Earnings Call: Q1 2016

Apr 29, 2016

Earnings release

And thank you for standing by for Baidu's First 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 would now like to turn the meeting over to your host for today's conference, Sherry Ng, Baidu's Director of Investor 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 the 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 includes discussions of certain unaudited non GAAP financial measures. Our press release contains a reconciliation of the unaudited non GAAP measures to the unaudited most directly comparable GAAP measures and is available on our IR website at ir.baidu.com. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu's IR website. I will now turn the call over to Baidu's CEO, Robin Li. Hello, everyone, and thanks for joining today's call. We had a terrific start to 2016 with strong performance in the Q1. Search and iQIYI grew strongly and GMV ramped rapidly, increasing nearly fourfold year over year. Mobile grew particularly well this quarter and hit a new milestone, contributing 60% of total revenue, off the back of improving search monetization capability driven by product and technology innovation. This quarter, we made notable progress in executing on our mission of connecting users with information and services, and we made great headway towards providing our customers and merchants with a fully integrated platform, one that meets their needs, not only for online marketing, but for transaction services as well. We have invested heavily not only to enhance, but ultimately to redefine the search experience. We continue to innovate to improve the search interface by further improving of voice and digital search and upgrading search results to make them more personalized, targeted, action oriented and content rich. This improvement drove the year over year upward trend in both mobile and PC CPM. And Baidu Brain, our name for Baidu's AI infrastructure as well as the tight integration of products across our platform make this possible. Baidu has a unique platform that users turn to in order to discover and connect with whatever it is they are looking for across any vertical and category at any time and from any place. More and more, they are able to fulfill through a seamless closed loop. Our users touch multiple Baidu products everyday, and the insights that we glean from their use of multiple products enable us to personalize and tailor the experience and give our users the fastest path to what they are looking for. We parlay the high intent that search users bring into great ROI for merchants. Customers, both large and small, partner with Baidu, and we match them to the user demographic they seek and do it at large scale. Increasingly, we provide our customers with a full integrated solution that leverages Baidu's wide range of products and infrastructure. This sets us apart from our peers in both online marketing and in transaction services. Search, Maps and our local service platform, Noemi, are cornerstones of our integrated offering that mutually share content and enrich each other. Search provides a very meaningful portion of traffic to both Maps and No. Me. Maps and No. Me in turn also further enrich search results with local extensions and transactions capability. For example, as of end of March, Baidu Maps had 1,500,000 points of interest that enabled closed loop transactions. Nearly 70% of those points of interest were provided by Nomi, which tripled its merchant coverage year over year. Accessing merchant listings, points of interest and services is easily done through We offer local merchants a compelling unparalleled value proposition. Baidu helps connect online to offline and helps merchants to drive user foot traffic to storefronts across a broad range of local services. We made it easy to get started on the Baidu platform by offering solutions that best suit their needs and by offering top notch infrastructure with low startup costs. Earlier this week, Nomi announced it would be weaving take rate and provide a cost per click marketing model for newer emerging local service verticals such as wedding services, house and beauty and home services to name a few. This is one of the many ways Baidu can work with merchants in underpenetrated verticals to bring them on our platform and provide them with an opportunity to experience Baidu's value proposition. Our local Express infrastructure ties together our powerful cornerstone products of search, maps and noise and has expanded merchant scale dramatically. Local Express reached over 200,000 merchants by the end of March and verticals covered by Local Express now include retail, education, healthcare, and property, among many more. A great example is Zhou Da Fu, the popular jewelry retailer. Baidu worked with Zhou Da Fu to drive leads through our online marketing platform and enable a closed loop transaction through Nomi. In mid April, over 2,000 Xiaodafu stores launched their local express account. And in the 1st week after the launch, March, Xiaodafu offers sold by Nomi were up nearly tenfold from the week before, driving foot traffic to their offline stores. Baidu takeout delivery also continued to grow rapidly. We are the market leader in most top tier cities like Beijing, Shenzhen and Guangzhou among the non student demographic. From the beginning, Baidu takeout delivery has catered to the working age demographic, which has significant spending power and value of high quality food and superior service. This was the right strategic decision and our focus on the demographic with higher spending power has given us a lasting advantage. Takeout Delivery offers an ever expanding range of carefully