Baidu, Inc.

Baidu, Inc.

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Baidu, Inc. (BIDU) Q1 2015 Earnings Call Transcript

Published at 2015-04-29 23:53:07
Executives
Sharon Ng - Senior Manager of IR Robin Li - Chairman and CEO Jennifer Li - CFO
Analysts
Eddie Leung - Merrill Lynch Alan Hellawell - Deutsche Bank Dick Wei - Credit Suisse Alicia Yap - Barclays Alex Yao - JP Morgan Piyush Mubayi - Goldman Sachs Ming Zhao - 86Research Chao Wang - Nomura Thomas Chong - Citigroup Chi Tsang - HSBC Cynthia Meng - Jefferies Natalie Wu - CICC Eric Wayne - Blue Lotus Ella Ji - Oppenheimer Wendy Huang - Macquarie
Operator
Hello and thank you for standing by for Baidu's First Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. After management's prepared remark 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 you host for today's conference, Sharon Ng, Baidu's Director of Investor Relations.
Sharon Ng
Hello, everyone and welcome to Baidu's first quarter 2015 earnings conference call. Baidu's earnings release was distributed earlier today, and you can find a copy on our Web site, as well as on newswire services. Today you will hear from Robin Li, Baidu's Chief Executive Officer; and Jennifer Li, Baidu's Chief Financial Officer. After their prepared remarks, Robin and Jennifer will answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the 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 statements, except as required under applicable law. Our earnings press release and this call include discussions of certain unaudited, non-GAAP financial measures. Our press release contains a reconciliation of unaudited non-GAAP measures, to the unaudited most directly comparable GAAP measures and is available on our IR Web site, 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 Web site. I will now turn the call over to Baidu's CEO, Robin Li.
Robin Li
Hello everyone, and thanks for joining today's call. This quarter we continued to drive mobile [indiscernible] to new heights as we build out our mobile eco system more fully. For the first time mobile represented half of Baidu's total revenues further reinforcing Baidu's industry leadership in mobile. We were able to reach this important watershed by innovating and doing things differently. Our track record proves that we showed the right strategy and tactics and that we executed [deeply] and decisively as we navigated the mobile shift in our home market. Search is still about direct immediate expression of our user intent. We successfully leverage this and the open nature of our platform as far as our extensive underground sales force to achieve this dramatic growth in mobile. And there is much more to come. As many user still just turning to recent to the power of smartphone and how it empowers them as consumers, see opportunities that mobile opens up are limitless. We see huge potential ahead for mobile marketing, online to offline and key life verticals such as healthcare, education and financial services. By leveraging our solid mobile foundation, exceptional technology advantage and proven operational experience. We are redefining the third spot by going beyond returning information like Web sites, addresses and phone numbers to our users. We are now connecting users with services and enabling close look transactions. We are pioneering a different approach to the basic inner way creating more naturalistic intuitive and convenient wave for people to perform search and delivering results than our more intelligently predictive and better matched to the need of time and place. To fulfill our ambition we are building our eco-system by investing heavily in R&D operating our own Baidu offering like Nuomi group buying, Baidu take out foot delivery and Baidu Wallet. Partnering with and investing in best in class players like [Chinar] and Uber and working closely with platform partners across verticals on Baidu Connect. This is the right time for Baidu to seize the opportunity and we are moving boldly and quickly. Tectonic shifts creates opening for forward looking, forward thinking companies to really drive innovation and getting front of tremendous new opportunities and Baidu is ready to lead. Now for an update on our core search wins. The fundamentals of core search remain very robust. Mobile now having reached 50% of top line continues to be the main driver of revenue growth. Mobile search driven by robust traffic growth and improving monetization again contributed the majority of our mobile revenues. We see much more growth ahead from our mobile marketing platform as traffic increases, infrastructure improves, ad targeting grows more precise and ad format proliferate and become more diverse. Meanwhile we continued to be pleased that with our PC wins which continues to grow healthily. We again raised the bar in search by focusing on improving the user experience making enhancements to our bidding