Baidu - Earnings Call - Q2 2011

Transcript

Speaker 1

Hello, and thank you for standing by for Baidu's second quarter 2011 earnings conference call. At this time, all participants are on 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 objection, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Victor Sung, Baidu's Investor Relations Director.

Hello, everyone, and welcome to Baidu's second quarter 2011 earnings conference call. We distributed Baidu's second quarter 2011 earnings release earlier today. You can find a copy of the press release on the company's website, as well as on Newswire Services. Today, you will hear from Robin Li, Baidu's Chief Executive Officer, and Jennifer Li, Baidu's Chief Financial Officer. After their prepared remarks, Robin and Jennifer will answer your questions. Before we proceed, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20-F.

Baidu does not undertake any obligation to update any forward-looking statement except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited non-GAAP finance measures. Our press release contains a reconciliation of the unaudited non-GAAP measure 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 be available on Baidu's corporate website at ir.baidu.com. I will now turn the call over to Baidu's CEO, Robin Li.

Speaker 3

Hello, everyone, and welcome to today's call. I'm pleased to tell you that our top and bottom line results, as well as our margins, were all extremely strong in the second quarter. This performance was largely driven by increases in overall traffic and ARPU. Our customers continue to spend more of their marketing budget for results. Baidu is at the center of China's increasingly sophisticated internet market, and our efforts to foster an ecosystem around that are paying off. The result can be seen in many areas, like e-commerce, where we have been a major beneficiary of the recent group buy spending trend. At the heart of this ecosystem strategy is box computing, which constantly improves user experience by incorporating dynamic data, content, and applications directly into search results. Specifically, our open applications platform is progressing well.

I'm proud to report that with many developers taking advantage of its offerings, we now generate about 20 million clicks per day in less than one year of the platform's launch. Social search features also remain a big part of Baidu's user experience. Baidu Postbar and Baidu Notes maintain healthy growth rates. We have added a lot of new features to make Postbar easier to use and stickier, while increasing social interaction between users. Our large and expanding social search user base provides us a solid foundation for socially flavored products moving forward. Recently, we've added Baidu Ting, our social product for music. Baidu Ting allows users to find, listen to, and manage their music. We are embedding features for users to share and personalize music files to enable social interactions.

I'm proud to report that Baidu Ting has gained support from virtually all major music labels, including EMI, Universal Music, Warner Music, and Sony Music. We expect this service to connect users through a large database of both international and Chinese songs. Complementing these internal initiatives, we've made a number of strategic investments and partnerships. Earlier this month, we announced a new partnership with Microsoft Bing for English language search. Last week, we began displaying Bing's top organic results on our pages for most of the English queries we get. We have bolstered our landing page strategy with strategic partners and investments in premium virtual players. Our objective is to ensure our users have the same great experience after they click through our search results to the most popular vertical websites.

As part of this strategy, we have a partnership with Quik to drive the real estate vertical and have invested in Qi Yi to gain a foothold in the online video space. I'm happy to report that Qi Yi now has more than 160 million monthly unique visitors. We have more recently expanded to travel search through our investment in Qunar. This will provide users with an even better experience in a sector that has long been one of our most popular query verticals. For example, shortly, we will launch enhanced hotel-related content with Qunar. When users search for hotels, we will serve Qunar information at the top of our results page if it is relevant. After clicking through to Qunar, they will be met with the same high-quality information on the landing page.

Each vertical partner in our landing page strategy shares the characteristic of having developed a premium database of content. This high-quality partnership enables us to monetize related traffic more efficiently. We are enabling searching and accessing rich information and making the decision to transact a seamless process with the landing page strategy. In terms of monetization in the second quarter, we continue to see increases in customer spending. Our customers benefited from improvements in our web search monetization platform relating to keyword coverage, click-through rates, quality of paid clicks, and a growing understanding of search engine marketing. I also want to highlight that our revenue growth is driven more by growth in paid clicks than by click price appreciation. We also benefited from strong momentum in e-commerce. First, the online retail sector continued to see triple-digit growth. Second, spending by group buying sites increased rapidly in the past quarter.