vetted merchants and continues to improve logistical efficiency. We've seen the number of orders delivered per delivery person per day and the on time ratio increased steadily quarter over quarter. At the end of 2015, Baidu take out delivery became a separate entity. And this week, we signed to close another round of financing from Baidu and other financial sponsors at a post money valuation of US2.5 billion dollars Baidu remains very supportive of the Baidu takeout delivery business and continues to hold a majority stake. Baidu Wallet also gained strength with activated Baidu Wallet accounts growing in the quarter from RMB 53,000,000 at end of 2015 to 65,000,000 at the end of Q1 2016. In the Q1, we ran various holiday promotions and deepened integration across 15 Baidu products, include Mobile Baidu, Baidu Cloud, Maps and Postbar. Nomi and Takeout Delivery also continue to observe increased share of orders completed with Baidu Wallet. With our vast distribution platform, merchant network and unparalleled data and technology capabilities, Baidu is uniquely positioned to play a transformative role in financial services. With our data and technology capabilities, we can better evaluate credit risk and provide educational institutions through our core search capability. And we have a much better understanding of the quality of their training programs. Baidu began working with over 250 educational institutions to provide credit loans to qualifying students. These credit loans aid the growth of education industry and enable credit worthy students, students who might not otherwise have had the means to take the courses they need. Our multiyear investment in artificial intelligence and particularly in deep learning continues to pay dividends across many products. Baidu Brain supports all product lines and now enable us to offer a more relevant result to users, higher click through rates to customers, faster delivery time for takeout delivery, highly naturalistic text to speech features for news users, just to name a few. Deep learning will be one of Baidu's key technology advantages as we move forward in autonomous driving. We believe that automobile is the next major computing platform and that advances and innovation will happen quickly, especially here in China, where the problems that autonomous driving addresses are so pronounced. We are aggressively beefing up our R and D efforts in this area, both here in China and at our U. S. R and D center in Silicon Valley. Baidu's strength in high definition mapping and in deep learning powered computer vision will prove to be decisive advantages and we are on track now to deploy autonomous vehicles powered by Baidu Technology in 2018 with production at scale by 2020. Spent according to iResearch in March 2016. In the Q1, grow particularly well off the back of iQIYI's exclusive and very popular Korean drama, Descendants of the Sun, which aired in Korea and on iQIYI in China at the same time. IQIYI has established its place as the online video platform of choice and a hub for popular culture. Online video is an important milestone for Baidu with iQiyi providing invaluable high quality content. IQiyi benefits from its strategic cooperation with Baidu across multiple fronts, including search traffic, ad targeting and big data. We look forward to maintaining a close strategic partnership with iQIYI. Over the last year, Baidu has opened a number of our quality assets to outside investors. And under this program, we've now received investments in Baidu Takeout Delivery, Baidu Music, Zueyabang, 91 desktop and more recently Baidu Video Aggregation Platform. This initiative help unlock hidden value for Baidu and provide an alignment of incentives and success to management and teams of this business. As announced in our earnings press release earlier today, Mr. William Decker will step down from our Board, having served as a Board member and Audit Committee Chairman since October of 2005. On behalf of Baidu's Board of Directors, I would like to express my gratitude to Bill for his long lasting dedication and invaluable contribution to Baidu. Meanwhile, I would like to welcome Mr. Brent Kalinicos, SR New Audit Committee Chairman. Brent has served as an independent director on our Board since October last year and brings extensive industry experience to the position. We look forward to his leadership on our audit committee. I'm very excited to offer what Baidu has in store for 2016 and beyond. Baidu plays a key role in driving innovation in China With our cumulative investments in technology, particularly in artificial intelligence and our large scalable platform and infrastructure, we are uniquely positioned to capture the vast opportunities in China. Our core search business is robust and opens up new opportunities for Baidu. We will actively pursue new opportunities where we have competitive advantage and drive change that will help transform people's daily life. The transformation of financial services industry and the transportation sector through technology, through innovation, like autonomous driving and Internet finance are but a few of the opportunities on the horizon. Progress in these new areas should be viewed over a long term time horizon, and we are confident this investment will create long term value for shareholders. With that, I will now turn the call over to Jennifer for an update on financials. Thank you, Robin. We're very pleased to report a very strong quarter, driven by superb performance of our core search business and ITE. We also further executed on our vision to build the next Baidu. I would like to reiterate that the annual cost expense guidance that I provided last quarter for