Earnings Call: Q1 2015

Apr 30, 2015

Earnings release

Hello, and thank you for standing by for BeiDou's First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Sharon Ng, Baidu's Director of Investor Relations. Hello, everyone, and welcome to Baidu's Q1 2015 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our site 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 actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our Annual Report on Form 20 F. Baidu does not undertake any obligation to update any forward looking statement, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non GAAP financial measures. Our press release contains a reconciliation of 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. This quarter, we continue to drive mobile monetization to new heights as we build out our mobile ecosystem more fully. For the first time, mobile represented half of Baidu's total revenues, further reinforcing Baidu's industry leadership in mobile. We were able to reach this important watershed by innovating and doing things differently. Our track record proves that we chose the right strategy and tactics and that we are we executed depthly and decisively as we've navigated the mobile shift in our home market. Search is still about direct immediate expression of our user intent. We successfully leveraged this and the open nature of our platform as well as our extensive on the ground sales force to achieve this dramatic growth in mobile. And there is much more to come. As many users still just starting to agree to the power of smartphones and how it empowers them as consumers, the opportunities that mobile opens up are limitless. We see huge potential ahead for mobile marketing, online to offline and key select verticals such as healthcare, education and financial services. By leveraging our solid mobile foundation, exceptional technology advantage and proven operational experience. We are redefining the search box by going beyond returning information like websites, addresses and phone numbers to our users. We are now connecting users with services and enabling closed loop transactions. We are pioneering a different approach to the basic interface, creating more naturalistic, intuitive and convenient ways for people to perform search and delivering results that are more intelligently predictive and better matched to the needs of time and place. To fulfill our ambition, we are building our ecosystem by investing heavily in R and D, operating our own Baidu offerings like Nuomi Group Buy in, Baidu Takeout Food Delivery and Baidu Wallet. Partnering with and investing in best in class players like Chunar and Uber and working closely with platform partners across verticals on Baidu Connect. This is the right time for Baidu to seize the opportunity and we are moving boldly and quickly. Tectonic shifts create openings for forward looking forward thinking companies to really drive innovation and get in front of tremendous new opportunities and Baidu is ready to lead. Now for an update on our core search spend. The fundamentals of core search remain very robust. Mobile now having reached 50% of top line continues to be the main driver of revenue growth. Mobile Search, driven by robust traffic growth and improving monetization, again contributed the majority of our mobile revenue. We see much more growth ahead from our mobile marketing platform as traffic increases, infrastructure improves, ad targeting grows more precise and ad formats proliferate and become more diverse. Meanwhile, we continue to be pleased with our PC business, which continues to grow healthily. We again raised the bar in search by focusing on improving the user experience, making enhancements to our billing system and further pushing infrastructure development. In user experience, we've taken further steps to make search faster, more relevant, more immediate and more tailored. This quarter, we upgraded instant search by improving speed and relevance. We made our search results more visual and personalized by dramatically increasing the coverage of images in paid search page fills and saw a marked increase in click through rates as a result. We are taking a vertical approach to the powerful click to action buttons, which provide unambiguous direct ROI to our customers. For example, in addition to the existing click to call, click to chat and click to download mobile ad formats, In healthcare, we are now offering click to consult and click to appointment. In education, we offer click to register for class and click to lesson to a course. And in restaurants, we offer click to book a table. We will be extending this vertical specific click to action buttons to financial services, travel, transportation and courier services. In February, we made search even more local by further targeting geographic areas for bidding from over 300 cities in China to bidding by distance proximity. We are rolling out distance proximity bidding in phases and the early response has been very encouraging. We think that customers who use distance proximity bidding have a higher propensity to spend on mobile and enjoy higher ROI. We are attracting a new incremental local customer base as our marketing offering grows more targeted and more local. These merchants are thinking mobile first and we offer easy to use tools and infrastructure as well as compelling mobile marketing solutions to meet their needs. Earlier this month, we began our annual nationwide search engine marketing campaign, our largest yet, spanning 500 cities to reach SMEs and local merchants and further penetrate lower tier cities. Mobile infrastructure has come a long way over the past 2 years, with Baidu playing an active role in pushing the development. Over 2 years ago, we recognized the importance of mobile infrastructure to the user experience. Early