This was a main driver for our outperforming guidance this past quarter. Having said that, we are seeing broad-based, healthy revenue contributions across all industry verticals. We have also recently upgraded our front-end customer interface. This streamlines the purchasing process from more than 15 steps down to a simple five steps. The easier navigation benefits all customers and is particularly important for SMEs who typically do not have sophisticated in-house marketing teams. As mentioned during the last earnings conference call, we continue to develop our backend CRM system to improve the sales process for our customers. Also, we are making improvements in the structure and quality of our customer acquisition and service teams to provide our customers with the most efficient experience possible. On the customer acquisition side, we had a successful 157-city search engine marketing tour and will continue this effort to develop the market.

Encouragingly, our box computing initiative is beginning to demonstrate its revenue potential. Our partnership with BidAuto, China's leading auto-related information website, is an example of how we can monetize the open data platform within the box computing context. When a user searches for Chevrolet Cruise, for example, our open data platform will retrieve and display dynamic information in BidAuto's database. Another example of box computing monetization is in the travel vertical. For a specific flight search, we offer users information provided by four different content providers under separate tabs. Some of the tabs can be sold at a set price to only the highest quality and most relevant websites. While box computing monetization remains at its very early stage of iteration, we see potential for revenue growth. We will remain highly selective in choosing content partners so that we can provide users the best possible experience.

Over the past 10 years, Baidu has achieved tremendous success by developing the right strategies and executing. Looking to our second decade, our organization is far larger and more complex than ever. In response, we have designed a new corporate structure. Our four new functions consolidate reporting lines. This will create greater efficiencies and drive more innovation. This structure will spur new technologies and products that will foster our growth in the years ahead. We will continue to invest heavily in all functions for our management to succeed. Finally, I'm excited to tell you about our sixth annual Baidu World Forum, which will be held on September 2 in Beijing. It is an opportunity for Baidu to bring together some of the best entrepreneurs, industry experts, and Baidu's loyal user base together and share our strategic initiatives and discuss China's internet trends.

I look forward to seeing many of you there. With that, I'll now turn the call over to Jennifer for financial highlights.

Speaker 2

Thank you, Robin. Hello, everyone. As Robin mentioned, we achieved excellent results in the second quarter, with our pool and customer growth driving overall growth. Investments in R&D, our talent pool, and network infrastructure will continue to be priorities. We plan to invest even more aggressively in these areas in the second half of the year. These investments will drive growth and innovation and ultimately deliver long-term returns. On strategic investments, we closed the Qunar investment last week. Qunar is growing healthily. With the transaction, we will consolidate its financials starting Q3. Given its current size, we do not expect material impact on our fundamental P&L structure. Qi Yi is ramping up nicely. As Robin mentioned, we and our investment partners will continue to support the company. Capital contribution will be made in the near term.

From Baidu's standpoint, the investment will continue to be recognized through the equity accounting method. As Qi Yi is loss-making, any cash contribution we provide will go through our P&L in the income or loss from equity method investment line, which is below the operating profit line. We do not expect the investment to materially affect our results of operations for the third quarter or full year of 2011. We will evaluate from time to time what is the optimal strategy to pursue in our support for Qi Yi. Now, let's look at the financial highlights for the quarter. All amounts mentioned are in RMB unless otherwise noted. Online marketing revenue for the second quarter of 2011 was RMB 3.4 billion, a 78% increase year over year.

Baidu had around 298,000 active online marketing customers in the second quarter of 2011, a 17% increase from the corresponding period in 2010, and a 9% increase from the previous quarter. Revenue per online marketing customer in the second quarter reached approximately RMB 11,500, a 53% increase from the corresponding period in 2010, and a 29% increase from the previous quarter. Traffic acquisition cost, as a component of cost of revenue, was RMB 269 million, or 7.9% of total revenues as compared to 9.7% in the corresponding period in 2010, and 8.2% in the first quarter of 2011. This decrease reflects traffic mix driven by stronger organic traffic growth. Contextual ads business is an important initiative for us and requires higher payout to Baidu Union partners. As we gain more traction in this business, we expect traffic acquisition cost as a percent of revenues to increase.

Bandwidth cost, as a component of cost of revenue, was $147 million, representing 4.3% of total revenue compared to 3.5% in the corresponding period in 2010. This increase mainly reflects an increase in server capacity to accommodate traffic growth, new product services, and higher computing requirements. Depreciation cost, as a component of cost of revenue, was $143 million, representing 4.2% of total revenue compared to 4.4% in the corresponding period in 2010. Selling general administrative expenses in Q2 were $378 million, an increase of 42% year on year. This increase primarily reflects an increase to personnel cost and marketing expense. Research and development expense was $299 million, an 88% increase from the year-ago period. This increase primarily reflects increased headcount.