full year 2016 continues to hold. The pace of spend may vary quarter on quarter based on the timing of events and activities kicking in. At the beginning of this month, we released our 20 F, and for the first time, we provided segment reporting for search services, transaction services and ITE. We plan to provide segment reporting on an annual basis, we will continue to report on the margin impact of transaction services in iQIYI. Our business will evolve over the next few quarters, and we will provide the appropriate level of visibility to the investment community. And we'll continue to update you on metrics that reflect the state of our business. Also, bear in mind that Q1 was our 1st full quarter of deconsolidation of Chinar. And for ease of comparison, we have provided apples to apples financials, excluding China. In Q1, we recognized in other income 2 months of equity pickup of Ctrip's 4th quarter 20 15 net income. For Q2 onwards, we will recognize a full quarter of equity pickup of Ctrip's net income on a quarter lag basis. Now moving on to financials. All monetary amounts are in RMB unless stated otherwise. For the Q1, total revenues were CNY 15,800,000,000, representing a 24% increase from corresponding period in 2015. The year over year increase is 31%, excluding Jina, in the Q1 of 2015. During the Q1, Baidu had approximately 587,000 active online customers, representing a 12% increase from the corresponding period in 2015 and a 24% year over year increase, excluding Jinar, in the Q1 of 2015. Revenue per online marketing customer for the Q1 was 25,400, a 6.7% increase from the corresponding period in 2015, a 1.6% year over increase, excluding Traffic acquisition cost as a component of cost revenue in Q1 was CNY 2,200,000,000, representing 14% of total revenue, flat from the corresponding period in 2015. Bandwidth cost as a component of cost revenues were CNY1.1 billion, representing 6.9 percent of total revenues compared to 6.7% in the corresponding period in 2015. Depreciation cost as a component of cost of revenues was CNY707 1,000,000, representing 4.5% of total revenues compared to 4.6 percent of the corresponding period in 2015. Operating costs operational costs as a component of cost of revenues were CNY1.1 billion, representing 6.9% of total revenues compared to 4.7% in the corresponding period in 20 15. This increase was mainly due to transaction services and IT related operating costs. Content costs as a component of cost of revenue were CNY1.4 billion, representing 8.7 percent of total revenue compared to 4.8% in the corresponding period in 20 15. This increase was mainly due to iQIYI's increased content cost. SG and A expenses in Q1 were CNY3.9 billion, representing an increase of 33% from the corresponding period in 2015 and a year over year increase of 64%, excluding Chinar, in the Q1 of 2015. The year over year increase was mainly due to an increase in promotional spending for transaction services. R and D expenses in Q1 were CNY 2,100,000,000, an 8.1% decrease from the corresponding period in 2015 and a year over year increase of 5%, excluding Chinar. The increase was mainly due to an increase in the number of R and D personnel. Share fees compensation expenses, which were allocated to related operating costs and expense line items, were CNY 309 1,000,000 in Q1 compared to CNY291 1,000,000 in the corresponding period in 2015. Excluding Tienar, the SPC cost was $201,000,000 in the Q1 of 2015. This year over year increase with Tienar's impacts from the corresponding period in 2015 and a year over year decrease of 12% after excluding Jinar's impact in the Q1 of 2015. Non GAAP operating profit was CNY 2,500,000,000, a 3% increase from the corresponding period in 2015 and a year over year decrease of 6.7%, excluding China. Income tax expenses were CNY675,000,000 for the Q1. The effective tax rate for the Q1 was 25.4% compared to 20.7% in Q1 twenty 15. The increase of effective tax rate for the Q1 of 2016 reflects that some loss generating entities in the group cannot tax law. The net income attributable to Baidu for Q1 was CNY 2,000,000,000, a 19% decrease from the corresponding period in 2015. Basic and diluted earnings per ADS for the Q1 amounted to RMB5.4 billion and RMB5.38 billion, respectively. Non GAAP net income attributable to Baidu for Q1 were CNY 2,400,000,000, a 14% decrease year on year. Non GAAP diluted earnings per ADS were CNY 6.8 billion. As of Q1, the company had cash, cash equivalents and short term investments of CNY 71,300,000,000. Net operating cash inflow and CapEx for the Q1 were CNY 4,700,000,000 and CNY 826,000,000, respectively. Respectively. Total headcount on a consolidated basis, including invested entities, was about RMB 43,500 as of the end of Q1 of 2016. This represents an increase of 5% compared to the end of last quarter. Now let's provide you with our top line guidance for the Q2 of 2016. We currently expect total revenues for the Q2 to be between CNY 20.11 billion and CNY 20.5 8,000,000,000, representing a 21.3% to 24.2% year over year increase. On an apples to apples basis, excluding Xunar from Baidu's financials, the guidance represents a 28.1% to 31.1% year over year increase. 