on, we made increasing the number of mobile optimized landing pages one of the key performance indicators for our sales force. We also provided free software to our customers to convert PC pages to mobile optimized ones. And we adjusted our algorithm to factor in mobile landing page quality in our search rankings. Now nearly all of our customers have mobile landing pages, but we're not stopping here. The next step is to continue to improve the overall landing page quality and really unlock the value of mobile by enabling services and transactions on Baidu. Now for progress in mobile and O2O. In Q1, mobile search Baidu Mobile Search reached 600,000,000 monthly active users, up from 540,000,000 in the previous quarter. And in mobile maps, we hit 270,000,000 monthly active users and we continue to occupy the top slot in app distribution in China. The scale and reach of these assets are the foundation of our mobile platform and mobile Baidu search app and mobile maps serve as powerful gateways that not only support the growth of our newer O2O offerings such as Nomi and Wallet, but also enable closed loop transactions. Maidu products share rich, diverse resources within our platform and across our ecosystem. For example, in Q1, 25% of normie movie tickets transactions originated from and were completed on mobile Baidu and Maps. In March, over International Women's Day weekend, we ran a successful movie ticket marketing and promotional campaign. Nearly 15% of all online and offline movie tickets sold in China on March 7 flowed through Baidu Nomi. With nearly 70% of those transactions completed with Baidu Wallet. The campaign educated users on discovering O2O services through our gateway products and demonstrated the ease of buying movie tickets through Baidu, driving user adoption for both Nomi and Baidu Wallet. Speaking of Baidu Wallet, it now boasts nearly 26,000,000 connected accounts, where users have both linked a bank card to an account and spend at least once with Baidu Wallet. Baidu Connect now has over 700,000 merchants. We continue to build out the infrastructure for this platform more fully and work more closely with verticals to tailor our offering. A great example is Coollearn, the online arm of New Oriental Education. Koolearn students on average spend RMB1000 per transaction. Baidu worked with Koolearn to drive leads through our marketing platform and enable a closed loop transaction through Baidu Connect. Over the past month, Koolearn tripled monthly revenue as compared to October last year when they launched their Baidu Connect account. Our takeout food delivery service was launched last August. In less than 9 months, we grow to over 70 plus cities and we believe we are already the leader in nearly half of those cities within the working age demographic by GMV, including Beijing, Hangzhou and 5 additional provincial capitals. And we are the leader in 16 cities overall that also include Beijing by GMV. Takeout food delivery not only complements our group buying services, but also leans on our technology advantage. The key sustainable edge in takeout food delivery is scale and optimizing logistics and resource allocation. Our technology platform pulls the resources of our maps, data and software capabilities. Baidu takeout food delivery offers a differentiated experience by targeting the working age demographic, higher quality licensed restaurants and faster delivery time. O2O addresses the enormous opportunity in local and it's still early days. The majority of consumption and transactions takes place locally and offline. With the rise of mobile, connecting local services from online to offline becomes possible. Bringing services online opens up information transparency and allows for better matching of supply with real time demand. That means increased efficiency in resource allocation. For example, with restaurant industry, a multi trillion RMB industry in China, behind only real estate and automotive in market size, More than half of seats are left empty daily. Only 1% of reservations are made online. And online takeout food delivery represents only a low single digit percentage of overall restaurant GMV. On average, 85% of movie theater seats are unsold and more than 40% of trucks on the road carry no merchandise. By connecting people with services, Baidu is providing users with convenience and choice and enabling merchants to fulfill real time demand, which can drive incremental revenue and improve capacity utilization. This is a long term strategy and ecosystem build out for Baidu. We still have a lot of work to do, but the results thus far are very encouraging. We will continue to run online and off line marketing and cross product promotional campaigns for mobile Baidu, Maps, Noemi and takeout food delivery in the coming quarters. This campaign will educate users about new services that can be discovered through our platform and foster the right user behavior. But connecting people with services goes beyond local. Our gateway position, our focus on data and technology, our enormous accumulated user base and customer base, all combined to put us in a unique position to truly transform major service verticals like healthcare, education, financial services, which in aggregate represent nearly 20% of China's economy. Baidu has an opportunity to play an impactful role in transforming each of these sectors. In healthcare, we are helping to better match patients to the right doctors. In China, people sometimes line up for days to make a medical appointment to see a doctor who might not be the right one to treat their condition. Baidu Doctor, which we launched in Q1, addresses this situation and supports online registration. The platform has brought nearly 700 hospitals and over 25,000 doctors across 3 provinces to the platform. We will work to expand the service