Hello, thank you for standing by for Baidu's third quarter 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'd 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 third quarter 2016 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, and Jennifer Li, Baidu's Chief Financial Officer. After their prepared remarks, Robin and Jennifer will answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20-F.
Baidu does not undertake any obligation to update any forward-looking statement 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 CEO, Robin Li.
Hello, everyone, thanks for joining today's call. In the third quarter, we continued to implement measures to improve customer quality and foster a healthy environment to enhance user experience and drive long-term sustainable growth. Beginning in the third quarter, we took proactive measures and required all customers on our platform to submit ICP licenses and verify enterprise Baidu accounts. We expect to complete the self-imposed verification measures across our platform in Q4. The new advertising law, which imposed stricter regulations on online marketing, also became effective on September 1st. The implementation of this regulation and our self-imposed proactive measures will have a short-term impact on our business. We expect the most pronounced impact on our business in the fourth quarter, followed by recovery early next year.
We remain highly confident in our long-term outlook, underpinned by the vital and attractive fundamental value proposition of search and our ongoing investment in technology, in particular, artificial intelligence. As we improve the quality of our platform, we continue to focus on driving product innovation and building our long-term core capabilities. We are particularly excited about how our growing leadership in artificial intelligence is improving user experience and user stickiness across our product lines, while helping us reshape traditional industries such as finance and local services, and driving future growth areas such as our digital personal assistant initiative, Duer, and autonomous driving. During the quarter, Newsfeed proved to be an excellent complement to our core search product and existing content ecosystem and contributed strongly to user stickiness.
Distributed content on Newsfeed platform grew 20 times since its launch in May, helping to drive a fivefold increase in Newsfeed daily active users to about 70 million, and a threefold increase in time spent per user over the same period. Our ability to help customers precisely target the right Newsfeed users based on their search queries and interests has opened the door to new categories of advertisers, such as real estate. We are very encouraged by the results to date. Mobile search represents a growing majority of our total search traffic. During the quarter, we released Mobile Baidu version 8.0, a major upgrade of our app with enhanced voice input, improved Newsfeed display, and personalized mobile homepage. Our initiative to increase the number of images in search results has shown great progress, with nearly 90% of mobile searches producing results with images.
In August, we launched our Mobile Instant Pages open source initiative. When mobile websites adopt this back-end technology, the speed at which they can be opened from both Baidu Search and Newsfeed increases by up to 80%. This not only enhances user experience but also increases website page visits by up to 40%. We are confident that Baidu Mobile Search has never been more powerful. Turning to our service ecosystem, Nuomi continued to play an important role as part of our services ecosystem, further integrating Baidu Search and Baidu Maps. With local queries as a percentage of total search volume in mobile growing steadily from the beginning of the year, Nuomi supports search with richer, more localized results, enhancing mobile search role as an O2O gateway.
Nuomi supported Baidu Maps by contributing the large majority of closed-loop points of interest and added advanced AI-driven features such as customized restaurant and retail store recommendations, which helped drive stronger user engagement. Ensuring that we attract the best merchants to Nuomi is a top priority, and offering a suite of services for them to make the most out of the platform is an important part of this. Efforts such as helping merchants build pages for local express products and providing tools including CRM systems and templates to enhance their online stores have been paying off. We've seen very good growth with 2.2 million merchants on the platform as of the end of September, a nearly threefold increase year-over-year. Consumers continue to fall in love with the speed and convenience of Baidu Deliveries, formerly named Baidu Takeout Delivery, with the service now expanding beyond the restaurant takeout delivery service.
The platform registered more than 150% year-over-year GMV growth during the third quarter. This success is largely attributable to our AI-driven logistics technology. With an average delivery time of 32 minutes and punctuality rate of over 98%, Baidu Deliveries continue to define new standards in the industry. We are proud that Baidu Deliveries continue to expand into new service categories such as fresh food product delivery and on-demand logistics, a strong validation of the potential of our AI-powered logistics technology. Baidu Wallet is also gaining strength during the quarter, with activated Baidu Wallet accounts growing to 90 million at the end of the third quarter, up from 80 million at the end of the second quarter. Baidu Maps further solidified its number one market leadership with nearly 350 million MAU.