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 Your first question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead. Good morning. Thank you for taking my question. Just two quick ones. The first one is about your advertising number. It was a pretty good quarter in terms of sequential growth. So could you share more color with us? Did you add back some of the travel related clients from China or were they related to your O2O business? And then secondly, a bit longer term about the longer term outlook. There seems to be a trend that Internet users are consuming video content within social media. So will this trend affect the usage of search down the road? And how Baidu can deal with the trend? Thank you. Hi, Eddie. From we did deconsolidate is one of the major verticals for us for many years, and it continues to be a major vertical for us. For the online travel agents who do advertising with us, they would be counted as online marketing customers and not particularly transaction service related customers. So if there are because we do have thousands of customers in that vertical, did not really track specifically the Tuna related marketing customers, whether they are or are not included in this past quarter. But bear in mind, Baidu's search is a very powerful and performance based marketing platform, and there are clients that would do advertising activities on multiple platforms, and Baidu continues to be a very attractive platform for many of these advertisers. So just to conclude, the travel verticals continues to be one of our major verticals. So on video content, yes, they are popular, not only among social media, but it's also very popular across the board of all Internet and mobile products. That's why you see IP is constantly ranked among the top 2 in iPhone's App Store, and we also invested in other short form video content companies like Kuaishou. And we fully and seamlessly integrate this kind of video in our Baidu core search, mobile Baidu app and users who search for video content on Baidu can get the most comprehensive and the best user experience for video content. And we did see that the click through rate for video content and exposure for video content in our search results increased significantly over the past quarter. The next question comes from the line of Dick Wei from Credit Suisse. Please go ahead. Hi. Thanks for taking my questions. I have a question on the recent company restructuring. I wonder what is the strategic reason for the amount and area of investments? Thank you. Yes. Basically, before the restructuring, mobile Baidu and MAP was under one leadership and Baidu Search and Nomi was under another leadership. We combined those 2 to form the Baidu Search company. I think this basically is the core business for Baidu. And other than that or outside of the Baidu search, we still have those new areas such as Internet Finance, autonomous driving and the underlying technology such as artificial intelligence. I core search, including transaction services under one leadership would make the company more efficient and robust. Just to add on that, if the internal organization change, we have not formed a separate legal entity. The effort is, as we mentioned, we're building an integrated platform, and this arrangement will help us make better internal alignment and help our service help us service our users and merchants more effectively. Your next question comes from the line of Erica Poon Wilkins from UBS. Please go ahead. Thank you. I've got two questions here. The first one, just wondering if you can update us on any changes to the competitive O2O? And the second question is on BaiduMab. Just wondering if you can share with us O2O? And the second question is on BaiduMab. Just wondering if you can share with us the progress of monetization for BaiduMab. How many of the merchants shown on BaiduMab are actual paying advertising customers? Thank you. Yes. On O2O, I think, Nuomi has made significant number of deals available. And we also continue to take market share from the competition and quarter after quarter. I think our market share started around 10% at the beginning of last year and now we are well over 20% as of last quarter and the trend continue as we enter into the current quarter. While we see all this kind of better and better metrics, our investment is prudent. I think we pay a lot of attention to RI for subsidies for the Numing business. And like I mentioned during the prepared remarks, we view this as an integral part of the overall Baidu core business, including search and maps. They cross leverage with each other and we do not necessarily need use just one piece to compete with other companies. MAP is right now not really focused on monetization, but more focused on connecting users with services. We pay attention to the daily active users. We pay attention to number of closed loop transactions enabled. We pay attention to the points of interest that's available to our users, the quality of those POIs and the rich content about those POIs. Your next question comes from the line of Vivien Hao from JPMorgan. Please go ahead. Hi, thank you for taking my question. My question is just also around the OTO area. For takeout delivery, what percentage of orders are fulfilled by our in house delivery team right now? And also what is our long term goal in terms of local logistics local logistics development and also investment? Thank you. Yes. For takeout delivery, as I mentioned, we target the more high end affluent user demographic. So we care a lot about the service quality, both for the supplying restaurant as well as the delivery team. So right now, over 50% of the orders are delivered by our logistic people. The long term goal is really to continue to lead in the top tier city among the white collar demographic who are not that price sensitive. And we will continue to improve the service quality and continue to integrate this service with the existing Baidu services from Nuomi and other products. Your next question comes from the line of Chi Zhang from HSBC. Please go ahead. Hi, good morning. Thanks for taking my questions. I wanted to ask you about AI. In particular, I was wondering