Guidance

Jun 13, 2016

Press Release

Hello, and thank you for standing by for Baidu's Analyst 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, Director of Investor Relations. Thank you. Hello, everyone, and thank you for dialing into our analyst conference call. The press release was distributed earlier today, and you can find a copy on our site as well as on Newswire services. 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. Medi does not undertake any obligation to update any forward looking statements 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 Viator's entire website. I will now turn the call over to IDI's CEO, Robin Li. Hello, everyone, and thanks for joining today's call. A few hours earlier, we distributed a press release to revise our 2nd 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 Plus B and user protection programs. More recently, we have proactively implemented numerous measures related to stricter customer requirements, reducing customer links and upgrading user feedback and user protection mechanisms, which go above and beyond the request of regulators. We know this is the right thing to do and 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 Q2 guidance mainly reflects the short term uncertainty surrounding the field, timing and rollout of regulatory review of medical organizations. Half of our medical customers temporarily reduced or delayed spend on our platform while awaiting clarification of regulatory requirements and submitting the necessary documentation for qualification. We have high quality customers who would like to be in line with the new regulations and are looking for a swift review so that they can resume normal operations. Baidu is also assisting its 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 the customers. We have complete confidence that the customers' spend will recover once regulatory requirements and applications are clarified and settled. Healthcare, while underdeveloped and undergoing regulatory review in the sovereign 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 sponsored banks across the platform, an effort that went beyond the requests from regulators. This measure impacts revenue over the short term, but and Baidu provides a strong value proposition in connecting users who seek information and services with high quality, qualified customers who want to be connected to the future. Our long term focus is further enhancing our value proposition by expanding 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 all creates tremendous value, transforming traditional industries such as financial services and transportation and enhancing people's daily lives. The long term outlook for ARPU 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. Your first question comes from the line of Natalie Wu from CICC. Such as precious metals and foreign exchange transactions or just health care? And second, before you recall your last business division in 2008, this also happened in the mid quarter. You replaced down revenue by about 30% at that time, while net profit per quarter went down by like 20%, should we spend similar scale of net profit impact this time? Thank you for your question. It's Jennifer Lee, 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 have you noted in Robin's remarks that we have proactively taking measures to enhance the quality of the customer base, ensure that we're building safe and trustworthy platforms for our users. And these are efforts including those factors that you're mentioning, are constantly being reviewed and insured for higher quality. So 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 merchant changes, obviously, the incidents are different to a different magnitude. And the one thing that I can offer is that obviously this happened in mid quarter and there is a partially of course affecting the revenue, but at the same time the expense structure is the fee. So there is no directly related expense line items that is very materially related to the revenue that is impacted. So look at the revenue line items and the expense line items, particularly and you would have your basically the margin profile or the profit meter 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 sponsor in the search results. I wonder how would the PDAC come to see revenue in the longer term I think just beyond Q2 and maybe up at Q3 and the longer term, I mean, how should we expect any negative or positive impact to the revenue? Thank you. Dick, as we mentioned in the release, we took proactive approach to reduce the number of concert links. In doing that, our intent is to enhance user experience, enhance also the service to our customers and drive better ROIs. And all these things that we're doing are driving healthy financial values for the platform. And although short term, we might see some negative impact. And also, as Robin mentioned, these would be price that we're willing to pay for better user experience, and we believe this kind of action is beneficial longer term. And 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 Ed Yihan from Merrill Lynch. Please go ahead. Good morning. Just a question. I know you made it difficult, but could you try to give us some color on the impact from the 2 separate changes that have made. The first one is more about the reviews of international advertising and the second one is more about the algorithm as well as the net loan. So trying to see whether you could give us some idea of the impact of these 2? Thank you. The revised guidance is predominantly majority of that is because of sector number 1. The customers, as we mentioned, over half of the customers, because of the review process and the very degree of implementation, timing, scope in different geographies, these customers are basically delaying or reducing their current efforts in doing marketing. And so this is a certain you can say to some extent a certain and more