Baidu Maps serves as a powerful O2O gateway, leading the industry with over 22 million local services point of interest, 1.9 million of which provide closed-loop service to users within the app. Baidu Maps also provided indoor maps for over 3,000 large shopping malls, which is unparalleled in the industry. We've expanded our footprint abroad to over 100 countries and regions to serve Chinese travelers overseas. Baidu Maps worked with over 1 million developers during the quarter, about 75% of the market, and provided open map services to 600,000 third-party apps and websites, more than any industry peer in China. As you know, Baidu has been investing in AI for years, and we are proud to be recognized as one of the leading AI innovators globally. Our AI infrastructure is already helping to make all of our products more efficient and useful.
For example, AI enables better filtering of bad search results and keywords, helps generate more intelligent and targeted search results and Newsfeed, automatically detects non-compliant images on Nuomi, enhances the accuracy of Baidu Deliveries delivery time estimates, and predicts traffic conditions in Maps, among other things. AI also enhanced ad displays and broadened the range of ad formats, driving further value to our customers. Our amazingly accurate speech and image recognition have become the envy of the industry, helping to drive further rapid growth in voice and visual search queries. Our AI-powered Baidu Translate product is the first online translation service to combine deep learning with a statistical model. With leading voice and image input and recognition, Baidu Translate services 28 languages and processes over 100 million requests a day on average, many of which come directly from Search and support over 20,000 third-party applications.
Beyond our core products, we are already applying AI and big data to many areas of people's daily lives. For example, Baidu AI medical assistant, Melody, helps doctors to diagnose illnesses from online conversations with patients. Our intelligent voice recognition-based CRM system understands callers' questions and guides salespeople with real-time answers and data. We use augmented reality to display live advertisements, and our digital assistant, Duer, provided live TV commentary for an Olympic basketball game. We also recently began to test facial recognition-based entry control systems here on Baidu Campus. In the beginning of last month, we open sourced our AI platform, PaddlePaddle, to developer community, providing access to Baidu technology in the areas of voice and image recognition, natural language processing, and machine learning. Now, looking to some of our newer areas.
While financial services is still an early-stage effort, we're making strong progress in creating an innovative platform to transform the traditional finance industry that gives users unparalleled convenience and approval speed, while minimizing risk through our AI-based risk control technologies, including facial and fingerprint recognition, OCR recognition of identification documents, and liveness detection. We continue to grow our leading position in the growing market for education loans in Q3. To date, we have worked with approximately 1,300 educational institutions, many of whom are our long-term search customers and have more than 50% market share. We are also making progress expanding into new areas, partnering with over 300 companies or merchants in new categories such as travel, where we partner with Qunar, cosmetic surgery, home decoration, and home rentals. Autonomous driving is an important area for future growth, where AI technology has helped us take an early lead.
Enabled by Baidu Brain's powerful image recognition and processing technologies, our Autonomous driving car recently broke a number of records in the KITTI benchmark tests, achieving an accuracy rate of 90.13% in vehicular recognition test. Last year, we began road tests of Autonomous driving under real-world conditions in China, and in August, we received our permit to begin testing Baidu's Autonomous cars on the public roads in California. We have an ambitious development schedule, but with our top team here in Beijing and in the U.S., leading technology, and unrivaled data resources, I'm confident that we will lead the way in making Autonomous driving a reality. Our iQIYI platform performed very well in the third quarter, with strong growth in revenue and paid subscriber numbers.
In August, according to iResearch, iQIYI's mobile app leads with 140 million daily active users, 520 million monthly active users, and 590 million hours monthly user time, representing a significant lead over the closest industry peer. We look forward to further supporting iQIYI's growth. In conclusion, while we are still experiencing some short-term challenges as customers adapt to the new regulations and our stricter standards, our core value proposition for users and customers remains solid. Just as importantly, we have a clear strategy for future growth as we enter the new era of AI. We are ahead of the game in many ways and thrilled to see the benefit of Baidu AI already becoming a reality in the lives of our users and customers. With that, I'll now turn the call over to Jennifer for an update on financials.