system and further pushing infrastructure development. In user experience we've taken further steps to make search faster, more relevant, more immediate and more tailored. This quarter we upgraded instant search by improving speed and relevance. We made our search results more visual and personalized by dramatically increasing the coverage of images in pay search and saw a marked increase in pixel rates as a result. We are taking a vertical approach to the powerful click to action button, which provide unambiguous direct ROI to our customers, for example, in addition to the existing click to call, click to chat, and click to download mobile app format in healthcare we are now offering click to consult and click to appointment. In education we offer click to [Reddit] for a class, and click to lesson to a course. And in restaurant we offer click to book a table. We will be extending this vertical specific click to action button to financial services, travel, transportation and career services. In February we made search a bit more local by further targeting geographic areas for bidding from over 300 cities in China to bidding by distance proximity. We are rolling out distance proximity bidding in phases and the early response has been very encouraging. We think that customers who use distance proximity bidding have a higher propensity to spend on mobile and enjoy higher ROI. We are attracting a new incremental local customer base as our marketing offering grows more targeted and more local. This merchant are thinking mobile first and we offer easy to use tools and infrastructure, that's why compelling mobile marketing solutions to meet their needs. Earlier this month we began our annual nationwide search engine marketing campaign. Our largest to get, spanning 500 cities to reach SMEs and local merchants and further penetrate lower tier cities. Mobile infrastructure has come a long way over the past two years with Baidu playing an active role in pushing the development. Over two years ago we recognized the importance of mobile infrastructure to the user experience. Early on we made increasing the number of mobile optimized landing pages one of the key performance indicators for our sales force. We also provided free software to our customers to convert PC pages to mobile optimized one and we adjusted our algorithm to factor in mobile landing page quality in our search rankings. Now nearly all of our customers have mobile landing pages but we’re not stopping here. The next step is to continue to improve the overall landing page quality and really unlock the value of mobile by enabling services and transactions on Baidu. Now for further I think mobile and O2O. In Q1 mobile search -- Baidu mobile search reached 600 million monthly active users up from 540 million in the previous quarter and in mobile maps we hit 270 million monthly active users and we continue to occupy the top slot in app distribution in China. The scale and reach of this asset are the foundation of our mobile platform and mobile Baidu search app and mobile maps serve as powerful gateways that not only support the growth of our newer O2O offering such as Nuomi and Wallet, but also enable closed loop transaction. Baidu products share rich and diverse resources within our platforms and across our ecosystem For example, in Q1, 25% of Nuomi movie tickets transactions originated from and were completed on mobile Baidu and maps. In March over International Women’s Day weekend we’ve run a successful movie ticket marketing and promotional campaign. Nearly 15% of all online and offline movie tickets sold in China on March 7th flowed through Baidu money, with nearly 70% of those transactions completed with Baidu Wallet. The campaign educated users on discovering O2O services through our gateway products and demonstrated the ease of buying movie tickets through Baidu, driving user adoption for both Nuomi and Baidu Wallet. Speaking of Baidu Wallet, it now boasts nearly 26 million connected dot coms where users have both linked a bank card to an account and spend at least once with Baidu Wallet. Baidu Connect now has over 700,000 merchants. We continue to build out the infrastructure for this platform more fully and work more closely with verticals to tailor our offering. A brief example is cuLearn the online arm of new oriental education. cuLearn students on average spend RMB1,000 per transaction. Baidu worked with cuLearn to drive these through our marketing platform and enable a closed loop transaction through Baidu Connect. Over the past month cuLearn tripled monthly revenue as compared to October last year when we launched via Baidu Connect account. Our takeout for delivery service was launched last August in less than nine months, we grow to cover 70 plus cities and we believe we are already the leader in nearly half of those cities within the working age demographic by GMV. Including