in the coming quarters. We are also making education more accessible by providing an online education platform and funding where appropriate. Our online education platform, Chuangue, which we acquired last August, already partners with nearly 7,000 educational institutions, providing over 25,000 courses to millions of registered users. In financial services, we launched a pilot program to offer consumer loans or consumer credit to lower the barriers to access for potential students. A few words on Baidu Research. Our research program, Mississippi's 3 labs in Beijing and the Silicon Valley, continues to yield great results. In addition to advances in our deep speech approach, which uses deep learning to deliver the highest accuracy in English speech recognition in the industry to date. We are making great strides in vision as well. In January, Baidu Research announced industry leading results achieved by the Baidu Deep Image Image Recognition System and our systems continue to improve. IQIYI continues to perform very well and grow its Q1 top line revenue over 80% year on year. It continues to offer a superior user experience among China's Internet video sites and we remain highly committed to and supportive of iQIYI. We are clearly excited by the opportunities ahead of us and we have seen we have been selective about choosing the right ones. Baidu's strategy is very focused and we do regularly review our portfolio for effectiveness and we have in the past and will continue to prune our portfolio and sunset products that do not meet our expectations. In closing, Baidu is redefining the search box and redrawing the boundaries of our addressable market. We are working hard and investing aggressively to fulfill our vision and tap into our platform's true potential. With that, I will now turn it over to Jennifer for a look at our financials. Thank you, Robin. Hello, everyone. In Q1, we again saw dramatic growth from mobile and continue to see tremendous opportunities on the horizon. We are executing our investment plan and closely tracking and monitor trajectory, scale and conversion metrics to measure return. While investments in some of the newer products such as Nomi, takeout food delivery, Wallet and Baidu Connect are still at an early stage. We're pleased with the progress that we have made thus far and we'll continue working hard to ramp up these services in the coming quarters. In Q2, we'll continue our marketing and promotional spend to take advantage of springtime travel and various consumer oriented shopping days. As we've said before, sales and marketing will be an area of particular focus. We'll be optimistic and spend will vary from quarter to quarter. IQIYI continues to be a highly strategic asset with attractive long term growth prospects. We'll continue to invest in content and spend where needed to procure high quality licensed content and develop self produced content to support iQIYI's growth. Content cost will vary quarter on quarter. The fundamentals of our business are very strong and the growth opportunities ahead for Baidu are vast, but also very much within reach. We're working hard and moving quickly to execute on our plan. In addition to leveraging our existing platform, we'll continue to deploy the necessary resources to further build out our ecosystem and create long term shareholder value. Now moving to the financials. All monetary amounts are RMB unless stated otherwise. For the Q1, total revenue was RMB12.7 billion, representing a 34% increase year on year. Over the Q1, Baidu had approximately 524,000 active online marketing customers, a 17% increase from the corresponding period in 2014 and flat from the previous quarter. Revenue per online marketing customer for the Q1 was RMB23800, a 14% increase from the corresponding period in 2014 and a 10% decrease from the previous quarter. Traffic acquisition costs as a component of cost of revenue in Q1 were CNY1.7 billion or 13.5 percent of total revenues compared to 12.4% in the corresponding period in 2014. The increase was mainly due to increased contribution of contextual ads. Bandwidth and depreciation cost as a percent of revenue in Q1 was 6.7% and 4.6%, respectively, compared to 6.8% and 4.5% in the corresponding period in 2014. Content cost as a component cost of revenue was CNY608 1,000,000, representing 4.8% of total revenues compared to 4.1% of the corresponding period in 2014. This increase was mainly due to iQIYI's increased content cost. SG and A expenses in Q1 were RMB3 1,000,000,000, an increase of 47% year on year. The increase was primarily due to an increase in promotional spend for mobile products and services. R and D expenses in Q1 were CNY2.3 billion, an increase of 79% over the corresponding period in 2014. The increase was primarily due to an increase in the number of R and D personnel. Share based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to CNY291 1,000,000 in the first quarter from CNY169 1,000,000 in the corresponding period in 2014. SBC increased due to more shares being granted to employees. Operating profit for Q1 was RMB2.2 billion, a decrease of 9% over Q1 2014. Total headcount on a consolidated basis, including invested entities, was about 46,800 as of the end of Q1. This represents an increase of 1% compared to the end of Q4 last year. Income tax expense was CNY541 1,000,000 for the Q1. The effective tax rate for the Q1 was 20.7% compared to 15.1% in Q1 2014. The higher effective tax rate reflects that some wealth generating entities in the group cannot be consolidated for tax purposes under PRC tax law and the expiration of a preferred tax license for 1 of our subsidiaries. For the remainder of the year, we expect our effective tax rate to be around this range of 20%. Net income attributable to Baidu for Q1 was CNY2.4 billion, a 3% decrease from the corresponding