if you could discuss the business model for autonomous vehicles. And secondly, if you can give us an update on Doomy, your virtual assistant. How is the product developing and what sort of activity levels are you seeing? Thank you so much. Yes. We have invested in AI for many, many years. We believe we're leading in this sector, not only in China, but around the world. This enables us to do disruptive things like autonomous driving. It's kind of early for us to talk about business model because right now, our focus is to solve those technical problems first to make the autonomous driving fully autonomous. Our target is not to drive to self drive like in 90% 5% of the cases, but to really release the driver from the driver's seat. So this will take a couple of years. We will worry about the big model later on. Regarding to DoMe, it's tracking very well and especially for our speech recognition capability and natural language understanding capability. We have a DoMe function in the mobile Baidu and lots of people use it from there. But more importantly, on the homepage of mobile Baidu, we have a large microphone button that enables people to talk to mobile Baidu and get the search results both in text and in speech. And that has grown very dramatically over the past couple of quarters because of the accuracy of RSP recognition and we believe that this will continue to trend up in the future. Your next question comes from the line of Wendy Huang from Macquarie. Please go ahead. Thank you. My question is mainly on the O2O. You reported RMB16 1,000,000,000 GMV for this quarter and I record last quarter it was actually close to RMB15 1,000,000,000. It seems a small incremental increase quarter over quarter. So I just wonder if you're seeing any actually competitive landscape change that resulted in this kind of small addition sequentially. And also you mentioned about some new business model you're adopting for the normi in your prepared remarks. Can you elaborate that a little bit? How would this actually affect the net take rate and also the OTO revenue in the near term? Thank you. Wendy, the GMV did sequentially increase. As we mentioned earlier, our focus to provide the transaction services is really an integrated approach. I think on the front of the Oto Oro transaction per se, the business the GMV is growing healthily and solidly. We also mentioned earlier that we note that our market share for the OTOO service is expanding, so we're pleased with the results that we're accomplishing. And of course, at the same time, we're executing on the O2O strategy, building the momentum, building quality and focusing on returns of the promotional activities we put in. So the GMV number, I think, reflects a solid progress. And regarding to the take rate, I think for the existing core Noemi services such as dining and hotel and movie tickets, We'll continue to enforce the take rate. But for the newer verticals, especially for high ticket, lower frequency ones, we think advertising model is a better one. Your next question comes from the line of Min Chao from 86 Research. Please go ahead. Hi, good morning. This is Joanne Lin on behalf of Min. So I have two questions related to O2O. First, you recently announced a 0 commission policy for merchants of many verticals on Nuomi. And I'm wondering whether you will extend the policy to the core O2O categories such as dining and the movie tickets or at least lower the commission rate to keep competitive and whether such policy will impact your monetization plan O2O? And also, does it mean that your O2O strategy is now transitioning from subsidizing consumers to a more focus on recruiting merchants? And the second question is about O2 monetization. I'm wondering what is the current advertising model for Nuomi, YMI and Baidu, whether you have adopted bidding system for all your O2O assets? And if not, whether you will launch bidding system on O2O in the near future? Thank you. Hi. We just commented on the take rate. I think for some of the basic services, high frequency, those business those take rate arrangements have been established, but we are expanding our verticals to cover more of the O2O services. And for these ways, really because of the powerful integrated platform approach that we're taking, but I do have different angles to service our merchants and work with them. And so for the other ones that we do not intend or plan to take on take rates, and there are other ways that our merchants can work with us to promote their business. So the overall value proposition that Baidu really works with merchants sets us apart from other O2O players. And so I think for us to continue to expand further into wider coverage of the O2O services, we do have multiple tools to work with the merchants. Yes. Just to add, Local Express is short answer for auto monetization in addition to take rate. For some of the core verticals, take rate will continue to be there. But for others, the local Express is a better way to monetize and not only through Nuomi's own platform, but through the overall Baidu platform, including mobile Baidu and Baidu Maps. And the local Express is a fitting system. Your next question comes from the line of Robert Lin from Morgan Stanley. Please go ahead. Hi, management. Thanks for taking my questions. I guess in terms of net customer add, we saw about 32,000. It's higher than last quarter's quarter on quarter add. Had. Can we split what the contribution was from Loco Express? And I guess that's the ex Juno number. The second question, I think recently there was an announcement that we are doing cooperation with Alibaba in terms of Olympics advertising. Obviously, it's still benefiting both