Hello, thank you for standing by for Baidu's analyst conference call. At this time, 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, Director of Investor Relations. Thank you.
Hello, everyone, thank you for dialing in to our analyst conference call. The press release was distributed earlier today, you can find a copy on our website as well as our Newswire services. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions in 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. 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, thanks for joining today's call. A few hours earlier, we distributed a press release to revise our second quarter revenue guidance. Baidu's commitment to delivering the best user experience possible is the company's single most important value principle that will drive our long-term success. Over the years, Baidu has proactively taken considerable steps to keep our platform safe and trustworthy by launching customer verification programs such as +B and user protection programs. More recently, we have proactively implemented numerous measures related to stricter customer requirements, reducing sponsor links, and upgrading user feedback and user protection mechanisms, which go above and beyond the requests of regulators. We know this is the right thing to do, these efforts to enhance user experience will be ongoing and continuous. We must never lose focus on prioritizing the user experience, even if revenue is sacrificed over the short term.
The revision in our second quarter guidance mainly reflects the short-term uncertainty surrounding the scope, timing, and rollout of regulatory review of medical organizations. Over half of our medical customers temporarily reduced or delayed spend on our platform while awaiting clarity, verification of regulatory requirements, and submitting the necessary documentation for qualification. These are high-quality customers who would likely be compliant with the new regulations and are looking for a swift review so that they can resume normal operations. Baidu is also assisting these customers with compliance to advertising regulations related to website content, online consulting formats, and marketing content. While we do not have clear visibility on the duration and scope of the regulatory review, we have observed a gradual recovery of spend from these customers. We have complete confidence that the customer spend will recover once regulatory requirements and complications are clarified and settled.
Healthcare, while under development and undergoing regulatory review, is a vibrant sector with government support and is vitally important for China's future. Healthcare will always be an important sector in China and will remain an important vertical for Baidu. Heightened regulation will be good for the sector, for Chinese citizens, and over the long run, for our platform. We also reduced the number of sponsor links across the platform, an effort that went beyond the requests from regulators. This measure impacts revenue over the short term, but enhances user experience and benefits Baidu over the long term. We service a wide range of verticals, and Baidu provides a strong, unique value proposition in connecting users who seek information and services with high-quality, qualified customers who want to be connected to those users.
Our long-term focus is further enhancing our value proposition by extending our offering to transaction services, providing a seamless transaction to our users and integrated solutions to our customers. Our industry-leading efforts in artificial intelligence and autonomous driving will create tremendous value, transforming traditional industries such as financial services and transportation, and enhancing people's daily lives. The long-term outlook for Baidu remains very positive, and we are confident and excited about Baidu's future. That concludes our prepared remarks. Operator, we are now ready to take questions.
Thank you. Ladies and gentlemen, the question and answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. The first question comes from the line of Natalie Wu from CICC. Please go ahead.
Hi, good morning, gentlemen. Thanks for taking my question. I have two questions here. First one is, does the change also reflect the latest removal of financial product advertising, such as precious metals and foreign exchange transactions, or just healthcare? Second is, if I recall your last earnings revision in 2008, this trend also happened in the mid-quarter. You revised down revenue by about 30% at that time, while net profit that quarter went down by 20%. Should we expect similar scale of net profit impact this time? Thank you.
Thank you for your question. It's Jennifer Li, the CFO of the company. With regards to the first question, the guidance we provided is a comprehensive understanding of our current view for the actions that have been taken, and also it reflects our best view at this point for the quarter. If you noted in Robin's remarks, that we have proactively taken measures to enhance the quality of the customer base, ensure that we're building safe and trustworthy platforms for our users. These are efforts, including those sectors that you're mentioning, are constantly being reviewed and ensured for higher quality. What we are providing in terms of guidance is all-encompassing, that comprehensively reflected the actions we're taking. With regards to the second question on the margin changes, obviously the incidents are different to a different magnitude.
The one thing that I can offer is that obviously this happened in mid-quarter and there is partially, of course, affecting the revenue, but at the same time, the expense structure is a steady, so there is no directly related expense line items that is very materially related to the revenue that is impacted. Look at the revenue line items and the expense line items separately, and you would have basically the margin profile or the profit picture for the quarter.
