Baidu’s (BIDU) CEO Robin Li on Q2 2014 Results – Earnings Call Transcript

Our press release contains a reconciliation of unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures, and is available on our IR website at ir.baidu.com.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Baidu’s IR website.

I will now turn the call over to Baidu’s CEO, Robin Li.

Robin Li – Chairman and CEO

Hello everyone. We had a great quarter and there are exciting things happening at Baidu, generating tremendous energy and having strong forward momentum.

In the mobile era, search can be even more powerful as it connects users not only to information but also to services. Search is one of the top two most used applications on mobile according to a CNIC [ph] report released this week.

This quarter, mobile monetization again progressed very well, with mobile revenue, which is largely comprised of mobile search revenue, accounting for 30% of our total revenue. The healthy mobile search monetization ramp is a testament to search as a proven business model with vast potential.

As a bit of a refresher, Baidu’s mission is to provide the best way and most equitable way for people to find what they’re looking for. Users come to Baidu to discover. In the mobile age, connecting people with what they’re looking for includes not only information, content and apps, but also services, a natural extension of our platform.

We hold leading positions in the key mobile entry points of search, maps and app distribution. We are making investments to facilitate the seamless connection of users to services in a closed loop, which allows us to have a better understanding of user behavior and conversion for merchants. Over the longer term these investments will increase the size of our addressable market.

In our core search business, we remain the clear, dominant, cross-channel search leader. Mobile search traffic, again, drove overall traffic growth. In the second quarter, for the first time in history, during some holidays and weekends, when people were out and about, mobile traffic exceeded the traffic of desktop search.

Our mobile search service grew to over 500 million monthly active users in June. In Q2, we continued to aggressively invest and innovate, to create a better experience for our users. We revamped our homepage, and our users who log in now get personalized pages with automatically refreshed content.

We continue to deliver ever-richer, more dynamic results directly on the search page by working with partners in verticals such as healthcare, e-commerce, education and travel. In the automotive vertical, for example, we partnered with Bitauto and Autohome to integrate customized auto vertical content.

We boosted our search response time, customized through technology improvement query prediction. Search response time on PC is 10 times faster now than the beginning of the year. In fact, the majority of our PC search response is now literally faster than the blink of an eye.

Baidu continues to be an online marketer’s preferred platform to capture leads on a large scale and generate and generate the best ROI. It’s been a little over a year since we implemented our integrated PC and mobile bidding system, and the feedback continues to be overwhelmingly positive.

Our customers are truly embracing the diverse range of ad formats adoption mobile has to offer, with over 90% of our customers choosing click to action mobile ad format that includes click to- call, click-to-chat, and click-to-download, which directly tie query to conversion. We continue to proactively drive the effort to further develop the mobile ecosystem by educating our customers and providing them with the right infrastructure and tools to optimize for mobile.

In search monetization, the number of paid clicks, CPMs and click-through rates are trending higher year on year in large part due to our investments in mobile and technologies like deep learning. For instance, we launched a personalized click-through rate prediction initiative on both PC and mobile search, to make search ads more relevant and useful for individuals. And we are already seeing increases to click-through rates.

City level bidding, which we launched at the beginning of the quarter is attracting new customers to our platform. And we’ve seen overall spend from customers who participate in city level bidding increase as well. Over the short course of three months, a quarter of our customers have already opted to participate in city level bidding. And we are very pleased with this positive early sign.

Mobile Baidu, our search-focused app, now boasts nearly 70 million daily active user, which put us among the most popular native apps in China. It continues to be our largest and fastest-growing single channel for mobile search.

We upgraded Mobile Baidu by adding more personalization features and refreshed content. With the new light apps that are being added, Mobile Baidu is a powerful, seamless way for our users to discover and connect with new information and services, by tying together multiple Baidu products, including Baidu Search, Mobile Map, the Nuomi group buying service, and Baidu Wallet.

For example, a Baidu movie ticketing purchase can originate and be fulfilled all within the Mobile Baidu app. Here, a user snaps a photo of a movie poster, opens a light app, chooses a nearby theater, the movie and seats, and then purchases the ticket with Baidu Wallet, all without leaving the Baidu Mobile app. We ran some movie ticket promotions in Q2 to highlight this feature and saw the movie tickets sold nearly triple in the span of a month between May 1st Labor Day holiday to Dragon Boat holiday in early June.

In LBS, our flagship Mobile Map continued to extend its leading position by gaining market share, with the monthly active user base surpassing 200 million in the second quarter. We are currently the only mobile map in China with turn-by-turn voice navigation for walking. We also added more real-time road and parking updates.

Our group buying platform Nuomi celebrated its fourth anniversary this quarter, and the platform continued to grow and scale up nicely, with GMV in mobile tripling and the number of users doubling since we consolidated the business in the fourth quarter last year. Our sales force reseller network is already providing additional feet on the ground to help Nuomi scale up.

As the number one native app distribution platform, we gained further traction with the combined Baidu and 91 Wireless platform distributing over 130 million apps on a daily basis.

The process of integrating and unifying the platforms has progressed smoothly. The revenue contribution from our app distribution platform continues to grow meaningfully, monetizing through both advertising and mobile games.

We have a rich gaming platform, and we partnered with six exclusive games in the second quarter.

Our personal cloud storage product continued its strong momentum, growing to nearly 200 million registered users in Q2, from 160 million registered users in Q1. Our personal cloud storage product delivers a great user experience and drives continued user adoption of the product.

Technology and big data are at the crux of our efforts here at Baidu. And we made some meaningful wins that reinforce Baidu’s renown as a world-class technology company. We are thrilled to have Andrew Ng, a pioneer in the field of artificial intelligence and the foremost researcher in deep learning, join us as our new Chief Scientist and lead Baidu’s overall research efforts. Andrew shares our vision that AI will transform the internet and truly change the world.