Thank you, Robin. Hello, everyone. We continue to be in a challenging transition period as we implement higher standards and comply with new regulations. As we mentioned, we took proactive measures and require all customers on our platform to submit ICP licenses and verify enterprise bank accounts. The process is on track with the completion of the verification work in healthcare and finance verticals in Q3, and we expect to complete the verification across all verticals in Q4. As Robin mentioned, we expect the most pronounced impact to our business to be in the fourth quarter, with recovery beginning next year. We believe these higher standards and regulations will result in a higher quality customer base and healthier industry environment over the longer term. Looking ahead, we'll focus on further enhancing our value proposition to our users and customers.
We will continue to execute our plan to build out our ecosystem and to spend where necessary with disciplined approach while closely monitoring return on investment. At the same time, investing in technology and R&D will continue to be a priority. Moving to the financials. All monetary amounts are in RMB unless stated otherwise. For the third quarter, total revenues were RMB 18.3 billion, representing a 0.7% decrease from the corresponding period in 2015. The year-over-year increase is 6.7%, excluding Qunar, in the third quarter of 2015. During the third quarter, Baidu had approximately 524,000 active online marketing customers, representing a 15.9% decrease from the corresponding period in 2015, and a 0.9% year-over-year decrease excluding Qunar. Revenue per online marketing customer for the third quarter was RMB 31,300, a 10.6% increase from the corresponding period in 2015.
No year-over-year change, excluding Qunar, a 10.2% increase compared to the second quarter of 2016. Traffic acquisition cost as a component of cost of revenue in Q3 was RMB 2.6 billion, representing 14.2% of total revenues. Bandwidth cost as a component of cost of revenue was RMB 1.2 billion, representing 6.8% of total revenues, compared to 5.3% in the corresponding period in 2015. Depreciation cost as a component of cost of revenues were RMB 802 million, representing 4.4% of total revenue, compared to 3.6% in corresponding period in 2015. Operational cost as a component of cost of revenue were RMB 1.2 billion, representing 6.3% of total revenue, compared to 6.8% in the corresponding period in 2015. Content cost as a component of cost of revenue was RMB 2.2 billion, representing 12.1% of total revenue. This increase was mainly due to iQIYI's increased content cost.
SG&A expenses in Q3 were RMB 3.6 billion, representing a decrease of 37% from the corresponding period in 2015, a year-over-year decrease of 23%, excluding Qunar in the third quarter of 2015. The year-over-year decrease was mainly due to decrease in promotional spending for transaction services. R&D expenses in Q3 were RMB 2.8 billion, a 2.8% decrease from the corresponding period in 2015, year-over-year increase of 14%, excluding Qunar in the third quarter of 2015. Share-based compensation expenses, which were allocated to related operating costs and expense line items, were RMB 414 million in Q3, compared to RMB 400 million in the corresponding period in 2015. Excluding Qunar, the SBC cost was RMB 278 million in the third quarter. This year-over-year increase, with Qunar impact excluded, was a result of increased share grants to employees.
Operating profit was RMB 2.8 billion, representing 11% increase from corresponding period in 2015, a year-over-year decrease of 12.5% after excluding Qunar's impact. Non-GAAP operating profit was RMB 3.2 billion, a 10% increase from a corresponding period in 2015, year-over-year decrease of 7.5%, excluding Qunar. Income tax expenses was RMB 1 billion for the third quarter. The effective tax rate was 25.3%, compared to 19.4% in Q3 of 2015. The increase of effective tax rate of the third quarter this year reflects that some loss generating entities in the group cannot be consolidated for tax purposes under PRC tax law. Net income attributable to Baidu for Q3 was RMB 3.1 billion, a 9% increase from corresponding period in 2015. Basic and diluted earnings per ADS for the third quarter amounted to RMB 8.53 and RMB 8.51 respectively. Non-GAAP net income attributable to Baidu for Q3 was RMB 3.4 billion, a 6% increase year-over-year.
Non-GAAP diluted earnings per ADS for Q3 was RMB 9.92. As of Q3, the company had cash equivalents, and short-term investments of RMB 78 billion. Net operating cash inflow and capital expenditure for the third quarter were RMB 3 billion and RMB 1.2 billion respectively. Total headcount on a consolidated basis, including invested entities, was about 44,800 at the end of Q3. This represents an increase of 2.5% as compared to the end of last quarter. Let me provide you with our top-line guidance for the fourth quarter of 2016. We currently expect total revenue for the fourth quarter to be between RMB 17.8 billion-RMB 18.4 billion, representing a 4.6%-1.7% year-over-year decrease. 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 with questions.
