Hello, thank you for standing by for Baidu's fourth quarter and full year 2016 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, Linda Sun, Baidu's Senior Manager of Investor Relations.
Hello everyone, welcome to Baidu's fourth quarter and full year 2016 earnings conference call. Baidu's earnings release was distributed 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; Jennifer Li, Baidu's Chief Financial Officer; and Qi Lu, Baidu's Chief Operating Officer. After their prepared remarks, Robin and Jennifer will answer your questions. Before we continue, please know 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 audited non-GAAP financial measures. Our press release contains a reconciliation of the audited non-GAAP measures to the audited 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 Baidu's CEO, Robin Li.
Hello, everybody, thank you for joining today's call. 2016 was a busy year in which we experienced both significant breakthroughs and challenges as Baidu transitioned into the newest and most exciting stage of our journey so far. In 2016, we began to see glimpses of AI revolutionizing the internet and traditional industries. The PC era and the rise of mobile over the past four or five years are in our rear-view mirror. We are now living and embracing the era of artificial intelligence. We believe that AI is the new electricity, which will transform industry after industry, spark new applications and products that we have yet to even imagine, and fundamentally change how users interact with technology.
AI represents an enormous opportunity. Baidu is primed to lead the AI revolution in China as a result of years of investment and our position at the intersection of big data, technology, and search, as well as our access to the best R&D talent in China and globally. To seize this opportunity, we have continuously shifted our strategy, organization, and resources to AI. We continue to gain industry recognition. Just yesterday, MIT Technology Review singled out face recognition technology as one of the 2017 top 10 breakthrough technologies, with Baidu as a key player. Launched last September, our artificial intelligence platform, Baidu Brain, is already deployed across nearly all of our products, including Search, News Feed, Maps, Nuomi, and Baidu Tieba, to name but a few.
Users experience the magic of AI when they use voice and image search, or when we push targeted content in News Feed, recommend dishes in Nuomi, optimize a route in Maps, or intelligently identify video content on Baidu Tieba. With AI, we are able to better match and predict user intent and deliver results that are more relevant and more targeted. By opening up Baidu Brain's APIs to the Chinese developer community, we are also leading the charge to transform traditional business into AI-enabled ones. Our AI-driven initiatives, such as DuerOS, supported by our leading Chinese language voice recognition technologies, opens up a new human-digital interaction paradigm. We've announced a DuerOS-powered TV assistant in collaboration with CITIC Guoan , and a DuerOS-powered home robot named the Little Fish with Xiao Yu Zai Jia. We recently completed our acquisition of Raven Tech, a smart home hardware startup.
We are excited to welcome Raven Tech CEO, Jesse Lyu, and the team to the Baidu family. Our AI technology is even showing signs of besting humans. Last year, DeepSpeech, our voice recognition technology for search, was just slightly better than human-level voice recognition accuracy at 82%. To date, our technology has further widened the lead, performing at 86% accuracy. In December, our AI capabilities were showcased on popular Chinese television show, "The Brain," where our Xiaodu robot competed in three mind-bending voice and image recognition challenges against the human geniuses. Xiaodu won two out of three challenges and tied for the third. Beyond our core platform, our leadership in AI creates vast opportunities in areas such as financial services, cloud, and autonomous driving. We are investing in these opportunities for the long term and have attracted some of the best talent to drive this effort to fruition.
In 2016, we made tremendous effort to upgrade the search user experience to ensure that users have confidence in the quality of content on our platform. To date, we have largely completed the process of verifying ICP licenses and enterprise banking accounts for all of our customers. In the process of this cleanup effort, some portion of our customer base may not be able to meet our stringent requirements. We may experience a short-term reduction in the number of online active customers. The higher standards are healthy and good for our platform. Customers who comply with our stringent requirements may be able to enjoy a higher volume of leads and even more attractive ROI. In turn, spend more of their budget on our platform, be it through search, News Feed, or our other AI-powered products. Our untapped customer pool also remains vast.
With Search, News Feed, and other products serving both direct response and branded advertising to key accounts, small and medium enterprises, and local merchants, our value proposition to customers is highly compelling. With hundreds of millions of users seeking and consuming content on Baidu platform, our content ecosystem is a key focus for investment and innovation. In particular, News Feed is a very exciting AI-powered product that has seen fast user adoption over the past several quarters. News Feed complements Search by bringing users fresh, tailored content, creating a virtuous circle of content push and pull. Nearly half of mobile Baidu version 7.3 and above users engage with News Feed on a daily basis and spend on average twice as much time in the app as compared to users who have yet to use News Feed.