period in 2014. Basic and diluted earnings attributable to Baidu per ADS for the Q1 amounted to Baidu6.76 and Baidu6.76, respectively. Net income attributable to Baidu excluding share based compensation expenses, a non GAAP measure for Q1 was CNY2.7 billion, a 1% increase year over year. Basic and diluted earnings attributable to Baidu per ADS excluding share based compensation expenses, both non GAAP measures were RMB7.62 billion and RMB7.58 billion respectively. As of Q1, the company had cash, cash equivalents and short term investments of CNY58 1,000,000,000. Net operating cash inflow and CapEx for the Q1 were CNY2.8 billion and CNY1 billion, respectively. Now let me provide you with our top line guidance for the Q2 of 2015. We currently expect total revenue for the Q2 to be between RMB16.365 billion and RMB16.75 billion, representing a RMB36.5 to 39.7 percent 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 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, Your first question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question. Good morning. Thank you for taking my questions. Just two questions. The first one is about the Internet landscape in general. We have seen some consolidations among certain verticals in the Internet landscape. So just wondering how that could affect the positioning of a search engine And how Baidu could cater for the changes in the industry? So that's my first question. And then secondly, besides what disclosed in 20 F, just wondering if you could share a bit more color on some of your key advertising industries in terms of contribution and perhaps more importantly, what are some of the opportunities and challenges you have seen in some of your key advertising industries? Thank you. And yes, I'll take the first question and Jennifer can talk about the second one. Yes, we also noticed that there are some consolidation in certain verticals. But overall, I think the Internet is especially the mobile Internet is still in its early days. There will always be new players coming in and old players some of them will fade. Baidu position as the gateway to mobile Internet stays strong. Our mobile Baidu app, our Baidu Maps continue to hit new highs both in terms of number of page views, number of searches, daily active users, monthly active users. So we are quite confident that our vision, which is in addition to connecting people with information, we are connecting people with services. There are lots of, lots of verticals that we can connect to this. Some of those verticals we decide to do it by ourselves, such as the takeout food delivery service or movie tickets. But for most of the verticals, we will choose to work 1 or more of those players. And we believe we will continue to be one of the most important channel for those service providers, if not the most important channel. And we will be able to work with many, many verticals, not just 360 verticals, maybe 3,600 verticals and users will benefit. I think the user experience for start from one place and get all things that's possible is the best user experience. Plus, we have the best voice recognition, image processing, natural language understanding technologies, not only users can type in text, they can talk to our apps and they can take pictures and initiate queries, All those kind of conveniences add the attractiveness of our platform and we are quite confident this will be the main form of connecting online with offline services. And with regards to your question, Eddy, on the advertiser base and the future opportunities, As of last year end, you know that we have over 800,000 customers. A lot of the customers have been really doing business with us throughout the years. And I think the large customer base has been built over time and predominantly over the majority of our lifetime that is PC dominated. And with now mobile becoming a much more imposing trend, these advertisers already recognize the opportunity and are fully embracing the opportunity that mobile brings. So as you have already seen, much of the existing customers are spending also very investing heavily on the mobile side. And what mobile opportunities really brings for these existing customers are some of these customers can really take incremental opportunities on the mobile side and increasing their overall spend and the contribution to the Baidu platform. As an example, if you look at some of the B2C business services such as business service, financial services, travel and education, these sectors are growing their spending on Baidu very, very nicely. As an example, in Q1, if we look at the top sectors, other than the familiar ones like medical, education and travel, we see financial services and business services becoming part of the top five also. So that is encouraging with existing customers. And with mobile, it really brings a lot more new customer base and advertiser base for us. As we mentioned earlier in Robin's comments, developing local merchants as we develop our technology and roll out the infrastructure platform and also with the data points that mobile can bring to us, we can help the advertisers with more precise targeting and that helps even smaller advertisers to be able to spend on So I think with as we look at the advertiser base, existing advertisers really continue to see the huge value that search engine brings. At the same time, new customers can start to take advantage of the platform, the power of search because of mobile. And so as we look at past and future opportunities, I think the customer base by Ducommun service continues to be very huge and promising in the future. That's very helpful. Thank you, Robin and Jennifer. Thank you, Heidi. The next question comes from the line of Alan Halliwell from Deutsche Bank. Please ask your question. Thank you very much. Regarding the