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 rejoin the question queue again after your first question has been addressed. Our first question today comes from the line of Eddie Leung from Merrill Lynch. Please go ahead.
Good morning. Thank you for taking my questions. I have two questions. The first one is about your mobile traffic outlook. We have seen a slowdown in the mobile traffic growth. Just wondering how much of that is due to perhaps a cut in traffic acquisition costs, and how much of that is perhaps due to competitions or industry slowdown. Any comment on the upcoming quarter's mobile traffic would be great. Secondly, just a question on your online finance business. We understand that there has been some education loan business. Could you comment on the credit risk and how we are going to account for that on the balance sheet? Thanks.
Okay. I'll address the first question, and Jennifer can take on the online finance one. Our mobile search traffic, as you know, the internet penetration rate in China is already around 50%. Going forward, we cannot count on a rapid growth of new internet users coming online and learn to do search. From that point of view, the growth driver for search traffic is less than before. Overall, I think search is still very fundamental and critical to every internet user and users are still getting used to mobile search. We have seen the trend that on average, people are searching more through their mobile phones. This kind of frequency-related driver will continue. Of course, we are still innovating in mobile search. We have seen very rapid growth in terms of voice-enabled queries.
We will continue to promote this kind of new input method, including voice and images. We think there's plenty of room for growth in our mobile traffic.
Eddie, for the financial services business that we are getting into, we think we have a natural advantage in the educational sector. Many of the current advertisers are our search customers, and we've been doing business with them for a long time. Our approach to educational loan is working with these institutions and also assess the individual credit risk, giving our technology infrastructure as well as the data capabilities. Our approach to this financial services is quite, I would say, measured and prudent. We have originated some education-related loans, and they are built up under the balance sheet, under other assets. We also, based on estimates, starts to accrue loss provisions for these related loans, and they're also embedded in the other assets. Today, it's only the early stage.
We don't really have the testing results to see the actual losses, but we're measuring them and monitoring them very closely. We believe that based on Baidu's capability in AI, using the data and the technology and also our knowledge about that vertical, this is the entry point that we are experimenting with our financial services business.
The next question comes from the line of Alicia Yap from Citigroup. Please go ahead.
Hi. Thank you. Good morning, Robin, Jennifer, and Linda. Thanks for taking my questions. My question is regarding the current plan and longer-term view on your O2O strategy. With sales and marketing spend come down quite a bit, and the transaction GMV also decelerated to 49% this quarter from triple digit growth last few quarter, can you share with us your current thinking about the O2O business? For longer term, let's say we have the opportunity to do some business combinations on O2O business, how should we think about Baidu Search growth and overall Mobile Baidu positioning if we don't have operation control of the transaction service in the long term? Thank you.
Yeah, Alicia, I think the O2O initiative is pretty much based on our vision of connecting people with information and connecting people with services, especially for connecting people with services. Our main focus is to make sure that Mobile Baidu users can start the search on our search app and finish in transaction wherever relevant. We've been working very hard to make that kind of experience better and better, and our O2O initiative is surrounded on that. As I mentioned during the prepared remark, we now have 2.2 million merchants on our Nuomi platform. That's like triple over a year ago. From that point of view, we are very determined to make Nuomi a success. In the meantime, we realized that the business model for O2O may not be purely commission-based or transaction-based model.
We start to shift a little bit of the transaction-based nature to advertisement-based nature. We also lowered the subsidies we provide for all kind of transactions on the Nuomi platform. As you correctly pointed out, the growth for DMA slowed down a little bit. The loss also contracted too. That reflects our mission of making sure that the users have the best experience regardless of a transaction or non-transaction, or regardless whether we control the O2O 100% or we rely on some kind of third party. The transaction we did in the last October with Ctrip is an perfect example. Now our users can book a hotel from Baidu Maps or Baidu Nuomi or Mobile Baidu, and the experience is very smooth. We don't own the Ctrip business. This is certainly a possibility going forward for other verticals.