This strong attraction is encouraging. We look forward to adding new app features and further improving our News Feed product. Another key part of our content ecosystem is our Baidu Brain-powered open content platform, Baijiahao, which we launched at the end of September. The Baijiahao content distribution platform creates high-quality content across media formats such as images, text, videos, AR, and VR, which Baidu hosts and operates within our ecosystem. Content creators are eager to be part of the Baijiahao platform due to our vast user traffic and targeted matching of users to content. The platform has shown rapid growth with over 200,000 content creators registered. On the customer front, News Feed is showing early signs of being a natural incremental complement to Search.
We are very encouraged by the momentum we've gained so far with both users and customers. We see strong potential for News Feed to help expand our customer pool and attract more large customers in verticals such as retail and auto, and more SME customers in verticals such as education and local services. Maps and Nuomi continue to support our Search ecosystem by providing rich local services content. In the fourth quarter, Baidu Maps, Nuomi, and Local Express added breadth and depth to our points-of-interest database, bringing users direct access to over 2.4 million merchants as of the end of December, which is a 117% increase year-over-year. Looking to some of our longer-term investment areas, we made progress in our autonomous driving initiative and demonstrated our technology at the World Internet Conference in Wuzhen this past November.
Over 200 attendees and journalists experienced level 4 fully autonomous driving under real-world conditions in our fleet of 18 self-driving cars powered by Baidu AutoBrain, our AI platform for autonomous vehicles. Our teams in Beijing and the U.S. are making incredible progress on a daily basis. With the accuracy of Baidu's vehicular recognition already above 90%, and Baidu HD mapping exceeding 90% accuracy with centimeter-level precision. We launched our Baidu Cloud business in the second half of 2016 and have been making solid progress in building out our cloud product offering. With our AI, big data, and cloud infrastructure at our core, we are able to provide our customers with a highly differentiated value proposition.
For example, Baidu helped the Taiyuan Railway Administration build up its intelligent logistics cloud platform by leveraging our cloud technologies and real-time big data algorithms to help optimize the customer storage, shipment, and route plan. We've also introduced advanced solutions such as logistics navigation, image recognition, and IoT offerings. Customer feedback for our cloud service has been very positive, and growth this year has been very encouraging. Our financial services business continues to transform the traditional financial services industry. Here, our AI strength is a crucial advantage for areas such as credit risk management and matching customers with the most appropriate product. Baidu Wallet, which serves as a user gateway to branch into other financial products, expanded its reach with activated user accounts surpassing 100 million as of end of fourth quarter, compared to 90 million as of the end of third quarter.
With Baidu's innovative approach to financial services products, we are creating new supply and demand and processing new markets, all the while helping to support the growth of traditional industries such as education, travel, home decoration, and cosmetic surgery. In the education loans, we continue to dominate with roughly 75% market share. iQIYI performed very well in the quarter too, with revenue and rapid subscriber numbers ramping up nicely. In December of 2016, according to iResearch, iQIYI mobile app maintained its industry leadership with 125 million daily active users, 480 million monthly active users, 335 billion minutes monthly user time. iQIYI is an important part of Baidu content ecosystem, and we look forward to supporting its further growth. iQIYI has also recently completed the issuance of 1.5 billion convertible notes, of which Baidu invested $300 million. Baidu deliveries also grow rapidly, nearly doubling GMV year-over-year.
Baidu deliveries differentiated go-to-market strategy of choosing select attractive markets, combined with our technology driven AI powered competitive advantage, are helping to build a sustainable business for the long term. As announcing our earnings press release earlier today, Mr. Greg Penner will step down from our board, having served as a board member since July 2004. On behalf of Baidu's board of directors, I would like to express my gratitude to Greg for his long-standing dedication and invaluable contribution to Baidu. Last but not least, on behalf of the entire Baidu team, I would like to welcome Dr. Qi Lu, our new Group President and Chief Operating Officer, who is joining our earnings call for the first time. Qi has been appointed as our new director and vice chairman of our board of directors.
As you know, Qi is one of the most experienced leaders in the global technology industry and also a foremost expert in AI. Qi oversees our products, technology, sales, marketing, and operations. I look forward to working closely with Qi to take Baidu's management and technology to the next level. Qi, do you have a few words to say?
Thank you very much, Robin, and hello to everyone. It is a real honor to be joining my first Baidu earnings call as Group President and COO. As a leader in China's Internet industry for over a decade, Baidu has built up an incredibly strong set of reinforcing assets in terms of technology, data, talent, and insights. This is a very exciting time, as China plus AI is an enormous opportunity for growth, which Baidu is very well positioned to lead. We have a great journey ahead of us, and I have already been very energized by the amazing work that's going on here. I look forward to speaking with you more in the months ahead for many of the initiatives, especially in AI, that are underway. Back to you, Robin.