Beijing and five additional provincial capitals and we are the leader in 16 cities overall that also include Beijing by GMV. Take-out food delivery not only complements our group buying services but also leans on our technology advantage. The key sustainable edge in take-out food delivery is scale and optimizing logistics and resource allocation. Our technology platform pulls the resources of our math, data and software capabilities. Baidu take-out food delivery offers a differentiated experience by targeting the working age demons graphic, higher quality, license the restaurants and faster delivery time. O2O address the enormous opportunity in local and it’s still early days. The majority of conception and transactions takes place locally and offline. With the write-off mobile connecting local services from online to offline becomes possible. Bringing services online opens up information transparency and allows for better matching of supply with real time demand. That means increased efficiency in resource allocation. For example, with restaurant industry a multi trillion RMB industry in China behind only real-estate and automotive in market size more than half of these are left empty daily. Only 1% of reservations are made online. And online take-out food delivery represents only a low single-digit percentage of overall restaurant GMV. On average 85% of movie theater seats are unsold and more than 40% of trucks on the go carry no merchandise. By connecting people on these services Baidu is providing users with convenience and choice and enabling merchants to fulfill real-time demand which can drive incremental revenue and improve capacity utilization. This is a long-term strategy and ecosystem build-out for Baidu. We still have a lot of work to do but the results thus far are very encouraging. We will continue to run online and offline marketing and cross product promotional campaigns for Mobile Baidu, Maps, Nuomi and take-out food delivery in the coming quarters. This campaign will educate users about new services that can be discovered through our platform and foster the right user behavior. But connecting people with services goes beyond local, our gateway position our focus on data and technology are enormous accumulated user base and customer base all combined to put us in the unique position to truly transform major service verticals like healthcare, education, financial services which in aggregate represent nearly 20% of China’s economy. Baidu we’ll have an opportunity to place an impact overall in transforming each of this sectors. In healthcare, we are helping to better match patients to the right doctors. In China, people sometimes line up for days to make a medical appointment to see a doctor, who might not be the right one to treat their condition. Baidu Doctor which we launched in Q1 addresses the situation and the support online registration. The transform has brought nearly 700 hospitals and over 25,000 doctors across three provinces to the platform. We will work to expand the service in the coming quarters. We’re also making education more accessible by providing an online education platform and funding where at comp rate. Our online education platform Chuanke, which we acquired last August already partners with nearly 7,000 educational institutions providing over 25,000 courses to millions of registered users. In financial services, we launched a pilot program to offer consumer loans or consumer credit to lower the barriers to access for potential students. A few words on Baidu Research, our research program this is [indiscernible] in Beijing and the Silicon Valley continues to yield great results. In addition to advance setting on our deep speech approach which uses deep learning to deliver the highest accuracy in English speech recognition in the industry to-date. We are making great strides in vision as well. In January, Baidu Research announced industry leading results achieved by the Baidu deep image in each recognition system and our systems continue to improve. ITE continues to perform very well and grow its Q1 top line revenue over 80% year-on-year. It continues to offer a superior user experience among China’s Internet video sites and we remain highly committed to and supported ITE. We are clearly excited by the opportunities ahead of us and we have seen -- we have been selective about choosing those [wave length]. Baidu's strategy is very focused and we do regularly review our portfolio for effectiveness and we have in the past and we'll continue to prompt our portfolio and [sound] that products that do not meet our expectations. In closing, Baidu is redefining the search box and [indiscernible] of our addressable market. We are working hard and investing aggressively to fulfill our vision and packing to our platforms through potential. With that, I’ll now turn it over to Jennifer for a look at our financial.