relatively robust 79% growth in R and D, I was just hoping to find out how much incrementally relates to new initiatives and connected devices, how much to app development and what other areas of growth may I have not mentioned. I would assume that R and D would grow maybe very moderately as a percentage of revenues. We don't seem to be tracking that, so I'd love to get an update around how that relates to the full year. And then any further color on some of the e commerce initiatives, Baidu Mall and others that you've been out? Thank you. Alan, on the R and D expenses, we commented last quarter as we were I was trying to help providing some lights on the whole year spending. Throughout Baidu's history, we're very committed to invest in R and D capabilities. And R and D extends as a percent of revenue continue to edge up. That reflects our commitment to R and D and our focus on technology. Over the past quarter, I think we net added about 1,000 headcounts in the R and D workforce and we already have a large workforce and these ads are spread throughout the different functions. Within the Baidu R and D infrastructure, it's really a very powerful house. You have really the team that does Baidu research leading into the cutting edge world class technologies. And we have the workforce to really continue to refine our search technology as well as the monetization power. And for new initiatives such as medical, financial services and education, that leverages on the existing platform and it will be replanting only a small incremental spend. But I think this is the commitment to R and D is not like one project focus. It is Baidu's long history of committing to technology. And frankly, if you look at the absolute dollar spend for Q1 compared to Q4, and that is consistent with prior year trends. And regarding to e commerce, the overall market is still growing very quickly and evolving very quickly. Mobile e commerce has shown some new characteristics that's different from the desktop e commerce. Baidu Mall is really an advertising oriented model that we can aggregate all kinds of different e commerce players and drive traffic to them. So it's although it's a new initiative for Baidu, it's very consistent with our enabling e commerce and driving traffic to our partners. Thank you very much. The next question comes from the line of Dick Wei from Credit Suisse. Please ask your question. Hi, good morning. Thanks for taking my questions. Looks like we got pretty good progress in food delivery and ticketing area. I wonder for other areas of O2O e commerce like real estate or secondhand car or like cleaning services, What is kind of our plans in those kind of other e commerce area? Are we going to be more heavily involved? Or we will be picking into some partners or we just let the we're just focusing on advertising with some of the players in the space. I'm not sure if there's anything you can add some color on. Thank you. Yes. Dick, our O2O strategy really has 3 layers. The first one, the internal one is online operated services like you mentioned the ticket out for delivery and movie ticketing. And the second layer is for companies that we will have typically a stake either minority or majority stake and we will be able to work together with them in a very tight fashion to integrate those services into our native apps. We invested in companies that do secondhand car or other verticals like you mentioned. But we've been selective on those. The 3rd layer is really the majority. We don't need to have equity relationship with those companies, but we are equally happy to work with those companies to integrate their services into our platform into mobile Baidu and Baidu Maps, so that our users are served and those services get customers and get traffic. So we are very open and we provide all sorts of collaboration opportunities for the overall mobile Internet ecosystem in China. Got it. Maybe just a quick follow-up question. I think Baidu Wallet we have got like 26,000,000 users. I wonder what's the company plans, say within like say in 2 years' time? Like what kind of target the company has maybe in terms of like user number or in terms of maybe the non Baidu or off platform transaction or offline Well, I think the 2 fundamental issue is connecting people with services. And in order to finish a closed loop transaction, wallet is very necessary part. So in that regard, we've been very aggressively pushing the adoption of Baidu Wallet. But having said that, this has been an early stage development for connecting people with services. There are lots of lots of things that we need to do to really complete those closed loops. Wallet is probably the last part of the closed loop transaction, before that we need to figure out how we direct user queries to the necessary service providers and how we integrate those services seamlessly so that users are best served. There are lots of things we need to worry about and we will really examine the current market condition, competitive landscape and we will selectively to decide where to invest more from time to time. But yes, this is a very important part of our overall plan. Okay, great. Thank you, Robin. Thanks. Your next question comes from the line of Alicia Yap from Barclays. Please ask your question. Hi, good morning, Robin, Jennifer and Sharon. Thanks for taking my questions. I have a question regarding the active customer growth. So you added 78,000 net add for the active customer this quarter, also grew on a flat sequential basis despite a weak seasonality. How should we read into this? So can we assume that your effort of cleaning up and verifying the accounts and putting higher quality requirements over the past one and a half year is now largely down? And should we expect a similar growth rate on the customer ad counts going forward? And does