Thank you, Qi. To conclude, AI represents a revolution in how humans and businesses interact with and benefit from technology. China plus AI will be a tremendous field of opportunity that Baidu is well-positioned to lead as a result of our long track record of investment and innovation. Looking ahead, we will continue to apply our expanding portfolio of AI-based technologies to an ever-widening range of applications, while we strengthen Baidu's role as an essential distributor of dynamic content on the Chinese Internet, from news and images to video, data, and connected services. With that, I'll now turn the call over to Jennifer for an update on financials.
Thank you, Robin. Hello, everyone. 2016 was a challenging year and a busy year, with the proactive implementation of stringent customer requirements and compliance with the new advertising law impacting our revenue. These efforts are necessary and will help us build a better user experience and a healthier, more robust platform. We largely completed our cleanup initiative in the fourth quarter and believe that the most significant revenue impact is behind us. Revenue in the fourth quarter resets our revenue base, and we look forward to 2017 as a time of gradual recovery and growth. Over the past year, we have carefully reviewed our strategy and business portfolio. As Robin mentioned, the mobile transition is behind us, and we are at the cusp of an AI revolution. Baidu's strategic focus, organization, and resources have shifted increasingly towards AI, and we are excited to execute our vision in this new era.
Given this strategic shift to capture the opportunities in the new AI era, we do not believe metrics such as mobile search MAU, mobile Maps MAU, GMV, and wallet user numbers are indicative of our business performance. As such, this will be the last quarter that we will report that set of operating metrics. We always seek to be open and transparent and will continue to update the investment community on the most important metrics to track our progress. In 2017, we'll continue to invest to build our content and service ecosystem and execute our plan to capture the AI opportunity in China. Content continues to be an important investment area as we continue to support iQIYI's growth and build out our Baijiahao content platform to attract content and service partners. Maps and Nuomi and key relationships with partners such as Ctrip will support our service ecosystem.
Now moving to the financials. All number amounts are in RMB unless stated otherwise. For the fourth quarter, total revenues were RMB 18.2 billion, representing a 2.6% decrease from the corresponding period in 2015, and flat year-over-year, excluding Qunar in the fourth quarter of 2015. Total revenues for the full year 2016 were RMB 70.5 billion, an increase of approximately 6.3% from 2015 and a 12% year-over-year increase excluding Qunar. During the fourth quarter, Baidu had approximately 552,000 active online marketing customers, an 18.6% decrease from the corresponding period in 2015, and a 13.7% decrease from the previous quarter. Revenue per online marketing customer for the fourth quarter was RMB 35,400, a 14.2% increase from the corresponding period in 2015 and an increase of 13.1% from the previous quarter.
Traffic acquisition cost as a component of cost of revenue in Q4 was RMB 2.6 billion, or 14.5% of total revenues, compared to 14% in the corresponding period in 2015 and 14.2% in the third quarter of 2016. Full year 2016 TAC as a percent of revenue was 14.7%, up from 13.3% for 2015. Bandwidth and depreciation cost as a percent of revenue in Q4 was 6.8% and 4.5% respectively, compared to 5.4% and 3.7% in the corresponding period in 2015. In 2016, bandwidth and depreciation cost as a percent of revenue increased to 6.7% and 4.4%, from 5.6% and 3.9%, respectively in 2015. Operational cost as a component of cost of revenue in Q4 were RMB 1.2 billion, representing 6.5% of total revenues, compared to 6.3% in the corresponding period 2015. Total operational costs for 2016 were RMB 4.4 billion, representing 6.3% of total revenues, compared to 5.8% in 2015.
Content cost as a component of cost revenue in Q4 were RMB 2.6 billion, representing 14.1% of total revenues, compared to 7.4% in the corresponding period in 2015. Total content costs for 2016 were RMB 7.9 billion, representing 11% of total revenue, compared to 5.6% in 2015. This increase was mainly due to iQIYI's increase to content cost. In 2017, we expect content cost to step up at a similar pace as 2016. Content cost will be used to invest in high-quality licensed and self-produced content to support iQIYI and support search and News Feed products through our Baijiahao platform. SG&A expenses in Q4 were RMB 3.3 billion, a decrease of 26.4% year-over-year, and a decrease of 22%, excluding Qunar, over the corresponding period in 2015. The decrease was mainly due to a decrease in promotional spending for transaction services.