Jennifer Li
Thank you, Robin. Hello everyone. In Q1, we again saw dramatic growth from mobile and continued to see tremendous opportunities on the horizon. We’re executing our investment plans and closely tracking and monitor trajectory, scale and conversion metrics to measure returns. While investments in some of the newer products such as Nuomi, take-out food delivery, Wallet and Baidu Connect are still at a early stage, we’re pleased with the progress that we have made thus far and we’ll continue working hard to ramp up these services in the coming quarters. In Q2, we’ll continue our marketing and promotional spend to take advantage of spring time travel and various consumer oriented shopping days. As we said before, sales and marketing will be an area of particular focus, we’ll be optimistic and spend will vary from quarter-to-quarter. ITE continues to be a highly strategic asset with attractive long-term growth prospect. We’ll continue to invest in content and spend where needed to procure high quality license to content and develop self produced content to support ITEs growth. Content cost will vary quarter-on-quarter. The fundamentals of our business are very strong and the growth opportunities ahead for Baidu are vast, but also very much within reach, we’re working hard and moving quickly to execute on our plan. In addition to leveraging our existing platform, we’ll continue to deploy the necessary resources to further build out our ecosystem and create long-term shareholder value. Now moving to the financials, all mandatory amounts are RMB, unless stated otherwise. For the first quarter total revenue were 12.7 billion, representing a 34% increase year-on-year. Over the first quarter Baidu had approximately 524,000 active online marketing customers, a 17% increase from the corresponding period in 2014 and flat from the previous quarter. Revenue per online marketing customer for the first quarter was 23,800, and a 14% increase from the corresponding period in 2014 and a 10% decrease from the previous quarter. Traffic acquisition cost as a component of cost of revenue in Q1 were 1.7 billion was 13.5% of total revenues compared to 12.4% in the corresponding period in 2014. The increase was mainly due to increased to contribution of contractual ads. Bandwidth and depreciation cost as a percent of revenue in Q1 were 6.7% and 4.6%, respectively, compared to 6.8% and 4.5% in the corresponding period in 2014. Content cost, as a component of cost of revenue was RMB608 million, representing 4.8% of total revenues, compared to 4.1% of the corresponding period in 2014. This increase was mainly due to ITE's increased to content cost. SG&A expenses in Q1 were 3 billion, an increase of 47% year-on-year. The increase was primarily due to a increase in promotional spend for mobile products and services. R&D expenses in Q1 were RMB2.3 billion, an increase of 79% over the corresponding period in 2014. The increase was primarily due to an increase in the number of R&D personnel. Share-based compensation expenses, which were allocated to related operating costs and expense-line items, increase in aggregate, to RMB291 million in the first quarter, from RMB169 million in the corresponding period in 2014. SBC increased due to more shares being granted to employees. Operating profit for Q1 was 2.2 billion, a decrease of 9% over Q1 2014. Total headcount, on a consolidated basis including invested entities, was about 46,800 as of the end of Q1. This represents a increase of 1% compared to the end of Q4 last year. Income tax expenses were 541 million for the first quarter. The effective tax rate for the first quarter was 20.7%, compared to 15.1% in Q1 2014. The hiring effective tax rate reflects that some loss generating entities in the group cannot be consolidate for tax purposes under PRC tax law and the expiration of preferred tax license for one of our subsidiaries. For the remainder of the year we expect our effective tax rate to be around this range of 20%. Net income attributable to Baidu for Q1 was 2.4 billion, a 3% decrease from the corresponding period in 2014. Basic and diluted earnings attributable to Baidu per ADS for the first quarter amounted to RMB6.79 and RMB6.76, respectively. Net income attributable to Baidu excluding share based compensation expenses a non-GAAP measure for Q1 was 2.7 billion a 1% increase year-over-year basic and diluted earnings attributable to Baidu per ADS excluding share based compensation expenses both non-GAAP was 7.62 and 7.58 respectively. As of Q1 the company had cash, cash equivalent and short term investment of 58 billion. Net operating cash inflow and the CapEx for the first quarter were 2.8 billion and 1 billion respectively. Now let me provide you with our top line guidance for the second quarter of 2015. We currently expect total revenue for the second quarter to be between 16.365 billion and 16.75 billion representing a 36.5% to 39.7% year-over-year increase. Please note this forecast reflects Baidu's current and preliminary view, and is subject to change. I will now open the call to questions. Operator please go ahead with questions.
Operator
Thank you. [Operator Instructions]. Your first question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.
Operator
The next question comes from the line of Alan Hellawell from Deutsche Bank. Please ask your question.
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The next question is coming from the line of Dick Wei from Credit Suisse. Please ask your question.
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[Operator Instructions]. Your next question comes from the line of Alicia Yap from Barclays. Please ask your question.
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Your next question comes from the line of Alex Yao from JP Morgan. Please ask your question.
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Your next question comes from the line of Piyush Mubayi from Goldman Sachs. Please ask your question.
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Operator
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.