any of these 700,000 Baidu Connect accounts contribute to the active customer number in the Q1? Thank you. No. The active online marketing customers are really advertiser market advertising customers that does online marketing services with us. So the Baidu Connect accounts, those customers are not included in here. And so sequentially, I think we had about 1,000 net customer add Q1 compared to Q4. Yes, I think that you're right in saying that at one hand, we put in good discipline to make sure that we have high quality customer base. We continue to make that a priority to make sure that lower quality customers do not really show up on Baidu's platform. At the same time, there is a vast customer base that's out there for us to tab and that is the marketing effort that we are currently conducting nationwide and we continue to see that with the power and extension of our platform much more online marketing customers can be brought on our platform. So we will continue to develop the customer base. The customer potential is big, but at the same time, we also want to ensure quality and that is an ongoing process. So I would say to the specific question on that, there is no end to how you ever ensure that there is continued effort to make sure that there is high quality customer base. And the customer base is dynamic and the platform, the products, the services that they can conduct continues to be dynamic and we'll keep a close eye on it. But we're very confident that the customer base can grow and it's because of the mass opportunities out there. Okay, great. Thank you. Your next question comes from the line of Alex Yao from JPMorgan. Please ask your question. Hi, good morning, everyone. Thank you for taking my question. I have a question regarding the mobile ad services. So we understand a meaningful portion of the PC advertising revenue is from non search products such as Baidu Union, the affiliate network and 1, 2, 3. Just wondering what is the development of the similar non search ad services on mobile? And what kind of the monetization gap is there for these mobile services versus PC? Thank you. I think similarly on the mobile front, we have affiliate programs that show display ads or other form of advertising properties not owned by Baidu. These are at very early stages. The monetization capability right now is relatively low. And of course, we see a lot of growth potential here. We see opportunities that we can come up with interesting ad formats that really related to the context both in terms of formats and content. So going forward, we expect very dramatic growth of those kind of areas. But right now, it's a very low base. Thank you. Your next question comes from the line of Piyush Moryavi from Goldman Sachs. Please ask your question. Thank you for taking my question. How do you determine which verticals you'd like to get into? And how would you be leveraging the resources across all of your subsidiaries? Yes. We cannot afford to get into too many verticals. So we have to select them very carefully. The basic criteria is frequency, because we run major gateways like mobile Baidu and Baidu Maps. People use our services on a daily basis, many times actually, any day. There are certain verticals services that people use it on a more frequent basis. And we like to integrate those services more tightly with our gateways. Therefore, we need to own those services. You've seen we have done a group buying movie tickets and take out food delivery. Those are high frequency activities in terms of consumption and we decide to do it by ourselves. Right now, I think pretty much all the areas that's high frequency and we intend to get in, we already got in. So we do not expect to add a lot more of those owned and operated vertical services. Thank you. Your next question comes from the line of Ming Chow from 86 Research. Please ask your question. Thank you very much. I want to ask this very latest incident, There's some news about the PHICC, their action towards the using Baidu search. We understand it's a negotiation process. Maybe could you update us on that? Is that a concern? Thank you. Yes. I think, Ming, as you mentioned, I think when it comes to contract signing with customers, there are specific issues that we deal with the customers. I would say the specific incidents you are referring is by far already finished and behind us. And I think if you look at our Q2 forecast, as we indicated, that reflects our current view, the best view. And so I think in just obviously, there is in all the customers we service, there will be different issues and that we talk to our customers and engage with our customers. I don't think the particular issue you mentioned, I would say, is behind us and moving forward, it's not an issue for us. Thank you. Your next question comes from the line of Chau Wang from Nomura. Please ask your question. Hi, good morning. Thanks for taking my question. I just wonder for those key advertising categories, do you have a sense that how the ROI on mobile is and how does it compare to the ROI on PC side? And also for this financial services category, are they mostly a brand ad from the traditional finance institutions or more performance based ad from the Internet finance companies? Thank you. What's your first question? Sorry. Mobile ROI. Okay. We actually manage the ROI so that it's roughly the same on mobile and desktop. We use price as a leverage. We constantly monitor the performance for ROI for our customers and advertisers and we make sure they get good value out of those traffic, clicks and conversion. And with regards to the financial services, I think it's a little bit of both, but I would say majority of these are really the brand companies. They come to our platform to really sell their financial services, insurance and also investment vehicles. Customers