parties. So one big significant announcement for a while for the 2 companies. Can we talk about what formats and channels that we're doing these joint marketing efforts for? Thank you. We did have a net a very strong net add of customer base over the past quarter. A part of that is a result of the launch of the Local Express. We do have many, as we mentioned, about 200,000 customers sign up with us, and we launched the product in Q4 of last year and continue to refine the product. So as you see, when we account for online active customers, these are customers that spend with us during the past quarter. And so I would say, as you see, the net add because of these customers taking for Local Express, because they take advantage of the product, they start spending with Baidu and they would be counted as the online marketing active customers. We have many people signed up with us and that really demonstrates the potential of the base of customers that could really take advantage of the product and we'll continue to refine the product and drive further growth of Local Express. And Olympics is the perfect and customers. Alibaba, of course, is one of the more important partner and customers for us. We work with them and try to drive traffic to them through this kind of event. Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead. Thank you. A question for Jennifer. Jennifer, would you be able to shed color on the SG and A plan for 2016 in terms of what is allocated for user acquisitions spending on the logistics network, for example? Also when you refer to the variability of SG and A on a sequential basis through 2016, what are the events you refer to? And again related to SG and A and the ROI of this spend, are there any early data points in customer retention, etcetera, that you could share with us? Thank you. As I mentioned last quarter, we provided some colors and insights into how you should expect the SG and A expense to shape for the 2016. And that guidance continues to hold. Namely, we really started to kick off our transaction services efforts in the second half of last year, and we expect that would be the kind of norm momentum for us to continue to invest in this sector. Most of the investment on SG and A would go to customer acquisition, promotional events and cross selling opportunities, getting users to really take advantage and use the new vertical areas that we are developing. And so these are a bunch of variety of activities. And sometimes, we can take advantage of holidays to kick out campaigns or take advantage of certain product offerings to promote specific verticals. And for certain cities, we might focus on regional build up market positions. So whether it's vertical or regional, these would be where the promotional money would go to. We do have closer tracking of the data and continue to learn from our experience. We have ROI target for longer range and for every campaign, and the team focus very much on ensuring that, on 1, we continue to improve on the returns and customer retentions as we carry out these activities and also how we really enhance value proposition to our merchants and the users building more personalized building on the data and the So the O2O will continue to be an investment a significant investment area for us, but I think we're building great momentum and we'll continue on the positive trend. Your next question comes from the line of Ms. Bethany Wu from CICC. Please go ahead. Hi, good morning, management. Thanks for taking my question. Regarding O2O Business and AI to simply ranking, which part do you think will be granted with largest spending budget in 3 years to come normally on AI? And also, could management elaborate something on the top 5 categories in terms of your advertisers? Do you expect any structural change this year or a typical category to outgrow or annual growth, say, healthcare, e commerce, etcetera? Thank you. I think both we are right in the middle of the investment for O2O, and we also mentioned we see great future for autonomous driving, taking advantage of our technology accumulation over the years. The O2O is an important strategic area, and we will continue on that path to build. The driverless autonomous cars is in its early stage. The team are making testing, making technology improvements, making great progress. I think once the team hit certain milestones over time, budgets might go up. But I think at this time, as we look autonomous car driving is more longer term down the time from a horizon perspective, and O2O is right I think we're right in the middle of it. So I think both fronts are strategically important areas, and both areas carry significant potential just for simply from a just business perspective, disruptive opportunities that they create. So it's difficult to pin down the exact, but I think one is more near term, one is longer term, but and both are important. For the top verticals, we mentioned last quarter, as we look at the macro developments and how Baidu as a powerful platform penetrating into the various sectors in the economy, we do see very solid strength in the consumer and service verticals. And so if we roll up some of the sub verticals, we continue to see local services, retail, medical services, education and even financial services as our top sectors. Your next question comes from the line of Thomas Chong from Citigroup. Please go ahead. Thanks for taking my questions. I have two quick questions. First is about the recent move into the PGC area in online video. So should we think about Baidu is going to do it independently or it will be integrated into ITE in the future? And the second question is about other revenue. Given the fact