Total SG&A expenses for 2016 were RMB 15.1 billion, a 11.7% decrease from 2015, and a 5.6% year-over-year increase, excluding Qunar. In 2017, SG&A will remain at a similar level to that of 2016, with spending shifting to Baidu App and News Feed to further drive user adoption. R&D expenses in Q4 were RMB 3 billion, an increase of 19.5% over the corresponding period in 2015, and a year-over-year increase of 25%, excluding Qunar, in the fourth quarter of 2015. Total R&D expenses for 2016 were RMB 10.2 billion, a 0.2% decrease from 2015, and 12.5% year-over-year increase, excluding Qunar. In 2017, we'll continue to invest in R&D. Share-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to RMB 632 million in Q4 from RMB 341 million in the corresponding period in 2015.
SBC expenses for 2016 increased at 27% over the 2015 level and increased 60% year-over-year, excluding Qunar. Operating profit for Q4 was RMB 2.2 billion, a decrease of 38.2% over Q4 2015, and a decrease of 40% after excluding Qunar impact in the fourth quarter of 2015. Operating profit for the full year 2016 decreased 14% from 2015, and 25% year-over-year, excluding Qunar. Other income net was RMB 1.8 billion in the fourth quarter of 2016, which mainly consisted of the investment gain recognized as a result of Baidu's exchange of Uber China shares with Didi. Other income net was RMB 24 billion in the corresponding period of 2015, which mainly consisted of the investment gain as a result of Baidu's exchange of Qunar shares with Ctrip. For the full year, other income net was RMB 3.8 billion in 2016 compared to RMB 24.7 billion in 2015.
Income tax expense was RMB 401 million for the fourth quarter. The effective tax rate for the fourth quarter was 8.9% compared to 12.7% in Q4 2015. The decrease in effective tax rate was due to the newly granted preferential tax licenses for certain PRC subsidiaries. For the full year, our effective tax rate was 20.1% compared to 14.4% in 2015. Excluding the share exchange transactions impact for the past two years, the effective tax rate was flat year-over-year. For 2017, we expect our effective tax rate to be in the mid to high teens. Net income attributable to Baidu for Q4 was RMB 4.1 billion. Basic and diluted earnings attributable to Baidu per ADS for the fourth quarter amounted to RMB 11.43 and RMB 11.4 respectively.
Diluted earnings attributable to Baidu per ADS, excluding net gain recognized as a result of Baidu's exchange of Uber China shares with Didi for Q4, was RMB 6.49. Diluted earnings attributable to Baidu per ADS, excluding net gain recognized as a result of Baidu's exchange of Qunar shares with Ctrip for the fourth quarter last year, 2015, was RMB 7.61. Net income attributable to Baidu for the full year was RMB 11.6 billion. Non-GAAP net income attributable to Baidu for Q4 was RMB 4.6 billion. Non-GAAP diluted earnings per ADS for Q4 was RMB 13.23. Non-GAAP net income attributable to Baidu for the full year was RMB 13.2 billion. As of Q4, the company had cash equivalents, and short-term investments of RMB 89.8 billion. Net operating cash inflow and capital expenditure for the fourth quarter were RMB 8 billion and RMB 1.2 billion respectively.
Full year net operating cash inflow and capital expenditures were RMB 22.3 billion and RMB 4.2 billion respectively. Total headcount on a consolidated basis, including invested entities as of December 31st, 2016, was about 45,900, an increase of 2.3% as compared to the end of last quarter. Now let me provide you with our top-line guidance for the first quarter of 2017. We currently expect total revenues for the first quarter to be between RMB 16.48 billion to RMB 17.03 billion, representing a 4.2%-7.6% year-over-year increase or a -9.5% to -6.5% quarter-over-quarter. Please note, this forecast reflects Baidu's current and preliminary view and is subject to change. I will now open the call to questions. Operator, please go ahead.
Thank you. 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, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. Our first question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.
Good morning. Thank you for taking my questions, and many congratulations in bringing Qi to the team as well. I have a questions on News Feed. I think Robin mentioned that so far you have been seeing some complementary results between Search and News Feed. Could you share more color with us on how your marketing clients are looking at these two applications, how they are allocating their budgets between Search and News Feed? Should we also see a bit of cannibalizations to some clients as well? Thanks.