Again, our focus is to make sure that the user experience for transactions on the Baidu platform is smooth.
The next question comes from the line of Alex Yao from JP Morgan. Please go ahead.
Hi, good morning, Robin and Jennifer, and thank you very much for taking the call. Jennifer, I have a financial question about the first quarter guidance. Can you talk about the implied core search revenue growth within the guidance? You guys mentioned the core search will see recovery in earlier, next year. Are you guys talking about on year-over-year basis or Q2 basis? How should we think about the magnitude of the recovery, and the timing of the recovery in first half next year? Thank you.
Thank you, Alex. Obviously, as I mentioned, we're going through the transition period. Much of the work is related to us validating our customer base with the required documentation. In Q4, across the board, we're targeting to finish all the verification process with all the customers. What gets impacted is some of the customers may be removed from doing business with us because they cannot provide the proper documentations, or there's also a change of display or different ways of doing advertising or keywords that being monitored with restriction, so customer cannot be spending as they used to be with us. Very much closely a tighter control over the whole platform. As you see, Q4, we will feel a more pronounced impact of the transition work that we're carrying on.
We do target that by year-end, all the verification work should be completed, and that will be the customer base that we're working towards going forward, getting into next year. We will also recruit new customer. The effort will be focusing on building new customer base that with the same kind of standard. As we look out into next year, we do anticipate that I would say much of the quality assurance work has been done this year, and next year we should start to resume our normal work just to build the customer service and also provide good service to the users. Basically, this is a very special period. It's not the time to talk about year-on-year growth yet. You can see that Q3 for online marketing business, it's flattish. Going into Q4, we will continue to feel this transition impact.
That kind of sequential changes should finish by the end of this year. Going into next quarter, we are focusing on building the business again. This is the transition going forward, and basically Q4 is what we anticipate to be kind of the bottom.
The next question comes from the line of Chi Tsang from HSBC. Please go ahead.
Great. Thanks very much for taking my questions. I wanted to ask you about two topics. Firstly, about the Newsfeed. The Newsfeed now has about 70 million DAUs, so that's ramping very rapidly. I was wondering if you can give us a little bit more commentary regarding time spent, and also whether or not the Newsfeed is helping to drive more paid clicks and what your monetization plans might be. Then second topic, I was kind of wondering if you can give us an update on the progress you're making as it relates to autonomous driving. You have a plan for small-scale production by 2018. Thanks so much.
Yeah. On the Newsfeed, we pretty much show the feed on the Mobile Baidu app. We leverage on our existing user base, and we only count a user as an active Newsfeed user when they click or they scroll on the related content. I think the 70 million daily active users is already very significant. In the meantime, I mentioned that the time spent has tripled, so it's growing very fast. We will let you know the average time spent per user in absolute numbers when we feel appropriate. The monetization capability for Newsfeed is also very promising because we have a very large customer base for our paid search. Right now it's an opt-out mechanism, so a lot of the advertisers are trying our Newsfeed ads and they're very happy about the effectiveness.
We think when we decide to become more aggressive in monetizing the News Feed, the revenue potential is huge. What's the second question?
Autonomous driving. In particular, you have a plan for small scale mass production by 2018. How are you progressing towards that objective?
I think we are still on track for a small scale production by the end of 2018. Right now we have more than 40 testing cars in China and U.S., we are making significant progress almost every day. We believe we have one of the strongest teams in autonomous driving technology, we also are talking to a number of the potential partners to supply us with cars and related technology. We are very happy and we are on track to make that happen.
The next question comes from the line of Evan Zhou from Credit Suisse. Please go ahead.
Hi, good morning Robin Li and Jennifer Li. Linda Sun, thanks for taking my questions. I have two follow-up questions on some cost items. I was wondering, our R&D expense on this quarter seems had a pretty decent increase. I was wondering if we could break it down a little bit on what's the incremental spending on our longer term AI-related initiatives and shall we expect them to have a permanent step up of these spendings down the road for this line? What's the roughly RMB 1.2 billion of the other income lines, what caused that line to increase in this quarter? Finally, maybe whether you can share with us some thoughts regarding the use of cash, as we are basically decreasing our cash burn on, say, O2O, and still decent cash flow from our core search business.