Share-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to $35 million in the second quarter of 2011, from $22 million in the corresponding period in 2010. Operating profit was $1.9 billion, a 91% increase year on year. Total headcount as of June 30, 2011, was about 12,800, roughly 1,100 more than the previous quarter. Income tax expense was $286 million for the second quarter. The effective tax rate for the second quarter was 14.9% compared to 14.4% in the corresponding period in 2010. Net income was over $1.6 billion, a 95% increase from the corresponding period in 2010. Basic and diluted earnings per ADS for the second quarter of 2011 amounted to $4.68 and $4.67, respectively. Net income, excluding share-based compensation expenses, a non-GAAP measure, was about $1.7 billion, a 94% increase from the corresponding period in 2010.

Basic and diluted earnings per ADS, excluding share-based compensation expenses, both non-GAAP measures, were $4.78 and $4.77, respectively. As of June 30, 2011, the company had cash, cash equivalents, and short-term investments of $10.3 billion. Net operating cash inflow and capital expenditure for the second quarter of 2011 were $2.08 billion and $387 million, respectively. Now, let me provide you both our top-line guidance for the third quarter of 2011. We currently expect total revenue for the third quarter of 2011 to be between $3.95 billion and $4.05 billion, which would represent a 75.1% to 79.5% year-over-year growth. This forecast reflects Baidu's current and preliminary view, which is subject to change. I will now open the call to questions. Operator, please go ahead.

Speaker 1

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 questioning queue again after your first question has been addressed. Your first question comes from the line of Dick Wei of JPMorgan. Please proceed.

Speaker 0

Hi, good morning. I'm Congressman Strong Carter, and thanks for taking my question. My first question is on the tech revenue ratio. What was the reason for the slight decline in Q2, and what should be the trend going forward? I guess Jennifer mentioned it could increase. Just trying to understand the magnitude of the changes. Thanks.

Speaker 2

Hi, Dick. As I mentioned in the prepared remarks, the decrease reflects basically the traffic mix driven by especially strong organic traffic growth. It's a very healthy trend, and we're happy to see this is a normal fluctuation as typically the traffic comes in the picture. I did mention that contextual ad business is an important initiative for us, and we are making a lot of efforts on that front and developing union partners to be part of the whole business. The contextual ad business itself does require higher payout. To the extent the business tracks very well, you should expect the traffic acquisition cost to increase as a % of total revenue.

Speaker 1

Your next question comes from the line of Jen Yoon with Moon Numero. Please proceed.

Speaker 0

Hey, good morning, everyone. You mentioned that you're going to make some capital expenditures or capital investments into iQIYI. Can you talk about what kind of monetary amount that you're talking about in terms of when that capital expenditure or investment will start? Second of all, you also mentioned that Qunar will be consolidating starting in Q3, and you said it's not that material. Can you identify what kind of revenue we should expect for the run rate for Qunar as well? I have a follow-up. Thanks.

Speaker 2

On the iQIYI investment, as we mentioned in our prepared remarks, it's an important landing page strategy for us. iQIYI offers high-quality content, and within a short period of time, it's tracking very well. Between Baidu and our investment partners, we plan to continue to support the company, and cash contribution will be made in the near term. As I mentioned, the cash contribution will flow through our P&L line item because we continue to account the investment in equity accounting methods. Because it's still loss-making, given the competitive video landscape, any investment we make and the loss that the venture generates, we will take our share of the loss through the P&L line up to the cash amount that we contribute.

As I indicated in the prepared remarks, we do not expect there will be material impact on the P&L side as a result of the contribution to the iQIYI venture, either in the third quarter or for the full year of 2011. For your Qunar question, in our guidance provided for Q3, we did incorporate the consolidated picture view as we provided the guidance. The vast majority of the strong Q3 guidance that we're providing is driven by the strong fundamentals of Baidu's core business. Qunar accounts for a very small amount, so it's very immaterial in the overall revenue guidance as well as in the overall P&L structure.

Speaker 1

Your next question comes from the line of Katherine Lung with Goldman Sachs. Please proceed.

Speaker 0

Hi, good morning. Can you comment on whether box computing is creating any side benefits that are helping monetization indirectly, such as better traffic retention or advertisers spending more to be more visible on the search results page, understanding that you're not aggressively monetizing it directly at this stage? Thank you.