Eddie, this is Robin. I think when we see that News Feed is complementary to Search and will bring incremental traffic and revenue to Baidu, it really means that many of our marketing clients, especially when I mentioned large clients in the industry of auto and real estate, they were not able to find enough number of queries or traffic to show their ads in the Search context. It's much easier for them to find targeted users in the News Feed context. Similarly for providers of local services or education services that got a local focus, it's again easier to use News Feed to target their customers instead of using Search. Our customers or advertisers can actually find more qualified traffic on the Baidu platform. Currently, we're seeing very good adoption rate.
Many of the marketing clients are already coming up with specially created creatives for the News Feed context, which is a very encouraging sign that they embrace and like our News Feed product. As I mentioned many times before, I think our business is very much traffic bound, not budget bound. The more traffic we can provide to our advertisers, they will have a more budget matching with it.
Thank you. Our next question comes from the line of Chi Tsang from HSBC. Please go ahead.
Good morning and good evening. Thank you so much for taking my question. I also want to congratulate you on hiring Dr. Qi Lu, as well as ending 2016 and putting that behind us. I wanted to ask you a little bit about strategy and also about core search. In particular, I was wondering if you could give us a little bit more detail on some of the strategic imperatives you might put in place over the next few years and what that game plan might be. Relatedly, I'm wondering if you can give us your current thinking on the importance of O2O. On core search, you're guiding to about 6% revenue growth in the first quarter.
I'm wondering what that might indicate for search revenue, if you can give us some color on just the pace of the recovery of the core search business this year, that'd be very helpful. Thank you very much.
Qi, I'll give you a bigger picture on the core business and new opportunities. I'll let Jennifer address the Q1 growth guidance. I think we have entered the era of artificial intelligence, fortunately, we've invested in this area for the past five to six years. Actually, both the existing core business of Baidu and the new opportunities we are addressing are powered by AI today, especially for Search. Five, ten years ago, when you think about search technology, it was very different. It's basically statistics-based technology. Today, search is Almost all about machine learning, natural language understanding. It's all about search, people will be able to express their interest or queries in a much more natural way. We support voice as well as image as queries.
We've seen increasing number of people using this kind of new form of queries to find what they need. These are all AI-based technologies. News Feed, again, is also pretty much an AI. Essentially, it's the technology that matches user interest with relevant content. We find we can leverage our strength in AI technology to come up with much better products for our users. O2O, again, we reduced the subsidies as well as marketing cost for Nuomi and Baidu deliveries. We think this an integral part of our core business. People come to Baidu, search for all kinds of things, including information, content, and services, and Nuomi provides perfect content for services.
We are fine-tuning the Nuomi content as well as services and make them more friendly to the Mobile Baidu users and make more opportunities for Nuomi merchants to show up in the Mobile Baidu platform. Going forward, we think we will be able to see solid growth in both our core products, which now include Search, News Feed, O2O, and also new initiatives in terms of cloud, financial services, autonomous driving, and a few other AI-related new initiatives.
This year, as you recall, last year was a busy year. Lots of the activity, particularly related to addressing the customer base, happened in the middle of the second quarter. As we look at 2017, I think thinking about 2016 was not a very normal year. Maybe looking and thinking about the revenues pattern from a sequential quarter-over-quarter perspective would be more meaningful. That I think it's perhaps an easier way to think about the revenue growth. As I mentioned earlier, Q4 largely resets our revenue base, particularly for Search business. Much of the cleanup activities, the higher requirement for our customers are put in place. The revenue impact as a result is largely behind us.
As we're going into Q1 and for the rest of the year, I think the Search, we have been carrying out this business for years, and it does have its quarterly pattern. Thinking it in that way as a normal pattern, maybe that's a helpful way to think about the business this year. This year, as we are looking towards gradually recovering and will drive growth in the Search business. Of course, other than Search, we have the Feed product that is complementary to the core Search business. That perhaps is helpful as you think about the 2017 revenue growth.
Thank you. Our next question comes from the line of Alan Hellawell from Deutsche Bank. Please go ahead.
Thank you very much. Yeah, I just want to join the chorus of congratulations with the senior management changes. Just with regard to iQIYI, excuse me, if I'm not mistaken, we talked about a 110% growth in content cost last year, and I believe Jennifer said we should expect a similar degree of growth, and I assume that's a percentage statement. If so, would that suggest that there's a further expansion in loss margin, or are there things going on in revenues that would somehow lessen that negative contribution? Secondly, I'm just curious, how would we view the margin profile of News Feed versus core Search, both in these early days? Then where would they be on a steady state basis? I assume you have content-related expenses associated with procuring news flow. I was just curious how those two margins might compare.
Thank you very much.