This quarter, we opened up a new R&D center in Sunnyvale, California, and we announced three new research labs, two of which focus on artificial intelligence, and the third, big data.

Deep learning already touches on much of what we do, from speech recognition to image-based search, and from ad ranking to big data analytics. It will fundamentally improve our ability to understand natural language, to provide more accurate translation, and to make more intelligent recommendations.

Baidu brings together the raw computational power, the talent, and the enormous amount of data to break new ground in AI research. We are building neuron networks of unprecedented size and power, whose performance increases with the number of neuron connections.

We have applied our big data capability to a broad range of data sets and have seen impressive results. Our World Cup predictions had the most accurate record of predicting results from the group of six games to the championship.

Soon we will also be introducing predictive data-driven products for real estate prices and even likely box office for theatrical releases. Though these examples may just be showcases, they provide a peek at what is possible. As we continue to aggregate more data and improve our big data capability, we will provide big data prediction for behavior, movements and trends.

On the international front, I’m happy to announce that we launched Portuguese search in Brazil last week.

Now to update you on our online video operations. iQiyi’s Q2 performance continued to be robust, and we are very pleased with the progress. iQiyi is now number one in PC monthly and daily unique visitors, and number one in both PC and mobile by monthly time spent respectively, according to iResearch. The long-term prospects for online video and iQiyi are very attractive and we remain supportive of the platform.

The true power of Baidu platform is our open system. We work with all forms of applications and services, and support all formats of web pages, native apps and light apps. This enables us to offer a rich, seamless, integrated Baidu experience, combining search, LBS, and our wide range of consumer products, all delivered with unmatched speed and reliability, from China’s most advanced and powerful cloud infrastructure.

We are still only in the early stages of realizing the full potential of our platform, and our technology and data capability. We are excited to demonstrate what we are really capable of achieving and how large the Baidu platform can really become.

I want to take this opportunity to remind you all that Baidu World will be held this year, on September 3 in Beijing. I look forward to seeing many of you there.

Jennifer Li – CFO

Thanks, Robin. Hello everyone.

We’re excited to deliver a solid set of results in Q2, with mobile strongly anchoring our business. The vast customer base continues to expand and we are encouraged by the strong progress, as we continue to innovate and our customers further embrace our services.

We remain committed to investing aggressively in our strategic focus areas, namely search, mobile cloud, consumer business, LBS, and our international business. We will manage our business in a disciplined fashion, as always. These efforts, centered with our dedicated focus on investing in technology, will help fulfill our broader mission to also connect people with services.

Now moving to the financials, all monetary amounts are in RMB, unless stated otherwise.

For the second quarter, total revenues were RMB12 billion, representing a 59% year-on-year growth. During the second quarter, Baidu had approximately 488,000 active online marketing customers, a 4% increase from the corresponding period in 2013 and a 9% increase from the previous quarter. Revenue per online marketing customer for the second quarter was RMB24,200, a 50% increase from the corresponding period in 2013, and an increase of 16% from the previous quarter.

Traffic acquisition cost as a component of cost of revenues in Q2 were RMB1.5 billion, or 12.7% of total revenues, compared to 11.6% in the corresponding period in 2013 and 12.4% in the first quarter. The increase reflects increased contribution of contextual ads, mobil, and the promotion of hao123. Bandwidth and depreciation cost, as a percent of revenue in Q2, were 5.8% and 3.9% respectively, compared to 6% and 4.7% in the corresponding period in 2013.

Content cost as a component of cost of revenues was RMB354 million, representing 3% of total revenues, compared to 2% in the corresponding period in 2013. Content costs are mainly related to iQiyi. Selling, general and administrative expenses in Q2 were RMB2.1 billion, an increase of 99% year on year. The increase was primarily due to increased promotional spend for mobile products. R&D expenses in Q2 were RMB1.7 billion, an increase of 84% over the corresponding period in 2013. The increase was mainly due to an increase in the number of R&D personnel.

Share-based compensation expenses, which were allocated to related operating costs and expense line items increased in aggregate to RMB221 million in the second quarter from RMB83 million in Q2 2013. SBC increased due to more shares being granted to Baidu employees.

Operating profit for Q2 was RMB3.6 billion, an increase of 23% over Q2 last year. Total headcount on a consolidated basis, including invested entities, was about 40,500 as of Q2. This represents an increase of 17%, as compared to the end of last quarter. Income tax expense was RMB606 million for the second quarter. The effective tax rate for Q2 was 15.4%, compared to 16.3% in Q2 last year.

Net income attributable to Baidu for Q2 was RMB3.5 billion, a 34% increase from the corresponding period in 2013. Basic and diluted earnings attributable to Baidu per ADS for the second quarter amounted to RMB10.12 and RMB10.09, respectively.

Net income attributable to Baidu excluding share based compensation expenses, a non-GAAP measure, for Q2 was RMB3.8 billion, a 38% increase year on year. Basic and diluted earnings attributable to Baidu per ADS excluding share-based compensation expenses, both non-GAAP measures, were RMB10.75 and RMB10.72, respectively.

As of June 30, 2014, the Company had cash, cash equivalents and short-term investments of RMB48.7 billion. Net operating cash inflow and CapEx for the second quarter were RMB4.1 billion and RMB864 million respectively.

Now let me provide you with our top-line guidance for the third quarter of 2014. We currently expect total revenues for Q3 to be between RMB13.42 billion and 13.78 billion, representing a 50.9% to 55% year-on-year increase. Please note, this forecast reflects Baidu’s current and preliminary view and is subject to change.

I will now open the call to questions. Operator, please get ready to take questions.

Question-and-Answer Session

 

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