Speaker 3

Hi, Katherine. I think you are very right. Box computing is generating benefits both in terms of user experience or traffic retention, as well as certain kinds of revenue potentials. You can basically view the box computing infrastructure as a better way of displaying when thinking about revenue. It's a better way of displaying ads. There are all kinds of different ways of displaying box computing results. In most cases, it purely just benefits the users. In some of the cases, it will benefit the advertisers or customers, too. We will do this kind of partnerships where we see fit going forward.

Speaker 1

Your next question comes from the line of Eddie Lung with Bank of America Merrill Lynch. Please proceed.

Speaker 0

Good morning, everyone. I have a couple of questions. The first one is regarding your agreement with the major music label companies. Could you share with us if there will be any cost for music rights going forward? If so, where will the cost item appear? Will it be in the cost of services or sales and marketing? Could you also give us the top advertiser segments for the second quarter? Thank you.

Speaker 2

OK. Hi, Eddie. It's Jennifer. As we have said in our press release, yes, we will be paying the record label companies some fee to incorporate their assets in our services. The amount itself is not significantly going to affect the cost picture. For any fee that we're paying them, we'll go through the operational cost line item as part of the cost of revenue. It's in the gross margin picture. In terms of your other question related to the top sectors for Q2, these mainly continue to be the typical ones, namely medical, machinery equipment, education, travel, and business service. All these five top sectors account to a little over 50% of the total picture, total revenue picture.

Speaker 1

Your next question comes from the line of Paul Wu with Samsung Securities. Please proceed.

Speaker 0

Thank you for the question. I was wondering, you mentioned the e-commerce and also the group buy advertising increasing. You didn't mention those in the top five. Did these two categories together represent over what % of revenues would these two groups together represent? Thank you.

Speaker 2

We have established a way of looking at our business and define the industry sectors. Because the e-commerce business is emerging and growing very fast, it is just really taking another angle and approach to look at our overall business. When we look at e-commerce businesses, obviously, that includes online purchases, whether it's physical goods or services, things like travel, for example. If you look at Qunar, they are part of the travel vertical, and they are also part of the e-commerce platform that provides online services. We have separately tracked the e-commerce contribution in the overall growth rate to give us a better understanding of the trends as we are in the fast-developing internet space. We have not separately, not to misguide you, we have not separately disclosed the percentage per se because it is just another angle to look at our industry sectors.

Having said that, we have mentioned quarter after quarter that we're seeing triple-digit growth in the e-commerce sector that continues to be very strong. It is not a separate industry vertical that we will separately disclose.

Speaker 1

Your next question comes from the line of Jane Sao with Macquarie. Please proceed.

Speaker 0

Good morning. Can you hear me OK?

Speaker 2

Yes.

Speaker 0

OK. Hi. Thanks for taking my question. Let me add my congrats to a strong set of results and guidance as well. My question is on the margins. It looks like you did extremely well across the board for your margin profile this past quarter. It showed a significant detection in terms of % of revenue for Xin-Zhe Li, R&D, et cetera. Just look forward in sort of an intermediate term. How should we look at your margin progression going forward in terms of the further expansion from here?

Speaker 2

Right. We delivered very strong Q2 performance and record high margins. It is a very strong quarter for us. As I mentioned in my prepared remarks, aggressive investment will continue to be our priorities, particularly in the areas of R&D, talent, network infrastructure, and frankly, office space, as we need to accommodate more people. We're also investing very aggressively in the strategic partnership side. If you look at our historical margin patterns, the second half of the year is typically expense-heavy. R&D expenses will be more heavily concentrated in the second half of the year. If you look at near term, in Q3, we'll have marketing events such as Baidu World. We'll also redouble our efforts in campus brand-building efforts as we come into the recruiting season. Expense will be particularly heavy in the second half of the year.

In addition to that, some of the strategic investments that we mentioned, these ventures do not generate very high margins. In total, if you look at the Q2 and Q3 margin relationships of last year, that probably serves as a good reference.

Speaker 1

Your next question comes from the line of Eric Nguyen with Marais Assets. Please proceed.

Speaker 0

Thanks very much for taking my questions, and congratulations on a great quarter. My first question is, given that Baidu has just done a 150-city tour, and I remember that is bigger than last year's 100-city tour, do you see a fast pickup of customer growth in the third quarter or toward the end of the second quarter? I have a follow-up question. Thanks.