Hi, Alan. Yes, as I indicated earlier, content investment will continue to be an important investment area for us going into 2017. For iQIYI, over the past two years, we have invested strategically and very successfully in iQIYI's content. As you can see, iQIYI's subscription user base is growing, that nicely complements its advertising revenue business model. I think going into 2017, we'll continue to execute on that strategy. iQIYI has demonstrated over the years a high competency in quality content selection. Going into 2017, more of the effort will be spent in self-produced content, that will help further strengthen and expand our subscription user base. From a margin perspective for iQIYI, over the past two years, their margin is actually improving, we expect that will be the trend going forward.
iQIYI is on a solid path, I think the investment is very warranted, they have demonstrated good returns for those kind of content investment. I included in 2017 content, as you mentioned, you correctly pointed out, that we also invest in content for our feed business. The feed business product from a margin profile perspective is different from search. Related at this early stage, part of the investment for feed is content related. Also we will be aggressive in rolling out user adoption mechanisms for feed to be more penetrated into the user base. Early stage monetization may be ramping up, but at the same time, we're investing in distribution channels in sales and marketing as well as content for feed.
Over time, as we mentioned earlier, this is also an integral part of our search service, that offers a bigger product selections for our advertiser customers also, very importantly, offers more ad inventory if our users adoption is good. Early stage for feed, but it does carry a slightly different margin profile. Overall, it's complementary and enhancing to our search service.
Thank you. Our next question comes from the line of Alicia Yap from Citigroup. Please go ahead.
Thank you. Good morning, Robin, Jennifer, and Qi. Thanks for taking my questions. My question is also related to News Feed. Wanted to get a sense, does the 1Q guidance that you provided include any expectations from the News Feed ad contributions? What is management expectation and target regarding how fast and how big the News Feed could achieve in 2017? Also given your comment on shifting to AI and all this content platform, and Jennifer, you just mentioned about some spending. Just roughly could you get a sense how much the investment spent that we should expect related to this News Feed ads initiative? Thank you.
Alicia, thank you for the question. For Q1, specifically, News Feed is the product that we launched for a few quarters now, and early stage in monetization. For Q1 guidance, we do have a small part that is contributing from Feed. It will grow over the years, over the quarters, into 2017 as we're growing the user base, users' time on it, the advertiser pool, and we expect News Feed to add more contributions to our overall revenue contribution. For investment related to News Feed, I mentioned earlier, content is one specifically related to building up the ecosystem and provide a rich content and good user experience as our users use the product and engage with our service. For News Feed investment, I also mentioned about sales and marketing related expenses. This is more for user adoption.
Investment in AI, particularly are more in the technology side, and that has to do mainly with R&D expenses. Therefore, as I mentioned earlier, we'll continue to invest in R&D steadily. That is more gradual. It's competency build-up, it's talent. That's not different from the way that we have been approaching R&D investment over the years.
Thank you. Our next question comes from the line of Alex Yao from JP Morgan. Please go ahead.
Hi, good morning, everyone. Thank you for taking my question. I have a question on the core search business. The mobile search MAU this quarter, the growth rate slowed down to 2% on year-over-year basis. As you guys mentioned in the past, that search is a traffic-bound business. Now that the mobile search traffic is slowing down and PC most likely is declining, how should we think about search growth outlook for the next two to three years? Thank you.
I think the MAU for mobile search has to slow down because we basically penetrated almost all the internet users here in China, and internet penetration rate, when it's more than 50%, the growth rate will inevitably slow down. What we are hoping is that we will continue to innovate in search technology to enable people to ask questions and their queries in more natural ways. Such as asking questions in natural language or in the form of voice, or when they take a picture, they can use that picture to search. This will increase the dependency of users to our product
I think overall, the traffic growth for mobile will slow down, but we think it should be able to continue to grow over the next two to three years.
Thank you. Our next question comes from the line of Juan Lin from 86Research. Please go ahead.
Hi. Good morning, Robin, Jennifer, Dr. Qi Lu, and Linda. Thank you for taking my questions. Actually, I have one follow-up question on News Feed. I'm wondering if you could share with us some metrics in terms of News Feed advertising. What is the current pricing policy click-through rate, and what is our strategy to compete for user time spent with our News Feed product, particularly in terms of user experience when competing against market leader? Thank you.
I think we allow users to create designated creatives for the News Feed advertisement, therefore, the advertisers have the power to name their own price. If they don't do that, when they show the same creative for both Search and News Feed, we will typically apply a smart discount to the cost per click on the News Feed. On average, the click price for News Feed is meaningfully lower than that of Search. We're thinking about probably half of the Search-related click price. Right now, the ad load on our News Feed is relatively low, and user experience has been very good with our Search-related customers, as well as those creatives dedicated for News Feed.