such as Ping An, Xinye, Zohang, Taiping Yang, these are really high quality customers and we're very happy to see the sector grow. Thank you very much. Your next question comes from the line of Thomas Chong from Citigroup. Please ask your question. Hi, good morning, Robin, Jennifer and Sheryl. Thanks for taking my questions. I have two questions. The first question is about the long term competitive landscape regarding performance based advertising as we see Tencent has already started doing these new advertising models? And my second question is about the second half outlook. Given we see the revenue reacceleration in the second quarter, how should we think about the Q3 and the 4th quarter revenue growth? Thanks. On the performance based advertising, I think Baidu dominated the market for many, many years and we expect to be to stay in a dominating position for a very long time. We believe that our platform either mobile Baidu or Baidu Maps or other Baidu properties provide the best scenario for customer for users to be converted into customers. And time and time again, it has been proven by hundreds of thousands of customers. And most of the Internet companies who are very, very performance sensitive spend most of their advertising dollar or marketing dollar on our platform. For other companies who also run ads on their properties, I think those are pretty much brand oriented instead of performance oriented. So there's still a big difference between us and the rest. And I think we you know that we provide 1 quarter's guidance. Too early to comment on the second half of the year. But I think the one thing I can say is the fundamentals is very robust and we continue to see many areas of monetization effort and customer base that we can drive the future growth. Thanks Wang and thanks Jennifer. I will get back to it. Thank you. The next question comes from the line of Chi Sang from HSBC. Please ask your question. Good morning. Thanks very much for taking my question. I just had a question on SG and A. I mean, you're spending a lot of SG and A. You're really seeing a lot of success with that in terms of your O to O efforts. I was wondering how you sort of characterize and how you might allocate your SG and A into things such as New Army and Baidu Connect wallet and delivery? Thank you very much. Obviously, we have very key strategic focus. And I think on one hand, our key gateways such as mobile Baidu and Baidu Map, these are pretty solid entry points to connect and synergize with our other new initiatives such as takeout food delivery, such as Baidu No Mi. So I think the advertising spend as we allocate for 1 is it has to be a strategic focus. And also at the time of those SG and A expense to occur, there has to be a product readiness. At the same time, there will be optimistic opportunities that whether it's a seasonal holiday or consumer events that we can take advantage of. So you should expect that SG and A expense vary quarter on quarter. At the same time, as we deploy these resources of advertising efforts, I would I commented in the past and a lot of the effort will be spending on the promotional activities to drive these new products and user adoption. And we closely monitor these ROIs and tractions. And as you noted already that we are gaining great traction and we're pleased with the progress and we'll continue on this path to exercise discipline and really have a very focused approach to SG and A. Thank you. Your next question comes from the line of Cynthia Ng from Jefferies. Please ask your question. Good morning. Thank you, Robin, Jennifer and Sharon. My question is on the Baidu Connect. Can management provide any feedback on Baidu Connect in terms of conversion ratio of traffic into orders for the merchants? And are these merchants also bidding for keywords? And if not, do you expect them to be bidding for keywords and place advertising search advertising budget on Baidu in the future? And related to that, the Baidu Mall strategy, what is the differentiation of Baidu Mall versus other e commerce players or platforms? Thank you. So on Baidu Connect, the conversion has been very encouraging. I've given you examples during the prepared remarks. There are lots of users or accounts or customers using Baidu Connect. They basically provide more closed looped or socially oriented features on the Baidu mobile Baidu app. So the conversion is definitely better than before. Before, I mean, a simple website. But it's sophisticated mechanism. Different customers use it at different level. Those who use it to a very advanced stage will have better conversion. Those who use it at a more basic stage will also see an improvement over their previous version, but they may not be able to close the loop. Our native app yet. I think this pretty much independent from their app budget. Some of them spent money to promote their sites on smart gateways. Some of them have not, but I believe once they are hooked, they see the performance, they will be able to convert to our customers. And for Baidu Mall, it's really an aggregation of those name brand that users can trust and have a good selection of quality goods. That's the basic characteristic and of course we can drive traffic to them. Thank you. Your next question comes from the line of Natalie Wu from CICC. Please ask your question. Hi, good morning, everyone. Thank you for taking my question. Just one follow-up question on the mobile revenue. Firstly, congratulations on the over 50% mobile contribution. But can you give us some color on the mobile revenue contributions from those O2O initiatives, for example, ticket sales, road delivery sales, etcetera? And can you update us your current mobile CPC, RPM level as well as mobile traffic relative to PC? Thank you. The mobile revenue that we currently are generating are predominantly