Speaker 2

I can start. Hi, Eric. Yes, we continued our market education efforts this year. We have increased the coverage this year and run a very successful marketing campaign. As the industry leader, it's our responsibility to really develop the market and educate the customers on the benefit of search engine marketing. From what we see, the campaigns are better run because we have a lot to learn over our first try last year. We are very pleased with the results in terms of customer acceptance and their understanding of our services and using search engine marketing as a very effective tool for them. On that front, I think we're very happy with the marketing campaign that we conducted this year, and that really helped on customer acquisition as well.

Speaker 1

Your next question comes from the line of Yu Jing with CICC. Please proceed.

Speaker 0

Good morning. First of all, let me congratulate on the strong quarter, and thanks for taking my questions. I have two brief questions. One question is related to our third quarter guidance. It seems that in the industry and also in the country, we have a very strong debate on the second half of the macroeconomy. As we see more and more, SMEs face a lot of challenges, especially in the key regions, like Guangdong and Zhejiang. It seems there's little impact on Baidu's operation in the third quarter. I want to know what the logic behind that is. We see brand advertisers are contributing more significantly to Baidu's operation than before. That's my first question. Thank you.

Speaker 3

Hi, Yu. I think Baidu's business nature is relatively isolated from the manufacturer and the economy in provinces like Hangzhou and Zhejiang. You can probably tell that larger customers contribute more and more of our revenue mix. Those customers typically reside in the tier one cities like Beijing, Shanghai, Guangzhou, and Shenzhen. Service-oriented industries, especially group buy and other things like among our top five industries, education, medical, or health care, are very different from what you would see in the manufacturer-oriented industries in the provinces you mentioned. I would say that our business is relatively isolated from that part of the macroeconomy. I think more importantly, the pay search benefit is just too young. There are lots of growth opportunities for us. As long as we can execute well, we should be able to generate very good growth.

Speaker 1

Your next question comes from the line of Philip Nguyen with Morgan Stanley. Please proceed.

Speaker 0

Hi. Good morning, everyone. Thanks for taking my question. You mentioned in your prepared remarks about the strong spending from large customers. Would you give us some more color about the output differences between large and normal customers? It would be very helpful if you could comment on the revenue contribution from large customers. Thank you.

Speaker 2

Our customers, we really cover a very diverse pool of customers. The customers' spending level can vary a lot. When we look at our large businesses, some of these customers spend tens of millions a year. Some of the SMEs can offer very long-tail services, and they buy keywords and spend maybe a few hundred, a few thousand of R&D per year. We do have a very wide spectrum in terms of customer spending. Having said that, what we have said over the past few quarters is we continue to see strong spending from the large customers. They are particularly good at using the search engine marketing tools, and they see the kind of ROI that can be generated from the Baidu platform. Therefore, they're spending more and more with us. The contribution from large businesses continues to grow very strongly. Over the past quarter, it exceeded the SME business.

Having said that, the SME continues to be the pretty vast majority of the revenue contribution. We're particularly happy with the large customer adoption of our business platform and their contribution to our overall revenue picture.

Speaker 1

Your next question comes from the line of Steve Weinstein with Pacific Crest. Please proceed.

Speaker 0

Great. Thank you for taking my question. I guess another question just on the growth in advertisers. I guess I was a little surprised that the growth in advertisers in terms of year-over-year % and year-over-year absolute % of new advertisers was already slowing down. Can you talk about maybe where your priorities are as a company in terms of targeting larger advertisers versus building out more mass within the SMEs and the different initiatives there? To help us frame how we should be thinking about growth over the next few quarters or into the next year. Can we also just get the headcount for the quarter in number of salespeople?

Speaker 3

OK. The year-over-year growth in terms of the number of customers, I think it does reflect the nature of our business. When we transformed from the legendary system to Phoenix Nest, the system became much more complicated. It did enable large advertisers or customers to do more. Coupled with the maturity of the market, large companies increasingly realize that they can benefit from search marketing. We were very busy serving lots of large customers. The vast majority of SMEs, it just takes them longer to get used to this new system and fully take advantage of all the functions and features of our system. Going forward, we will continue to improve the customer experience online and do more hand-holding for our smaller customers.