Any plans to maybe return more value to shareholders, that'll be helpful. Thank you.
Thank you, Evan Zhou. For the R&D expenses, throughout our history, we've been steadily investing the R&D capabilities and the R&D expenses line item is particularly related to the talents, the manpower capabilities. What you are seeing is, I would say, a consistent approach to R&D investment. Going forward, that will continue, I would say, to be a priority for us and our focus on accruing and attracting and retaining the top talent will continue to be our focus. The patterns, there is no surprise and there is no swift change, and we'll continuously invest in R&D. The other income line for this quarter is related to spinoff assets that the transaction itself generated gains.
We do have, if you do the sum of the business, like Baidu Video, that was spun off and because of that transaction, we do have other income line that reflects the gain of the transaction. For cash, obviously as we continue to look into the future, we're very excited about the AI age and the opportunity it can bring. Many applications can be born out of this technology competency and our cash is a strategic asset for us to invest in the future. Currently, we don't have other plans to deploy cash other than for strategic purposes and for our organic growth.
The next question comes from the line of Natalie Wu from CICC. Please go ahead.
Hi, good morning, management. Thanks for taking my question. Regarding your feed ad product, can management share with us more color on this product, say, the current revenue run rate, annual target for 2017 or longer future? Also, is it combined within the existing advertising system? Is the rebate rate for agencies in alliance with your search products, et cetera? Thank you.
Are you talking about Newsfeed?
Yeah. Newsfeed in the Mobile Baidu app.
Okay. Right now, we just began the monetization process, so the ad load is relatively low. I think it's much lower than industry peer. I mentioned it previously that the current mechanism is an opt-out mechanism for Baidu advertisers. They share the same mechanism of rebates or channel policies, things like that. Right now, we just got started. I think that the growth rate is very high, but the ad load rate is very low right now.
The next question comes from the line of Piyush Mubayi from Goldman Sachs. Apologies. Please go ahead.
Thank you. Thank you for taking my questions. Could you talk about iQIYI's performance across advertising and subscription businesses during the quarter as well as their content spending plans for two years, if possible, a path to profitability for that business? Second, would it be possible at all to talk about the split between medical and non-medical through the last quarter? When you talk about potential recovery into 2017, how much of the emergence overall can we expect to be coming back? Put it another way, of the 70,000 decline that we saw in the last quarter, could you give us a sense of what the split was? Thank you.
Thank you, Piyush. For the iQIYI business, both its advertising business and subscription business are growing nicely, I think you can perhaps read a little bit of that in the breakout of the revenue line. Its content strategy continues to keep priority for iQIYI as it carries out solid growth in advertising and subscription. As I mentioned at the beginning of the year, the content plan last year was at a rate of double this year you should expect a similar rate, that plan is not changed. Going forward, I think the investment in content will continue to be the key. Over the years, iQIYI has built a core competency in both content identification and also self-production content capabilities. I think we're very encouraged by iQIYI's progress.
Because of also the subscription user business growth, I think its financial performance is improving significantly. Very encouraged by the iQIYI development. For the customer base, yes, as we're going through last quarter, for example, of all the customer validation process, medical and financial services were the customer sectors that were I think are mostly affected. Obviously, the effect is across the board to all the customer base. As I mentioned earlier, the medical and financial services sector has pretty much completed its customer validation work, and the Q4 is actual work related to across the board or other sectors. We expect the medical sector is steady and is slowly recovering, and the other sectors may be much affected Q4, but going into next year, we should start to build a customer base again.
Because of this really strict control and the regulatory review from our perspective, some of the customers will not be able to do business with us. There will be a portion of the customer base that used to be doing business with us will be removed. Of course, we think the potential advertising customers, the pool is big, and we will provide unique advertising platform services and products, and combined with the Newsfeed, that kind of new inventory that we have, we have more product portfolios that we can service the customers. The short answer is that some customers will be cut out, and there will be plenty of new customers, and we'll continue to build the customer base going forward.
I would just add, there's also a macro trend with the new normal. We see a lot of consolidation across many different industries, from medical to education to finance, you name it. This may not be a bad thing for us. I think when the industry is more consolidated, they will care more about their brand and have a more systematic way of evaluating the effectiveness of their advertisement. We expect to actually benefit from this, but the number of customers driver may be affected because of this macro trend.