Your next question comes from the line of Dick Wei from Credit Suisse. Please go ahead.
Hi. Good morning. Thanks for taking my questions. I have a question about the reduced sponsored links, ad load in the search results. Wonder how would it impact the company revenue in the longer term, even just beyond Q2 and maybe Q3 and the longer term? How should we expect any negative or positive impact to the revenue? Thank you.
Dick, as we mentioned in the release, we took a proactive approach to reduce the number of sponsored links. In doing that, our intent is to enhance user experience, enhance also the service to our customers, and provide better ROIs. All these things we're doing are driving healthy fundamental values for the platform. Although short term, we might see some negative impact, and also as Robin mentioned, these would be prices we're willing to pay for better user experience, and we believe this kind of action is beneficial longer term. We believe this kind of impact is short term, and we should benefit and will be rewarded in the long term.
Your next question comes from the line of Eddie Leung from BofA Merrill Lynch Please go ahead.
Good morning. Just a question. I know it may be difficult, but could you try to give us some color on the impact from the two separate changes that you have made? The first one is more about the reviews of the medical advertising, and the second one is more about the algorithm as well as the ad load. Trying to see whether you could give us some idea of the separate impact of these two. Thank you.
The revised guidance is predominantly, majority of that is because of factor 1. The customers, as we mentioned, over half of the customers, because of the review process and the varied degree of implementation, timing, scope in different geographies, these customers are basically delaying or reducing their current effort in doing marketing. This is a certain, you can say, to some extent, a certain and more of per scale touches on the revenue and the customer base. For the second factor, obviously, this measure is applied across the platform to all the factors. Having said that, I mentioned earlier, this kind of effort we're doing we believe is a short-term negative impact that we see carries long-term value, and we should expect that to recover over time.
I think there are more matters in our control that we can try to do the great things for the users and the customers, and at the same time, driving better technology and monetization improvement. It's factor 1 that's a bigger component of the revision.
The next question comes from the line of Alicia Yap from Citigroup. Please go ahead.
Hi. Good morning, Robin and Jennifer. Thanks for taking my question. I wanted to follow up on the impact of the ad load. The revamp specifically, can you quantify it mostly on PC, and how about the mobile? Because I think I understand from mobile perspective, we are still potentially speaking to the requirements from the government side. Just wanted to get a sense if that is mostly on PC, and then also what measures you are planning to get back some of the lost revenue. Thank you.
Thank you, Alicia. Yes, I think the different measures we take have different patterns of impact on PC and mobile side. Obviously, PC has bigger screens, and the algorithm, the display changes over there is a sudden change for the users who are used to the layout and setup of the screen. It does take some time to get used to. Obviously, as we enhance the quality of the page and also the quality of the ads, and the users get, over time, used to it, there are obviously recovery that we would expect. Having said that, the PC today, I think it is not the main growth engine in terms of revenue contribution. On the mobile side, it is already very much laid with a limited space for ads. Not so much of an impact on the mobile front.
The next question comes from the line of Wendy Huang from Macquarie. Please go ahead.
Hi, Jennifer. I think you mentioned earlier that we should have the Qunar's expense items separated from the revenue items despite the recent changes. How about the full year? You mentioned before that the company is running quite an R&D cheaper and CapEx cost for the full year. Are you also reviewing this entire year spending, or you are sticking to this money-driven spending?
Yes, these decisions are made independently. Obviously, as we lay out our long-term objective, we allocate appropriate resources to support that long-term initiative. As we go forward, we continue to assess the different specifics of the spending and the investments. That plan is on track, and we are not, to this point, making any changes simply because of this one incident. That's basically how we approach it. Obviously, I think for Q2, that you would see some flow through the lines if the revenue gets revised, the expense and the investment will continue to carry. There would be variations of operating profits. As we mentioned, we focus on the long term, where long-term value build-up of our platform and for our customers remains intact.
We continue to invest in the integrated solutions for the customers and also invest in technologies that drive artificial intelligence and the driverless automobile.
The next question comes from the line of Chi Tsang from HSBC. Please go ahead.