of scale touches on the revenue and the customer base. And for the second factor, obviously, this measure is applied across the platform to all the factors. But having said that, I mentioned earlier, this kind of effort we're doing is we believe is a short term negative impact that we see carries long term value and we should expect that to recover over time. And I think there are more measures 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. But it's sector number 1 that's a bigger component of the revision. Your next question comes from the line of Alicia Yap from Citigroup. Please go ahead. Hi, good morning, Robin and Jennifer. Thanks for taking the questions. I wanted to follow-up on the impact that Eddie has. So the revamp specifically, can you quantify the monthly of the 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 understand, is it mostly on PC? And then, what measure that 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 change for the users who are used to the layout and setup of the screen. So it does take some time to get used to. But obviously, as we enhance the quality of the landing the page and also the quality of ad and the customers the users get over time used to it, there are obviously recovery that we would expect. But having said that, the PC today, I think it's not the main growth engine in terms of revenue contribution. On the mobile side, it's already very much laid with limited displays for ads. And so not so much of impact on the mobile front. Your 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 2nd quarter's expense items separated from the revenue side of the recent changes. But how about the full year? You mentioned before that the company RMB20 1,000,000,000 in cash and cash costs for the full year. So are you also reviewing entire year spending or you are sticking to the 20,000,000,000 spending? Yes. These decisions are made independently. Obviously, as we lay out our long term objective, we allocate other resources to support that long term initiative. And as we go forward, we continue to assess the different specifics of the spending and the investments. So that plan is on track and we are not at this point making any changes simply because of this one incident. And that's basically how we approach it. So obviously, I think as for Q2, 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 profit. But as we mentioned, we focus on the long term, the long term value buildup of our platform and for our customers that remains intact. We continue to invest in the integrated solutions for customers and also invest in technologies that drive our special intelligence and the driverless automobile. Your next question comes from the line of Chi Jang 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? And I think that you think the medical policies that come out of this review? And 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 adjustment at the end of May June. You talked about a gradual recovery. I mean, is there any do you think that gradual recovery is sustainable? Or do you think that there's risk to that recovery actually disappoints again? Thank you so much. Yes. Thank you. We mentioned earlier, the government are having regulatory reviews in the medical organizations. And in different geographies, the rules may be interpreted differently. There is no clear implementation details that is made known to everybody. And so the timing and scope and implementation interpretations of the rules can be very varied. And so 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 the implementation. So 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. But having said that, the measures that we have taken on our platform were successfully implemented before May 31st and as also the matters reached with the government, that was a very swift and quick review. And so I think from just Baidu's practice perspective, we have done work 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. But I think in the medical service organization sectors, the policies and the rules remains out there and will take some time for it to implement. So we do see that in some places, some customers would gradually start resuming their business. But I think as 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. So it's we can really have the visibility in terms of how the business is going to resume in terms of speed or magnitude. Our team is collectively working with the local government with our customers to try to articulate these rules and also help our customers to comply to these rules. Your next question comes from the line of Jen Lin from 86 Research. Please go ahead. Hi, good morning, Erwin and Jennifer. So 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. So 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? Let me touch on that first. 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 requirements and may be lost. That's just part of the usual business that we do. And sometimes I think in a new business as a growth, that might be just the step up of these implementations of qualification reviews. We continue to think our the medical healthcare sector carries tremendous opportunity. I think in near term focus on helping our customers resume their normal business is our near term focus and this will continue to be an important factor for us. Going forward, I think we have 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 database like Search, like Normi, like Map. And so we continue to enhance the integration of these services and making a comprehensive value proposition to our customers. And this is an elevated level of service connecting not only people with information, but people with services too. And longer term, the investments 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. Yes. I think, Chen is pretty much covered both the short term and long term. I would just like to emphasize that the measures and steps we have taken positive to user experience. So 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 businesses, meaning connecting people to information and people with services, there are a lot of top line items in e commerce area, in service area. There are a lot of things that we can eat and we can make it available to our users. And we have accumulated a tremendous amount of useful data that can be very useful to our financial service offerings and we have invested aggressively in our digital intelligence for the past 7, 8 years and I think that will be very, very useful for our future new businesses such as the first time in cars. Your next question comes from the line of Woo Ji Lee from Arete Research. Please go ahead. Thanks for taking my questions. 