The next question comes from the line of Joanne Lim from 86Research. Please go ahead.
Hi. Good morning, Robin, Jennifer, and Linda. Thank you very much for taking my questions. I have a follow-up question on the Newsfeed ad. You mentioned that you will leverage the existing advertiser base. I'm wondering whether the Newsfeed product will start generating incremental revenue right away, and advertisers will increase their budget on Baidu because of Newsfeed ad, or whether the growth of Newsfeed ad at the early stage is mainly due to advertisers shifting their search budget to Newsfeed ad. Also, when do you expect this new product to become a meaningful revenue contributor? Thank you.
Yeah, I think I've talked about the nature of search quite a few times. I think it's always the traffic bound instead of budget bound, meaning that many of our customers or advertisers, they have the budget. They just cannot buy enough amount of traffic on our platform. Newsfeed provide a perfect incremental traffic for our advertisers. So far, based on our existing testing, I think advertisers are pretty happy about the performance of Newsfeed ad. I think the revenue opportunity here is very much incremental, and we do expect meaningful contribution for next year.
The next question comes from the line of Wendy Huang from Macquarie Capital. Please go ahead.
Thank you. My first question is about traffic acquisition cost. That declined in both dollar term as well as the percentage ratio. How should we expect the TAC ratio to trend going forward? Also, can you give us update on the gap between the mobile and PC, in terms of the CPM, where it is standing now? Lastly, on the SG&A cost, assuming there is no change with the O2O competitive landscape, how should we expect the SG&A cost in dollar amount in 2017, given that currently we are seeing the sequential decline? Should we expect this kind of sequential decline to continue into 2017? Thank you.
Hi, Wendy. For the TAC cost, Q2 obviously was a very special quarter. I mentioned last time, very much the medical-related revenue were affected, and much of that was organic. So you could see that in Q2, it was a very pronounced increase of the TAC rate. In Q3, other than that, we're implementing the measures across the board, and some of the other verticals are also, of course, affected by this. The TAC ratio was not only because of the medical or organic revenue, and therefore it kind of fluctuates a bit. Directionally, over time, you should expect the TAC rate to continue to increase as a % of revenue, simply because we're growing the mobile contextual-related revenue. Much of that is yet to be fully developed.
That generally pays a higher TAC rate, and if they bring a bigger contribution to the overall revenue, we should expect TAC rate to go up. The
CPM.
I think, Wendy, for the mobile CPM, obviously, it continues to improve, but I think at this moment of time, the comparison may not be very meaningful because much of the changes is going through PC. Obviously, we're changing the display methods, so there is a lot of other variables that's moving around to effect. Generally, of course, we continue to believe that mobile has tremendous monetization power and would continue to improve its capability and the narrow, and eventually, we think it surpasses the mobile monetization capability. For SG&A expenses related to O2O, we mentioned earlier that we have a continued improvement or thinking or revelation in the O2O area. We want to connect people with services, as we are executing on this business, we're very much focused on the user value proposition and merchant value proposition.
Of course, at the same time, deploy our SG&A investments in a very disciplined manner. Our three-year plan for Nuomi, for O2O, has not changed. I think as I mentioned earlier, we're approaching the business in a very disciplined approach and a focus on ROI and the value generation to our users and merchants.
The next question comes from the line of Erica Werkun from UBS. Please go ahead.
Morning, Robin and Jennifer. Thank you for taking my question. This is Ming Xu asking on behalf of Erica. I have two follow-up questions on Newsfeed. The first question is, could you clarify in terms of DAU, is it 17 million or 70 million ? And also, could you comment on the time spend trend? Secondly, in terms of technology, how would you differentiate from the competitors. In particular, I think one thing is the AI technology that Baidu has. The other thing is, we know that you invest in Taboola, the recommendation engine of U.S. How these unique technology advantages help you to differentiate from your competitors in terms of recommendation? Thanks.