At the end of the day, we will focus on what will benefit the company most in terms of revenue generation and profit, all that kind of things.

Speaker 2

Yeah. Steve, to continue to add to Robin's point, we are doing a lot more to help the customers better use our platform. The customer base grew at a healthy rate of 17% year on year. We're enhancing our sales and customer services and the educational process to help SMEs to master the features of our online marketing platform. As we mentioned in our prepared remarks, we upgraded our front-end interface, making it easier for the customers, particularly the SMEs, to make the whole process for decision-making and maneuvering down to five steps instead of the original 15. We are doing all kinds of things to try to make the sophisticated system more user-friendly. The market potential continues to be huge. We are doing our efforts, as we mentioned, in developing the market. At the same time, we are redoubling our efforts to better service the customers.

As Robin mentioned, it generally takes a few quarters for the customers to really take benefit, take advantage of the better system and more streamlined process that they can see. In terms of your second question, the number of salespeople for Q2 was, at the end of Q2, 6,300.

Speaker 1

Your next question comes from the line of Cynthia Ming with Jefferies. Please proceed.

Speaker 0

Thank you. Thank you for giving me the chance for questions. I have two questions. Number one, Baidu has already introduced a Baidu browser. Can you share with us the overall strategy regarding client-side software and desktop applications on both the PC side and the mobile side? Any details regarding future product development roadmap would be very helpful. Second question is regarding box computing. We would like to know some more details with respect to the coverage, the % of queries that are covered by box computing. Management mentioned some time ago it was 50% before. We would like to know what is the % right now. Thank you.

Speaker 3

Hi, Cynthia. On the client-side software, we do think browser is a very important distribution channel for our business. In China, the browser market is relatively fragmented. People have developed a habit of installing their preferred browser on the desktop. We are trying to meet that part of the user needs. Once a user installs a browser controlled by us, they will be able to generate more search traffic. This is true both on the PC side and also on the mobile side. On the mobile side, we also have a mobile browser serving our users. In general, we just view the client-side software as a way of distributing Baidu services. Most people are still used to go to Baidu website and do their things.

There are a certain percentage of users, maybe 10% or less, they have developed a habit of using client-side software to do all kinds of things. We just view that as a distribution. Sometimes we are doing it by ourselves, developing our own client-side software. Sometimes we'll just partner with those client-side software developers and share revenue with them. On the box computing coverage right now, it's roughly 70%. 70% of the search results pages contain box computing results.

Speaker 1

Your next question comes from the line of Mekarish Masharat from Collins Stewart. Please proceed.

Speaker 0

Hello, everybody. Congratulations on a great quarter, and thanks for taking my questions. Could you talk about the revenue contribution this quarter from your initiatives other than core search, like contextual online video, e-commerce, and so on, and also what you have assumed for them in the third quarter guidance and how big you expect it to be for 2012 and beyond?

Speaker 2

Other revenue contribution in terms of contextual and online display ads, they in comparison, they dwarf in comparison to our main core business, which is paid search. They are, as I mentioned, an important area for us to grow future revenue possibilities. They are growing at a faster speed, although it's a smaller base. They are growing at a faster speed, and it's tracking. It's taking good traction in terms of growth projection, the speed of growth. The overall contribution from this line is very small of the total picture. As I mentioned, they are growing faster, and over time, they'll become meaningful.

Speaker 1

Your next question comes from the line of Jane Mustard with Piper Jaffray. Please proceed.

Speaker 0

Good morning. I'll add my congratulations at the impressive revenue growth. On that note, in terms of the overall search, can you continue to drive this ARPU higher? If so, what changes in the future do you see to the platform? I guess we don't call it Phoenix Nest anymore, but to the platform that you can make in the next year to continue this high double-digit growth. Thanks.

Speaker 3

Hi, Jane. From what we have seen or heard from our customers, especially the larger ones, they still allocate the majority of their ad budget to offline advertising, while the ROI or the performance for online advertising, especially search, is much better. We do expect this kind of trend will continue. The ARPU should continue to grow. Internally, we do see a lot of room for improvement, both in terms of the bidding mechanism as well as tools to help advertisers to better manage their advertising campaign. There are lots of things we can do. The market is in its early stage. We do expect significant growth going forward.

Speaker 1

Your next question comes from the line of Wendy Hung with RBS Scotland. Please proceed.