that the paid subscription is on the rise, any color why it drops on a Q on Q basis? Thanks. So on your first question, iQIYI has PGC content and the recently spun Baidu Video, well focused on PGC too. I think video is a very large and fast growing sector. Baidu, overall, we will try to address all kinds of different needs and different content format through various Baidu products and offerings. And for other revenue, yes, you're right. Our subscription base continues to grow, and the revenue generated from subscription fees continue to rise. What's included in other services other revenues are all the non online marketing related services. So these include other user paid services and also includes, for example, content exchange or content sales of ITE's business that would be recorded as revenue. And for those kind of other items, they do move around, but I think there is no worry really on the subscription based revenue. It does continue to grow. Your next question comes from the line of Alan Halliwell from Deutsche Bank. Please go ahead. Yes, hi. Questions about Baidu Wallet. I was just wondering how we might want conceptualize the margin profile of the emerging payments business. I know Jennifer mentioned rising at operational costs attributable to transaction. Can you specify what the impact might be? Also curious as to what percent of Baidu Wallet GMV might be non Baidu O2O? And if you could characterize the frequency of use by the Baidu Wallet user? And then finally, just would love to get an update on the proposed management buyout of IgE, what approvals may still be required and what time line we might want to consider? I think the Baidu Wallet user base continue to grow, and we do take advantage of the consumption scenarios that happen on the Baidu platform and the majority of the transactions on Baidu Noemi and a growing part of other services are using the Baidu Wallet. So the Baidu Wallet is really built on top of the Baidu consumption scenario and help us build the data, the closed loop services for our customers. Within operating costs, our related transaction services expenses are going up. Part of that is, of course, the transaction for payments. There are also other operating costs like customer service, ground troops that helping doing the promotion. So it's doing wallet. The payment fee is part of the cost. But it's I think for us, it's we are building it majority within the Baidu umbrella, and that is valuable data for us as we build ancillary business and financial services, in particular. Those kind of data are valuable. With regards to your question on the management buyout for iQIYI, we do have a special committee that continues to work with the financial advisor as well as external legal counsels to assess the strategic options and also the various details related to the transaction. I think it's really up in the special committee's hands to make decisions and make assessments to the extent that we do have progress information that we are ready to share, we'll make it available to the investment community. Your next question comes from the line of Jason Helfstein from Oppenheimer. Please go ahead. Thank you for taking my question. This is Bo speaking for Jason. So basically, I have two questions. Number 1, I just want to follow-up a bit on the gross margin. So the gross margin come in a little bit lower than expected, pretty much away by the increasing investment on iQIYI and also the increasing tech. So just wondering if management can comment a bit on there any rationale behind how should we look at a long term trend over there? And second question, just want to reconcile a bit on the R and D expenses and your budgeting throughout the year, given that even on apple to apple basis, the expenses barely grow, right? Just trying to understand why how should we look at that as well? On the gross margin, a couple of moving items that I provided, some indication how you should expect the parts to move around the last quarter. And I think the ones that would move more meaningfully materially are operational costs and content costs. Operational costs relate to a lot of the cost for transaction services, as I mentioned earlier, and content cost is almost all related to iQIYI's investment in content. And for operational cost, I mentioned last time that last year in 2015, you would note that it increased by 75%, and we expect that to increase in similar pace very aggressively, maybe slightly moderately. Same thing for content cost. I think within gross margin, infrastructure buildup would have some impact on bandwidth costs. And as we grow the contextual business, a tag with traffic acquisition cost as a percentage of revenue might also edge up. And so I think these are all within our plan and targets, and these trends should have already past references that you can look at. For R and D expenses, on the Q1 year over year comparison, there are there is a slight increase excluding TNR. You recall that in the second half of last year, and particularly in Q4, we slowed down in our hiring. We tried to realign the efforts to the internal realignment to make sure our workforce is put in the best place for efficiency and productivity. And so that, as you see in Q1, might have some reflection in that. But having said that, R and D has been a consistent investment area for us. And as we talk about building the technology capabilities for autonomous driving and recently you do see that we announced that we're building the teams in both the U. S. And China, we will continue to invest in R and D capabilities. Your next question comes from the line of Jim Muenster from Piper Jaffray. Please go ahead. Hey, good morning. Just a