Good morning. Thanks for taking my questions. I wanted to ask you one question about the medical, the regulatory review. Do you have any sense of how long this might take? At the end of it, do you think there might be more policies that come out of this review? Secondly, I was wondering if you could discuss a little bit more about sort of the momentum you're seeing in the business. I mean, the investigation started in May. You implemented the adjustments at the end of May and in June. You talked about a gradual recovery. I mean, do you think that gradual recovery is sustainable, or do you think that there's risk that recovery actually disappoints again? Thank you so much.
Yes. Thank you. I think we mentioned earlier, the government are having regulatory reviews in the medical organizations. In different geographies, the rules may be interpreted differently. There is no clear implementation details that is made known to everybody. The timing and scope and implementation, interpretations of the rules can be very varied. When it comes to the actual execution of the plans, the different geographical areas would have different speed or you can say, the magnitude of implementation. We, at this point, do not have visibility in how long this will take or how much of a scope or how the rollout will be. Having said that, the measures that we have taken on our platform were successfully implemented before May 31st. As also the measures reached with the government, that was a very swift and quick review.
I think from just Baidu's practice perspective, we have done what we have agreed to do and also went beyond, to do even more to enhance our own discipline and ensure users' experience as Robin mentioned. In the medical service organization sectors, the policies and rules remain out there and will take some time for it to implement. We do see that in some places, some customers would gradually start resuming business. As I mentioned, there is no nationwide implementation details, and some of the rules can take time to develop. Others, in terms of the speed of that development can vary. We don't really have the visibility in terms of how the business is going to resume in terms of speed or magnitude.
Our team is proactively working with the local governments, with our customers, to try to articulate these rules and also help the customers to comply to these rules.
The next question comes from the line of Jen Ling from Eighty6 Research. Please go ahead.
Hi, good morning, Robin and Jennifer. My question is related to the medical sector and the related sector. Since there seems to be a permanent loss of some advertisers in the medical sector. I'm wondering, what are the new growth drivers that can offset such permanent loss going forward in the near term and over the long term?
Yes, I think as we go through constant reviews of our customer base and continuously to elevate the quality standard for our customers, you do have customers that may not meet your requirement and may be lost. That's just part of the usual business that we do. Sometimes I think in a new business, as it grows, there might be just the step-up of these implementations of qualification reviews. We continue to think the medical healthcare sector carries tremendous opportunity. I think near term, focus is on helping our customers resume their normal business is our near-term focus, and this will continue to be an important sector for us. Going forward, I think we have to constantly drive our business for growth and provide better value propositions for our customers.
We are building integrated platform capabilities for our customers, including the gateways like search, like Nuomi, like Map. We continue to enhance the integration of these services and making a comprehensive value proposition to our customers. This is an elevated level of service that connecting not only people with information but people with services, too. Longer term, the investment in artificial intelligence I mentioned earlier, and also in driverless cars. I think that is the long-term growth driver as these efforts, you can imagine, changes people's lives and changes the society.
I think Jennifer pretty much covered both the short term and long term. I would just like to emphasize that the measures and steps we have taken are positive to user experience. We expect that people will search more, going forward because the experiences are better and there are a lot of room for innovation in our core
Business, meaning connecting people to information and connecting people with services. There are lots of offline items in e-commerce area, in service area. There are lots of things that we can invent, and we can make it available to our users. We have accumulated a tremendous amount of useful data that can be very useful to our financial services offerings, and we have invested aggressively in artificial intelligence for the past seven, eight years, I think that will be very, very useful for our future new businesses, such as the credit card.
Your next question comes from the line of Mujie Li from Piper Sandler. Please go ahead.
Thanks for taking my question. I have a question regarding the future revenue impact in the second half. Can you give us some guidance of what might be the outlook in the second half? Secondly, can you update us with the mobile DAU and the mobile search, daily search volume as well? Thank you very much.
I think we mentioned that we provided revised guidance because there are measures and situations occurred during the quarter. The main issue or the main factor is that there are regulatory rules that will be articulated and implemented, and our customers will submit their application and be approved of it. This kind of exercise takes time, and at this point, as I mentioned earlier, we do not have real visibility over the timing of the implementation. It's premature for us to provide a second half guideline, but as soon as we have visibility, as we do our regular quarterly earnings report, we will be able to provide you the outlook. I think, if I got your second question correctly, you asked about mobile traffic. Mobile traffic continues to grow, and it continues to be driving the overall traffic growth.