Speaker 0

Thanks for taking my question. Number one, it seems that every Q2, your ARPU will enjoy very strong growth. Is this partly driven by the seasonality, and should we apply this to the future years as well? Secondly, apart from the online video, travel, and recruitment, those verticals that you have already made significant investment and progress, what will be the next vertical that you are eyeing on or you plan to make the investment in? Thank you.

Speaker 2

The strong Q2 ARPU performance, there is a strong element of seasonality. Typically, Q1 is a slower season because of Chinese New Year, and you will see a big sequential increase in the second quarter from a total revenue standpoint. Total revenue contribution typically, of course, comes from both the ARPU growth as well as the number of customers' growth. Both metrics will continue to have a lot of potential going forward. The seasonal pattern will tell us that we should continue to see strong ARPU as well as some step up in terms of customer growth in the future. In terms of the strong verticals, yes, those verticals that you mentioned, we have established either partnership or investment in those areas. We have, as we mentioned, also in the real estate area formed a partnership to help deliver better user experience, overall user experience. These are important vertical areas.

Things like auto will continue to develop. Financial services will continue to develop. Our landing page strategy helps to cover the strong and important verticals. Our objective is to form a strong partnership, working with others in different forms, and deliver a high-quality user service experience.

Speaker 1

Your next question comes from the line of Wallace Chung with Credit Suisse. Please proceed.

Speaker 0

Hi, good morning. Thanks for taking my questions. Question mainly on your mobile phone strategy. There are some news reports saying that Baidu is developing on operating systems on the mobile side as well as the mobile phone. Can you elaborate more about the strategies in terms of potential timeline of the launch and even potential, say, number of hands of shipment? Thank you.

Speaker 3

We do see a lot of opportunities for the smartphone industry as adoption continues to grow fast. We are developing a number of mobile phone-related services and systems. As long as they become ready, we will announce that. Before that, we are not going to disclose our plans.

Speaker 1

Your next question comes from the line of Musi Li with Mizuho Securities. Please proceed.

Speaker 0

Hi. Thank you for taking my questions, and congratulations for a great quarter. Jennifer, would you please give me more clarity on the definition of large customers? Do you define them by the size of their spendings or the size of their revenues, et cetera? Thank you very much.

Speaker 2

Large customers, in our definition, typically have a more comprehensive request when it comes to marketing and promotional efforts. These players typically have a brand that they want to build and continue to enhance. If you name them, there are maybe 1,000 of these large customers in the country, and these are branded advertisers. As I mentioned, their service requirements will be more comprehensive, and their service needs are more sophisticated from both their own perspective and requirement on the advertising platform.

Speaker 1

Your next question comes from the line of Andy Lee with Standard Chartered Bank. Please proceed.

Speaker 0

Hi, good morning. This is actually Dong here. Robin, Jennifer, Victor, congratulations on good results. I just have a quick question. Can you give us a little bit more color on your overseas plan? Are you planning to set up offices, sales offices, maybe in the more Chinese-dominated countries, for example? Thanks.

Speaker 3

Like I mentioned before, we are going to expand into many other markets for the years to come. We are internally developing a better infrastructure that will support multiple languages. When it's ready, we will be able to launch multiple languages simultaneously. Around that time, we'll be able to set up overseas offices. Right now, we are not ready to say which market we're going into and how aggressive we will become.

Speaker 1

Your next question comes from the line of Tian Hou with TH Capital. Please proceed.

Speaker 0

Hi, Jennifer. I have one question. Regarding the site, Hall 123, I want to know how much the traffic contribution from Hall 123 is and how much revenue contribution from 123, if it's possible.

Speaker 2

Yeah. Hall 123 has been around for a number of years. It's a very well-known directory site and brand name. It does contribute some level of monetization. It's an integral part of our overall service. We have not separately disclosed the traffic or the amount of revenue contributed from the site. As I mentioned, it's an overall offering that we provide to the marketplace as well as to our advertisers.

Speaker 1

Your next question comes from the line of Andy Ying with Oppenheimer. Please proceed.

Speaker 0

Hi. Good morning. Thank you for taking my question. My question is about your view on vertical search markets. Some of your investment in partnerships, such as Quik, Qunar, Qi Yi, and DuerOS, all have some vertical basis in them. Can you give us some insight into your view on the vertical search markets and how that plays into your future investment and product strategy? Thanks.