follow-up question for Robin on the autonomous cars just so we fully understand is that the goal to create basically use a lot of Baidu Maps to improve the experience in China? Or is this an opportunity that you could export outside of China? Thanks. Yes. I think from a technology point of view, it's universal. It should if it works in China, it should work elsewhere in the world. Actually, China probably has the worst traffic situation and the most complicated situation that we need to handle. So right now, we are spending most of our time and effort on the China market. And while we also have testing cards in Silicon Valley, too. Like I mentioned before, I think this is still in the early stage. We are focusing on pretty much technology itself. And later on, we will worry about this model and which market to target. Your next question comes from the line of Jin Yoon from Mizuho Securities. Please go ahead. Hey, good morning guys. I apologize if this question has been asked before. It's kind of got on the call a little bit late. How much of your search revenues is 20 driven, given the fact that Nomi is pretty important to search? And going forward, is there a possibility that we may actually see kind of the O2O being up advertising being priced on a CPC model or a transaction model? Thanks guys. Yes. I think it's not a good idea to separate revenue contribution from O2O because we view this as the integral part. O2O is just trying to satisfy the user needs. We try to connect people with information and connect people with services too. And Oduo is one of the most important sectors for services. Right now, O2O has both the CDC model and the transaction fee or take rate model. But direct revenue contribution for search is still minimal. It sort of function more like a user feature that helps to attract user to the Baidu platform. They rely on us for everything from information to services. To give you a better color, about 10% of our search queries is related to local services and about 40% of the queries on map is related to local services. So this is a very significant part of user demand and we try to satisfy that first and worry about revenue later. Your next question comes from the line of Alex Liu from Daiwa. Please go ahead. Hi, good morning. Thanks for taking my questions. I just want to ask Robin, I think from a high level basically, what do you think about the search market going forward in China? I think specifically for the search advertising as a format comparing to other formats of advertising, for example, the social ads formats and the feed ads and native ads formats. So I think mobile is now already 6% of the total revenue. What do you think about mobile search ramp up specifically in the next 1 to 2 years? Thanks. Yes. We've been in the search space for many, many years and it's always pretty much traffic bound. Customers or advertisers can never buy enough amount of traffic for search because the ROI, the performance for them is so good. They always want more traffic from us. So to Baidu, we try our best, try very hard to satisfy users' needs so that users continue to depend on us to find information, to find services. So I think the business model for search will continue to be pretty much on marketing dollar basis. And it's just way better than any other advertising format available on the Internet or off the Internet for that matter. Our focus is really to provide the best user experience through technology, through product innovation. And you will see that the mobile search is very different from PC search right now and will continue to evolve over the next 1 to 3 years. Due to the time limit, our last question Thanks, management, for taking the questions, Robin, Jennifer and Sharon. I have some additional questions on Local Express. You mentioned about the customer ad. How is the revenue per customer look like comparing to your traditional search customers? And how big is its growth potential in terms of CTR, CPC and coverage ratio? And lastly, if you can elaborate how much revenue contribution do you expect in this year for Lokey Express? That's what we're very grateful. Thanks. Yes, Eric. We launched Local Express last quarter and many customers signed up. These customers are Nomi customers or existing Phoenix, NASA customers as well as new customers who signed up. Basically, I think the beauty of that is since with mobile and with more targeted locations, the traffic local traffic can be better monetized and serve the merchants as well. These are typically compared to the Phoenix Nest customers, a much smaller merchants. And I think their ad budgets as a result is not as high as the traditional search customers that you would have seen. And so I think we're in the early stage to monetize and help these merchants to take advantage of the products. Revenue contribution from Local Express is still small, but I think given the customer base and the enthusiasm that we see, I think this is a product that will bear a lot of potential. Early to say what the CPC CTCTR would be. I think we'll continue to refine the product and also educating the customers to use the product. Over time, we think it is going to be a very valuable product for both us as well as the merchants because they do have multiple ways to promote their products and services and not only through possibly not only through search, but also through many other gateways within the Nomi platform and within the map gateways as well. So I think for local Express, it's really early, and but I think we will work hard, and it bears a lot of potential. We are now approaching the end of the conference call. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.