search related. For the O2O side that is really to drive the transaction, So that doesn't get categorized as online marketing revenue. And as you know that our O2O initiative is focused on user growth and also the GMV transaction. And so that really does not account for as a mobile as our mobile revenue. I think your question is related to mobile monetization. I don't think CTC itself is representative for monetization power. If we look at the overall monetization capabilities on mobile, it continues to narrow the gap versus PC. The trending is encouraging and going smoothly and we'll continue to spend effort to narrow the gap. And we are very confident about the mobile monetization power in comparison to PC. At the same time, obviously, the mobile traffic continues to grow as a percent of the total traffic. And overall both the monetization trend and the traffic trend are as I mentioned very robust and healthy. Your next question comes from the line of Eric Yuan from Blue Lotus. Please ask your question. Mr. Eric Wen, your line is open. Please ask your questions. Hi, good morning. Thanks very much for taking my question. Good morning, Jennifer and Romy. I just have some housekeeping questions. Eric Wenn, your line is open. Please ask your question. Hello. Can you hear me? Okay. We can hear you, Eric. Please go ahead. Okay. Thank you. I just have some housekeeping questions. One is your bandwidth cost seem to went up spike up this quarter. Can you Can you hear me, sorry? Yes, Pete. Yes. My question is just about the bandwidth costs that spike up this quarter. Is there any one time reasons that lead to that cost increase? And growth profile of iQIYI literature and music in your other revenue line? Thanks. Yes. I think bandwidth did increase a bit this past quarter, iTE's business is growing nicely and their business growth and user traffic growth occupies bandwidth cost as you understand. In the other revenue line, yes, as you rightly noted, these are, I would say, non online marketing related revenue and the contributors are predominantly ITE and the other services such as music and online reading. I think there is no they continue to grow. These are smaller part of the oral business. And I think the main part is ITE, the subscription membership revenue growth and that continues to track very nicely. Thanks. Your next question comes from the line of Ella Ji from Oppenheimer. Please ask your question. Thanks. Just a quick question. Can management provide us an update of your total OpEx budget spending level for the year on a full year basis including for example SG and A, content cost and attack? I think I provided the ballpark outlook last quarter in our call and that remains the same. There's no additional updates. Got it. And then a quick follow-up relating to iQIYI. I think you mentioned the revenue growth is around 80%. And this quarter the content cost is up around 55%. So it seems like you are making some nice progress in terms of moving towards less loss. Is this trend sustainable for the rest of the year? I think you should look at iQIYI's top line and maybe the content cost separately. They do not necessarily match on a quarter over quarter basis. IQIYI's general business continues to grow very nicely and we're very pleased to see that. At the same time, I mentioned last quarter, content cost is a strategic asset for ITE and you should expect that overall content cost to step up. And I mentioned also earlier that content cost can vary very much quarter over quarter, depends on what kind of program is brought online and the content cost and because it's amortization based will start to trigger. So you should expect content cost to vary quarter over quarter, but I did give you the outlook for the whole year and that will remain the same. Thank you, Jennifer. Your next question comes from the line of Wendy Huang from Macquarie. Please ask your question. Thank you. Just want to get more color on the SG and A given the different dynamics at industry and company level. So we have seen actually handset shipment in China actually declined recently. And previously, you actually guided the mobile installation costs to be flattish year over year in dollar amount. So will you adjust budget given the industry change? And also I think your cooperation with Uber and other private car companies was really announced after you made that RMB 5,000,000,000 kind of the budget guidance a quarter ago. And also given the recent R and D cost surge, so how likely do you think that you may spend up more than RMB 5,000,000,000 for the whole year? Thank you very much. As every company does, you do have a plan as you try to manage the companies with its strategic focus and execution resources. As mentioned that as we're looking forward for this year, the new products we push such as Baidu no Mi, takeout, food delivery, a lot of these and movie tickets, a lot of these relates to marketing spending and that would be very much promotional effort focused. And that is not the kind of channel spending that you used to see. And for this year, majority of the SG and A expenses will be incurred on the promotional efforts to drive these products adoptions and among users and also to make sure that there is synergy among cross sell between these products. There is I would say, obviously, we manage the SG and A expenses as a whole group category. There is no specific budget just for channel and the resources can be deployed depends on the situation, depends on competitive landscape and also depends on how the market is evolving, user behavior is shaping and also products that get ready. So it is managed dynamically. But from the whole year's perspective, the guidance that I provided last quarter for SG and A continues to hold. Okay. Thanks, Jennifer. 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.