Your next question comes from the line of Karen Chan from Jefferies. Please go ahead.
Thank you, Robin and Jennifer, for taking my question. I just have two quick questions. Sorry if I have missed this earlier. First of all, is there any potentially heightened government scrutiny on other vertical advertising, such as finance? The second question is there any preliminary CPC or CTR trends that management may share with us? Thank you.
I'll handle the first question. I didn't quite get the second question. I think, as a general situation, I think the internet is becoming more and more penetrating and related to the society and to the offline world. I think for some of the verticals or sectors to have increased oversight to provide the discipline and healthy order of growth is a good thing. I think in view of also our own responsibility, we take a proactive approach to manage our customer base and make sure that we deliver high quality content to our users. Some of the new sectors, as they emerge, I think there probably are shortages of rules and regulations, I think we take it proactively to address these new emerging verticals, and also, I think, over time, as these verticals or sectors become more regulated, I think it's just beneficial for everybody.
I think it's the matter that addressing these issues responsibly and proactively is our approach. I didn't quite get the What? The CPC and CTR trend?
The trend.
I think-
Can you repeat the question?
Sure. Just my second question is about, is there any preliminary trend of the cost per click, the bidding intensity, or the click-through rate that management can maybe share with us? Thank you.
Yeah, I think both CPC and the CPM are lower because of the delayed spending from many of the medical customers. The click-through rate stays about the same. Once again, we think this will gradually recover.
Your next question comes from the line of Eric Wen from Blue Lotus. Please go ahead.
Good morning, Madam. Thanks for taking my question. Can you update us on the progress of that in Q3? Also, what kind of advertisers tend to advertise for Olympics? Thanks.
Again, I think there are always customers that we work with that take advantage of major events like this. For this upcoming Olympics, we take advantage of this, working with customers on the campaigns to provide them with comprehensive services of marketing. I think this year we're doing similar things with our customers. To be frank, I do not have the customer names, but I know our paid team is working with customers to take advantage of the events and promote their brands and products through our platform.
Your next question comes from the line of Robert Lin from Morgan Stanley. Please go ahead.
Good morning, Madam Jennifer . This is a question on healthcare advertisers. We talked about eliminating relationships with about 2,500+ of the hospitals before, but incrementally more during the quarter has been factored into our expectation for this quarter and maybe for the full year. I guess, if I were to isolate impact from healthcare vertical versus other because of our changes to our allies, can you tell us what the net impact has been for the healthcare vertical versus others in our expectation?
Yeah, I think Jennifer already answered this in a previous session. It's predominantly impacted by the healthcare advertisers.
Your last question comes from the line of Billy Leung from Haitong International. Please go ahead.
Hi, thanks for taking my question. This is just on another part, because I understand that our online forum, the Tieba, has also been closed down or cleaned up. Can we just sort of quantify or assess the impact of what's happening with Tieba and whether or not this has to be accounted for in our revision as well? Thanks.
I think, in general, as I mentioned earlier, we have a very dynamic and living platform. We constantly go through exercises to ensure the quality of the content that's made available on our platform. In short, Tieba is not a major revenue contributor, and the fact that itself is not the main element when it comes to working on the revision for the guidance. That's not the case.
Just a quick follow-up question I think everyone's been asking is, I just wanted to sort of understand how much of the cost attributed to search is actually fixed, just roughly?
I think we do separately provide a search service segment reporting, and I think you would have the idea what its margin looks like. I think, in looking at the financials, the cost of sales components are normally variable because those are revenue related, but these are revenue related because of the fundamentals, can be traffic related or just usual service related. Fixed cost for search is mainly R&D and sales. You do know that we invest quite constantly, steadily in the R&D capability. Our sales force is a very mature presence over the country, these, I would say, would be the main components for fixed cost, if you say, per se. I think, the traffic-driven infrastructure, of course, is a fixed cost, too.
I think a variable cost is our traffic acquisition cost.
Ladies and gentlemen, 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.