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? And secondly, can you update us with the mobile DAU and the mobile search TV search volume as well? Thank you very much. I think we mentioned that we provided a revised guidance because there are measures and situations occurred during the quarter. And 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. So 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. So it's premature for us to provide a second half guidelines. But as soon as the we have visibility as we do our regular quarterly earnings report, we will be able to provide you the outlook. I think if I put your question second question correctly, you asked about mobile traffic. Mobile traffic continues to grow and continues to be in 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 quick two quick questions. Sorry if I have missed it earlier. Is there any potentially heightened estimates scrutiny on vertical advertising such as finance? The second question is, is there any preliminary CTC or CGR trends that management you may share with us? Thank you. I'll handle the first question. I didn't quite get the second question. The 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. And so I think for some of the verticals or sectors to have increased oversight to provide the discipline and a healthy order of growth is a good thing. And 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. The some of the new sectors as they emerge, I think there probably are shortages of rules and regulations. And 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. So I think it's a matter that addressing these issues responsibly and proactively is our approach. I didn't quite catch Can you repeat the question? Sure. Just my first question is about, is there any preliminary trend of the cost market rate that management can maybe share with us? Thank you. Yes. I think both CTC and TTM are lower because of delayed spending from many of the medical customers, the take through rate stays about the same. But once again, we think this will gradually recover. Your next question comes from the line of Eric Yuan from Blue Lotus. Please go ahead. Good morning. Thanks for taking my question. Actually regarding the organic advertising and can you update on the progress of that in Q3 and also what kind of advertisers tend to advertise for Yes. I think there are always customers and that we work with that take advantage of amazing events like this. And for this upcoming Olympics, they we take advantage of this working with customers on the campaign to provide them with comprehensive services of marketing. And this I think that this year we're doing similar things with our customers. I do not just to be frank, I do not have the customer names But I know our team, PayA team is working with customers to take advantage of the events and to 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, management. Just a quick question on the health care advertisers. We talked about eliminating relationship with our 23100 plus of the total our expectations for this quarter and maybe for the full year. And I guess if I were to isolate the impact from healthcare vertical versus other because of our changes to our allos. If it's in the color on what that have been impacted in a healthy vertical versus others Yes. I think Jennifer already answered the in previous session. It's predominantly impacted by the health care adversaries. Your last question comes from the line of Billy Leung from Haitong International. Please go ahead. Hi, thanks for taking my question. So this is just on another part because I understand that online from the Teva has also been closed down or cleaned up. So can we just sort of quantify or assess the impact of what's happening with Teva and whether or not it has been accounted for in our revision as well? Thanks. Yes. I think in general, as I mentioned earlier, there is we have a very dynamic and living platform. So we constantly go through exercises to ensure the quality of the content that's made available on our platform. But in short, Chiba is not a major revenue contributor and that itself is not the main element when it comes to working on the revision for the guidance. And that's not the case. Okay. And just a quick follow-up question. I think everyone's been asking is that I just wanted to sort of understand how much of the cost you're going to search is actually fixed roughly? I think that we do separately provide a search service segment reporting. And you would have the I think you would have the idea what its margin looks like. And 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 its the fundamentals can be traffic related or just usual service related. Fixed cost for search is mainly R and D and sales. And you do know that we invest quite constantly and steadily in the R and D capability. Our sales force is a very mature presence over the country. And so these, I would say, would be the main components for fixed cost, if you say, per se. But I think the traffic driven infrastructure, of course, is a fixed cost too. I think a clear fare cost is our CAC, our asset 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.