQIYI continues to lead in the market. We are number 1 in terms of DAU. We are number 1 in terms of average time spent. We're number 1 in terms of number of paying subscribers and we are number 1 in terms of profitability. Although it's not profitable yet, but we lost a lot less than the competition. So it's continuing to do very well. In terms of margin, at this point, the margin for fees is lower than search, but longer term, I think the margin for feed will be very close to search. It's a very, very fragmented supply on the supply side. So it sounds like long form video, we have lots of choices to choose from. And the platform has a lot of power to direct traffic. The key competency for the fee bins is how can you efficiently distribute content instead of what kind of content you have. The short form video or text or images, those kind of content, the price is not that high. The key value add is how you find the right users for the right content. Our next question comes from the line of Alex Yao from JPMorgan. Please ask your question. Hi, good morning, management. Thank you for taking my question. Appreciate your color on the feed adds growth outlook into 2018. Can you give us at least some preliminary thought on how you think about the core search will be growing in 2018, especially in the backdrop of slowing down industry traffic, particularly on the handset on the mobile side, what's the strategy to drive core search revenue growth in 2018? Thank you. Yes. Hi, Alex. I think a couple of things. Qi mentioned earlier how we're growing our core search. I think what you're seeing is a lot of the Baidu technology such as old CPC, such as dynamic ads, leveraging data. I think that's on the one hand you're seeing a lot of new feature sets that we're doing that we're allowing the users to come on our search in addition to be able to do closely to be able to do transactions and so forth. So that's on the one hand. On the other hand, what you're also seeing is us focusing on the flagship Baidu app so that as we're getting more users on the app itself, they'll come. Sometimes they'll maybe come to look at our feeds and sometimes they'll maybe come to do searches. So you're seeing that as a combined. So I think from an advertiser perspective, also from a user perspective, they benefit the 2 at the same time. So you're probably going to see more and more of those 2. If one grows, it's probably going to pull the other because it's all wrapped up in one container. Fundamental service human needs and there's long term growth perspective. There's no question. So we've been thinking about for search product, it's all about driving long term growth of users and usages and more content. There's 2 fronts. One is we're getting more and better and richer content into search. We talk about videos and strong growth of high quality videos and we're doing a lot of investment to steadily grow better quality, richer content as part of search. The other is enable search to be done more with different type of modalities. There's keywords based modality search, but there's a lot of growth potentials for voice, for image based search capabilities. That's another front of search user and usage growth. And there's monetization growth. We talked about dynamic ads, talked about OCPCs. For each of the key search verticals, we believe there's opportunity to go deeper to harness better yields. And the last thing is I want to emphasize what Huenhu also said, We're going to strongly grow Baidu App because within Baidu App, we have better opportunities to deliver a highly richer, differentiated search experiences. And for Baidu App, we have 0 tag. So it's all our traffic, all our monetizations. So there's these pivots that are driving long term growth. They emphasize long term user usage growth and long term profitability Our next question comes from the line of Thomas Chong from Credit Suisse. Please ask your question. Hi, thanks management for taking my questions. I have a question on Internet Finance initiative. Given the fact that we see this business line is going at a very fast momentum, can management highlight about the regulatory 3 headwinds and the timeline for profitability? Thank you. Hi, Thomas. You're probably referring to the regulatory headwinds that started in December where the government are now banning products that are over 36% APR. With regards to that specific policy, for Baidu, our financial services, we leverage Baidu's data. So because we're leveraging a huge set of data, we're leveraging our AI computing power, we're able to actually be able to compete at a more efficient level and we're able to offer products that are sub-thirty 6 percent APR. With that said, obviously, with the overall regulatory environment trying to get funding from banks, it has been harder since the announcement in December. So in that sense, we are impacted from that. With regards to profitability, we're still at a loss, but we're seeing the trend to be pretty positive. If you look at it sequentially, for the last few quarters, our negative margin is getting less and less. So we're pretty bullish on the future of our financial services. Thanks. Our next question comes from the line of Jim Yoon from Mizuho. Please ask your question. Hey, good morning guys. Couple of questions regarding content. I think Herman on your prepared remarks you said that content costs should increase by the same rate in 2018 versus 2017. I apologize if I missed this, but is that on a percentage basis or in absolute terms? And in Q1, should we see the greatest or the most significant quarter over quarter jump because of the revenue push out in iQIYI and the sequential jumps for the rest of the year should be a little bit more stable. Is that how we should look at it? Great. Thanks guys. Hi, Jing. With regards to content, yes, for 2018, I would expect our content cost to grow at least at a rate that we saw from 2016 to 2017, number 1. And with regards to sequential content costs, yes, I would expect Q1 to be a little bit higher than Q4 because Q4, as you recall, IQI was impacted by certain events at the beginning of October. As we're going into Q1, you no longer have that kind of content restriction environment. So as a result, you'll be able to probably see a better advertising and we will probably have to have similar content costs. If I could just quickly follow-up, that jump that you're talking about, is that on a percentage basis or an absolute dollar jump on a 2016 to 2017 and 17 to 2018? Percentage basis. Percentage basis. Great. Thanks, guys. Thanks. Our next question comes from the line of Natalie Wu from CICC. Please ask your question. Hi, good morning, Robin, Doctor. Lu and Herman. Thanks for taking my question and Happy New Year in advance. My question is regarding the for the sales and CDAD, what's the current spending from KA versus SME? I mean, the contribution wise and what's the trend going forward should we be looking at? Thank you. Hi, Natalie. Historically, we have not disclosed the exact percentage contribution between KA and SMEs. But Tier 20 is that revenue contribution from KA or larger customers have been growing faster. That's in part because of our rich data and coupled with our AI technology and also increasingly our online marketing customers are more willing to open up their data or exchange their data with our user data so that we can leverage the data on both sides to optimize conversion using our AI technology that resulted in a faster growth of the QA revenue. Thanks Robin. Just wondering is there any difference that you have witnessed between the search and the feed ad product regarding the KA and SME spending preference? Yes. There are overlaps between search and the feed customers and there are also differences. Some of the advertisers say would prefer more specific requests using search queries. Others would probably target more certain specific demographic group, for example, age between 20 to 25 or residing 3rd tier cities, things like that, we use the feed to better target those kind of advertisers. Okay. Thank you. Real estate, travel, this is our suitable customers for feed. Thank you. Very helpful. We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Good day.