Ming, in terms of DAU, that's 70 million. In terms of time spend, I mentioned it has tripled since our launch back in May and still growing steadily. User sticking is very good. You are right that the Newsfeed product is essentially an AI product. We tailor the content for everyone on a very personalized basis, and we leverage our AI technology in the form of machine learning and many other different AI technology to make sure that we well feed each user with the most relevant, most interesting, high-quality content. Also for the monetization, it goes without saying that we are leveraging on a very large advertiser base. We also have the industry-leading targeting technology based on the user profile, location, their query history, things like that.
We are able to provide a very diversified ad creative and sources for the users and for the advertisers. We think we are best positioned to win this game.
The next question comes from the line of Alan Hellawell from Deutsche Bank. Please go ahead.
Yeah. Great. A basic question. Just what is the breakdown in GMV between food delivery and group buying? Secondly, over the past many years, whenever you've introduced a successful innovation, whether it's you moving to travel or mobile app stores or other refinements, we've been able to kind of quantify that breakthrough. I'm just wondering, now that we're several quarters into leadership in AI, whether you can give us any sense, whether it's a CPC or CPM basis, the difference of purchasing a keyword that kind of benefits from AI versus one that would've been produced from your previous algorithm. Could you try to capture that improvement?
Alan, for your question on the GMV breakdown, the larger GMV is the Nuomi, continues to be the Nuomi business. The takeout food delivery service at a frequency level is much higher, and it's really growing very nicely. It's narrowing the gap, but the biggest is still Nuomi.
On how AI helped our CPC and CPM, we started to invest in AI technology about five years ago. Starting from about three years ago, we implemented AI-related technology to help monetization. It has contributed to CPC and CPM, and click-through rate, for quite some time. I would say at least for the past three years, we've seen very significant contribution from our AI technology on monetization. I believe there are still lots of room for improvement on that direction.
The next question comes from the line of Thomas Chong from BOCI. Please go ahead.
Hi. Thanks for taking my questions. I have a quick question about the top five advertising categories. If my understanding is correct, should I expect the contribution from healthcare to increase from third quarter to fourth quarter, while some other sectors should be on a declining trend in the fourth quarter? Thanks.
Yeah. The top sectors, just for your information, are the medical services, the local services, education, retail, and real estate and home renovations. I think, as you can see, even go through these large changes, we continue to have the relatively steady, the top sectors, that remains largely similar to prior quarters. Yes, I think for what you just said, I think I mentioned much of the review work for these verticals, like medical, were finished, and they should gradually resume some of the business that these advertisers can do with that. Other sectors will be going through the same exercise that we have been doing.
The next question comes from the line of Eric Wen from Blue Lotus. Please go ahead.
Hi. Good morning. Thanks for taking my questions. I have two questions. First, a short follow-up on Newsfeed. Is it mostly branded ad, or do we also see effectiveness with local ads in this media format? My second question is more open-ended. As the company is shifting to more fundamental technologies like autonomous driving and AI, given similar companies like iFLYTEK has much lower revenue than us, what's our thought on our business model going forward, taking into account our past successes and lessons learned with search? Thanks.
Okay. On the Newsfeed, right now, I think a super majority of the advertisements are performance-based ads. They share the same advertiser base with Phoenix Nest or Search app. We do see a number of advertisers who are more brand-oriented, especially for those advertisers who aim to target a specific geographic location, for example, in real estate, they would like to target a specific geographic location. Sometimes you can see that they are also performance-driven, sometimes they are looking for branding effectiveness, too. I think overall, Newsfeed is still pretty much performance-based advertising, but we are increasingly add some flavor of brand ad. On AI technology, I think it has helped almost all of our existing products, helped the monetization, helped to deliver better user experience in search, in many other Newsfeed, and many other content-based products.
Also, I think for our newer initiatives, be it internet finance or autonomous driving, we've seen significant contribution from AI-related technology. I think that will position us uniquely in those very large markets. The newer initiatives generally take longer to see material impact on revenue and earnings. We'll need to wait for maybe a couple more years.
We are now approaching the end of the conference call. I'll now turn the call over to Baidu's Chief Executive Officer, Robin Li, for his closing remarks.
Well, again, thank you for joining us today. Please do not hesitate to contact us if you have any further questions.
Thank you. That does conclude the conference for you for today. Thank you for your attendance. You may all disconnect.