Baidu, Inc. (BIDU)

Q2 2010 Earnings Call

July 21, 2010 8:00 pm ET

Executives

Victor Tseng - IR Director

Robin Li - Chairman and CEO

Jennifer Li - CFO

Haoyu Shen - SVP of Business Operations

Analysts

Alan Hellawell - Deutsche Bank

James Mitchell - Goldman Sachs

Richard Ji - Morgan Stanley

Alicia Yap - Citi

Dick Wei - JPMorgan

Yu Jin - CICC

Andrey Glukhov - Brean Murray

Eddie Leung - Bank of America

Stephen Ju - RBC

Aaron Kessler - ThinkEquity

Wallace Cheung - Credit Suisse

Mayuresh Masurekar - Kaufman Brothers

Jake Li - Guotai Junan

Wendy Huang - RBS

Welin Li - UBS

Presentation

Operator

Hello and thank you for standing by for Baidu's second quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn the meeting over to your host for today's conference, Victor Tseng, Baidu's Investor Relations Director.

Victor Tseng

Hello, everyone, and welcome to Baidu's second quarter 2010 earnings conference call. We issued Baidu's second quarter 2010 earnings release earlier today. You can find a copy of the earnings release on the company's website as well as on newswire services.

Today, you will hear from Robin Li, Baidu's Chairman and Chief Executive Officer, and Jennifer Li, Baidu's Chief Financial Officer. After their prepared remarks, Robin and Jennifer will be joined by Haoyu Shen, Senior Vice President of Business Operations, to answer your questions.

Before we carry on, 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. Baidu does not undertake any obligation to update any forward-looking statement except as required under applicable law.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Baidu's corporate website at ir.baidu.com.

I will now turn the call over to Baidu's Chairman and CEO, Robin Li.

Robin Li

Hello, everyone, and thank you for joining us today. I'm pleased to report another quarter of strong performance. Successful customer acquisition was the main driver of our top-line growth. We saw a record number of customer additions, a total of 33,000 during the quarter. This was driven largely by our successful nationwide marketing campaign and the favorable macroenvironment.

As part of the marketing campaign, our teams visited over 100 cities across China and attracted a significant number of new customers by educating the market about Baidu and the power of search engine marketing.

The rollout of our CRM systems helped increase sales productivity. Today, our current base of 254,000 customers is still just a tiny fraction of the total addressable market of millions of SMEs in China. As the market leader, we will continue to educate companies about Baidu's cost-effective marketing platform.

During the second quarter, we continued to implement enhancements to our online marketing platform. We were able to monetize more effectively and large companies and SMEs are spending more with us. The strength should continue as customers become more familiar with the platform's functions and see potentially higher ROI.

Phoenix Nest implementation is largely complete, but consider it as version 1.0. There is still much more room for further improvement on an ongoing basis.

Q2 also marked a big step over for our mission of Box Computing. We continue to add more applications in our search engine results page. In other words, our box can do more, especially for time-sensitive queries.

The World Cup event is a great testimony of this technology. During that time, we answered more than 100 million related queries with eight different apps on game schedule, match scores, live broadcasting and recorded videos, et cetera. And the social game we developed during the World Cup on Post Bar attracted millions of people to participate.

As a result, we have seen good traffic patterns since the game started. Typically, our web search traffic is negatively impacted during large and newsworthy events. This time, it was an exception. And in part because of the better-than-expected search traffic during the World Cup, we were able to deliver Q2 revenue higher than previously guided.

Our close connection to our users has been a central factor in establishing Baidu's leadership. As the new technologies are emerging all the time, the market remains a very competitive place. Over time, success depends on investing in long term to anticipate industry trends and keep up the technological development.

That's why we're putting top talent, especially in R&D remains a focus for us. As you may have heard, we were in Silicon Valley just now, looking for top software engineers to expand our R&D team. We are excited about the talented people we met and look forward to making some great hires.

In our Union business, we benefited from our new policies which reward high-quality incremental traffic. This is an initiative we began in the third quarter last year. By focusing on improving Union traffic quality and nurturing organic traffic growth, we saw a significant decline in traffic acquisition costs as the percentage of revenue. We're also working on improving our contextual ad business, although it is still relatively small.

As we approach the fifth anniversary of our IPO, it is worth looking back on how far we've come. Since our NASDAQ listing on August 5, 2005, China's internet population has grown from 100 million in 2005 to 420 million today, Baidu's revenue growth from RMB70 million in Q2 of '05 to RMB1.9 million this past quarter. And we've gone from having 41,000 active online marketing customers to 254,000. Keep in mind that while China already has the largest online population in the world, almost 70% of the country is still offline.

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