Speaker 3

Yeah, we do see value in the vertical search area. That's why we make partnerships and investments in a number of companies in this sector. The value they can add is typically they can customize a lot of data. For example, for Quik, they have a lot of realtor data in the second-hand homes or those kinds of information that's more structured in a database. In the case of China, they have a very large database of hotels that they work with that can provide up-to-date information, such as price per room night, those kinds of information. We would like to tightly integrate this kind of information in our search results so that our users are better served. On the other hand, because of the enhancement or the value those vertical search players can add to the kind of data, they deserve to make money from this.

For very important verticals, we'd like to have a certain kind of positioning in those leading companies to ensure that we do not lose the good user experience if they decide not to work with us in the future. This kind of investments or partnerships are win-win, and each party brings in their value. At the end of the day, it's better for our users.

Speaker 1

Your next question comes from the line of Gary Hengen with UBS. Please proceed.

Speaker 0

Good morning, everyone. Thanks for taking my question. I have two questions. The first one, just now, Jennifer, you mentioned that there is about 1,000 large customers in the country or so. Could you comment a little bit what kind of roughly the coverage ratio that Baidu has already established a relationship with? My second question is related to what Robin just now mentioned about Baidu's interest in the social search or social-related businesses. In your view, do you think that the social networks, i.e., Weibo and Facebook-like type of SNS today in China, are the long-term mode of social networks, or Baidu is thinking about some other really innovative and completely landscape-shaking SNS mode in the future?

Speaker 2

Hi, Gary. I'll take your first part of the question. The about 1,000 large customers, these, as I mentioned, are the branded advertisers. They typically, you know, these are the large customers that basically all the advertising media platforms will approach, and they will take advantage of those marketing platforms. We are probably not much different from a customer per se as compared to other media platforms. It's more a matter of budget allocation. Historically, these players will spend a lot more on the traditional media side. With the internet and particularly search engines, we offer targeted performance-based marketing platforms, and we offer a full bundled set of services to be. They are increasingly allocating more ad budgets to our platform.

Speaker 3

On the social front, our pick is basically embrace and expand. We have added a lot of social features in our existing products, such as the app feature, the share feature. We also have feed in some of our products, like Baidu Postbar. We think in the future, there are lots of things we can do, starting from our core offerings, web search or search-related. We'd like to perfectly combine the people relationship with content relationship. In some cases, users are looking for content. In some other cases, users are looking for relationships. We'd like to perfectly combine these two and give users a home that they depend on. We are indeed working on some new products that will better satisfy users' needs. In China, there's no dominant SNS in this market. That gives us a very good opportunity to innovate and lead in markets like this.

Speaker 1

You have a follow-up from the line of Eric Nguyen with Marais Assets. Please proceed.

Speaker 0

Oh, thanks very much for taking my follow-up question. Robin, my question is, how far is Baidu towards monetizing its map products? Given the strengths of showing from the group buying companies, how much of those advertising are being integrated with Baidu Maps? Thanks very much.

Speaker 3

Right now, the revenue from map product is very insignificant, and we do not expect that to change in the near future. The map is strategically important to Baidu, especially in the age of wireless internet or mobile internet. I'm not sure if we generate revenue from the group buying companies on the map service. It's not important. We're working on a better map service continuously so that people can find better local information, and people can get connected through nearby people who share similar interests or who know each other. Map is not a revenue generator. It's not going to be in the near future, but it's very critical in our overall map service landscape.

Speaker 1

Your next question comes from the line of Hugh Dong with HSBC. Please proceed.

Speaker 0

Good morning. Thanks for taking my question. I have a quick question for Robin. I think China e-commerce online advertising spending story has been with us for some time. When do you think this segment growth will reach peak and start to slow down? Thanks.

Speaker 3

I think China's e-commerce market is still in its early stage. It took off much later than search. That's not the case in the U.S., as you know. These days, there are lots of companies that founded traditional companies, brick and mortar companies, started to embrace the e-commerce trend. More importantly, consumers are developing a habit of buying online. We see tremendous momentum going forward. More and more companies will realize that the best way to do e-commerce is through Baidu. We will continue to benefit from this trend for the years to come.

Speaker 1

We are now approaching the end of the conference call. I would now like to turn the conference over to Baidu's Chief Executive Officer, Robin Li, for his closing remarks.

Speaker 3

Thank you for joining us today. Please do not hesitate to contact us if you have any further questions.

Speaker 1

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.