All right, thank you. Our next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead.
Thank you for taking my question. Jennifer, you talked about MAU and GMV being less relevant for gauging success of business. What would be the relevant metrics you'd look at going forward, and could you give us a sense of which ones are the ones that you would share with us going forward? A question for Robin. Robin, you made a push into software and hardware AI applications, including the acquisition of Raven Tech and the establishment of few business units. How do you see this evolve, and could you talk about the shape and size of this opportunity? Thank you.
Yes. With regards to the operating metrics, as we mentioned earlier, the mobile transition is pretty much behind us and our services have very much penetrated into the current Internet population in China. Also related to Nuomi services, it helps provide service-related content for our Search ecosystem and the GMV won't be a meaningful target of objective for us. We will always seek to be transparent and open with our business performance and provide relevant indicative metrics to give you insights into our business. As we develop and focus on the ecosystem for Search, the service of the feed products, information such as what we commented on how many parties are registered with Baijiahao, that help build our content ecosystem.
We talked about how much of our mobile Baidu users are using the feed products, and we might share more insights as our product is tracking and giving the indicative insights into the business. With meaningful metrics that we feel is reflective of our business, we will be very open and transparent about that, as we have always been doing so.
Yeah. On the hardware-software integration, I think this is one of the most important characteristics of AI era. With this kind of integration, there are a lot of innovations become possible and the user experience is significantly improved based on that. That's why we are investing in both hardware and software for AI-related technologies. That is true for the mobile platform, but it's also true for the home environment as well as the auto environment. For example, when you're at home, we mentioned we have collaborated with CITIC Guoan . When you are watching a TV show, you can instantly ask, "Who is that actor?" In natural language, we'll be able to find the answer for you. In the car environment, we have CoDriver, we have CarLife, which integrate a lot of internet and AI, voice-based command in those environments.
That's just a couple of the examples of when you integrate software with hardware, what could be possible going forward.
Thank you. Our next question comes from the line of Natalie Wu from CICC. Please go ahead.
Hi. Good morning, management. Thanks for taking my questions. I have a question regarding your transaction and related service. I've seen that the GMV declined sequentially by RMB 1.6 billion. You also mentioned that the transaction service reduced operating margin by 21.8% versus the 23.8% last quarter. Just wondering, why is it that the related losses expanded while GMV scale contracted? What's the management guidance for the margin for this year? Any color would be helpful. Thank you.
For Q4, I think the margin impact from transaction services also has to do with the overall base business. As you recall, our search service sequentially is decrease. Normally in Q4, we would have increased, but because of all the activities going on, we didn't grow our revenue in Q4 per se. I think that sets the base and the component for transaction services, even if it stays similar with our continued investment in R&D and all that would translate into a bigger impact. At the same time, just looking at the transaction services. Within it, we have reduced the spending for normally related promotional expenses, but at the same time, we see good traction on the takeout delivery service. That continues to do well. Included in transaction service is financial services, and we're growing that business very nicely, too.
I think our strategy is quite clear and components of the transaction services, different elements are performing differently. I think as we go into 2017, it is quite clear. I think it's not the whole package that you focus on GMV and normally can help a search ecosystem on the service content side, and both the takeout delivery service and FSG financial services can also take advantage of the AI technology and enable business growth and also good user experience.
Thank you. Our next question comes from the line of Evan Zhou from Credit Suisse. Please go ahead.
Hi, good morning, Robin, Dr. Lu, Jennifer, Linda. Thanks for taking my question. The question is regarding our paid subscription business on iQIYI. You've been actually sharing with some updated paid subscribers numbers. I remember by 2Q last year, we have reached the target of roughly 20 million, which is the leader across the sectors. I was wondering if you can provide an update on that. Regarding the comments about the cost structure profitability for iQIYI, are we looking into the possibility that iQIYI can be close to breakeven in the next year or two? A quick follow-up on the content spend guidance comments you have just now. Regarding the similar level of increase, is it referring to the percentage terms increase year-over-year, or about absolute amount of incremental cost run rate hike? Thank you.
On the iQIYI membership question, number of subscribers continue to grow at a very rapid rate, and we believe we are solidly number one in terms of subscription revenue, and we are continuing to grow very fast.
Yeah. I think on your other comments, specifically for content costs for 2017, what we were trying to provide you some color is it will increase at the same rate, very similar rate compared to last year. Over the past two years, steadily, content cost has been following a similar increase in investment levels. We mentioned iQIYI is doing well in its business, both on the user front as well as the revenue front, and we are the market leader. I think the business has demonstrated a two powered engine revenue source. I think in the near term, we'll continue to invest in content and differentiate iQIYI as a service. It's tracking very well.
Thank you. Our next question comes from the line of Ella Ji from China Renaissance. Please go ahead.
Thank you for taking my questions. I have a question for Dr. Qi Lu. I just wonder, after you have joined the company for several weeks, what do you think would be your to-do list for 2017? Is there any specific strategy that you can share with us? As an ordinary user, as we use Baidu product, what should we expect to see differently going forward? Thank you.
First of all, thank you very much for your question. Since I've been here only for a few weeks, I would say I've been able to spend a lot of time with Robin, thinking about our overall company's long-term strategy, particularly in the context of AI and China. The focus is to land the opportunity in concrete user experience and concrete economic opportunities. That will take some time to unfold and evolve. As I mentioned a bit earlier, I look forward to the opportunity of, in the coming months, speaking to many of you about those ongoing initiatives. I have full confidence over time that they will generate real user values and economic opportunities for our company. That's perhaps all I'm able to say at the time for now, but do very much appreciate your question. Thank you.
Thank you. Our next question comes from the line of Wendy Huang from Macquarie. Please go ahead.
Thank you. I have 3 housekeeping questions. The first, can you give us an update about the search revenue breakdown between the mobile and PC? How has the pricing gap between the two actually evolved over time in terms of the CPM? Secondly, the number of advertisers seem to be the lowest point in the past 10 quarters. I assume that was partly due to the seasonality, partly due to the lingering impact from the medical ads and the advertising law. Going forward, how should we expect the number of advertisers to trend in Q1? When should we expect the advertiser base to normalize? Lastly, on the iQIYI, you recently did a CB, but I noticed Baidu only contributed $300 million out of $1.5 billion. Previously, Baidu held about 80% in iQIYI. What will be the Baidu holding after this? Thank you.
Yeah, Wendy. I think that we reported on the mobile revenue contribution for total revenue. For the fourth quarter, it stands at 65% and continue to grow. Obviously, we live in the mobile age and it's undoubtedly mobile is contributing more, and we do see monetization power on the mobile front growing at a much faster pace compared to PC, and we expect that to exceed PC's monetization capabilities very soon. On the customer front, yes, I think you understand last year we went through the whole review of our customer base, have much higher and stringent requirement for our customers. For particularly the ICP license and the bank account validation for enterprises, basically we block out individuals who do search engine marketing business on our platform. Having raised the bar, it's no doubt that some of the customers may not meet that requirement.
We know it's good for our user experience, it's good for the business long term, and that's what we'll do. At the same time, we know the addressable market for the customers that we can service is vast, and we are innovative on the product side. Not only search, with feed products, there is much more inventory for our advertisers, and that can serve both brand players as well as the smaller players. We expect our customer pool to be able to grow. We will continue to have the high requirement for our customers and gradually build up our customer base, assuring that we have high-quality advertisers with us. For iQIYI, yes, Baidu will continue to strongly support iQIYI, and iQIYI is a very important content provider for our search ecosystem. With this transaction, Baidu continues to have a majority ownership of iQIYI.
Right. Thank you. Our last question comes from the line of Thomas Chong from BOCI. Please go ahead.
Hi, Robin, Jennifer, Dr. Lu. Thanks for taking my questions. I have a quick question about the number of headcounts in 2017. Given that we are investing in R&D and in particular in AI, are we going to hire a lot more talent in China or from overseas? Jennifer, can you give us some color about the headcounts trend on an overall basis in 2017? Thanks.
Yes. We have steadily invested in talent, R&D capabilities is really a key differentiating and competitive advantage Baidu have over the years. We have steadily invested in R&D talent. As I mentioned earlier, particularly in the AI age, with many of the AI-enabled services that we're working on, we'll continue to invest in R&D. I think from an overall headcount perspective, if you look at last year, the headcount overall has not materially changed. Obviously, with more mature business, we look to the business to produce results more efficiently and therefore, getting more efficiency and productivity out of existing business. At the same time, redirect resources to invest in new areas. Overall, I think our R&D expenses will be a bigger component of the overall headcount, and that is how we deploy and allocate the human capital.
I think 2017, we should expect R&D trending normal patterns compared to before, as we invest in AI. At the same time, the company is approaching workforce planning with a disciplined approach and getting productivities out of the whole way we approach business.
Thank you. Ladies and gentlemen, we're now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect.