Linda Sun - Baidu, Inc. Robin Yanhong Li - Baidu, Inc. Qi Lu - Baidu, Inc. Jennifer Xinzhe Li - Baidu, Inc..

Eddie Leung - Merrill Lynch Far East Ltd. Chi Tsang - The Hongkong & Shanghai Banking Corp. Ltd. (Broker) Alan Hellawell - Deutsche Bank AG (Hong Kong) Alicia Yap - Citigroup Global Markets Asia Ltd. Alex Yao - JPMorgan Securities (Asia Pacific) Ltd. Juan Lin - 86Research Ltd.

Piyush Mubayi - Goldman Sachs (Asia) LLC Natalie Wu - CICC Evan Zhou - Credit Suisse (Hong Kong) Ltd. Ella Ji - China Renaissance Wendy Huang - Macquarie Capital Ltd. Thomas Chong - BOCI Research Ltd..

Hello, and thank you for standing by for Baidu's Fourth Quarter and Full-Year 2016 Earnings 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, Linda Sun, Baidu's Senior Manager of Investor Relations..

Hello, everyone, and welcome to Baidu's fourth quarter and full-year 2016 earnings conference call. Baidu's earnings release was distributed today, and you can find a copy on our website as well as on Newswire services.

Today, you will hear from Robin Li, Baidu's Chief Executive Officer; Jennifer Li, Baidu's Chief Financial Officer; and Qi Lu, Baidu's Chief Operating 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 the 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..

Hello, everybody, and thank you for joining today's call. 2016 was a busy year, in which we experienced both significant breakthroughs and challenges as Baidu transitioned into the newest and most exciting stage of our journey so far. In 2016, we began to see glimpses of AI revolutionizing the Internet and traditional industries.

The PC era and the rise of mobile over the past four or five years are in our rear view mirror. We are now living and breathing the era of artificial intelligence.

We believe that AI is the new electricity, which will transform industry after industry, (3:18) new applications and products that we have yet to even imagine, and fundamentally, change how users interact with technology.

AI represents an enormous opportunity and Baidu is primed to lead the AI revolution in China, as a result of years of investment and our position at the intersection of Big Data, technology and search, as well as our access to the best R&D talent in China and globally.

To seize this opportunity, we have continuously shifted our strategy, organization, and resources to AI. And we continue to gain industry recognition. Just yesterday, MIT Technology Review singled out face recognition technology as one of the 2017's top 10 breakthrough technologies with Baidu as a key player.

Launched last September, our artificial intelligence platform, Baidu Brain, is already deployed across nearly all of our products including Search, News Feed, Maps, Nuomi, and PostBar to name but a few.

Users experience the magic of AI when they use Voice and Image Search or when we push targeted content in News Feed, recommend dishes in Nuomi, optimize a route in Maps, or intelligently (4:51) video content on PostBar. With AI, we are able to better match and predict user intent and deliver results that are more relevant and more targeted.

By opening up Baidu Brain's APIs to the Chinese developer community, we are also leading the charge to transform traditional business into AI-enabled one. And our AI-driven initiative such as DuerOS supported by our leading Chinese language voice recognition technology opens up a new human-digital interaction paradigm.

We've announced a DuerOS powered TV assistant in collaboration with (5:37) and a DuerOS powered home robot named Little Fish (5:43). And we recently completed our acquisition of Raven Tech, a smartphone hardware start-up. We are excited to welcome Raven Tech's CEO, Jesse Lu, and the team to the Baidu family.

Our AI technology is even showing signs of adapting humans. Last year, DeepSpeech, our voice recognition technology for Search, was just slightly better than human level voice-recognition accuracy at 82%. To-date, our technology has further widened the lead performing at 86% accuracy.

In December, our AI capabilities were showcased on popular Chinese television show the Super Brain where our Xiaodu robot competed in three mind-bending voice and image recognition challenges against human geniuses. Xiaodu won two out of three challenges and tied for the third.

Beyond our core platform, our leadership in AI creates vast opportunities in areas such as financial services, cloud and autonomous driving. We are investing in these opportunities for the long-term and have attracted some of the best talent to drive this effort to fruition.

In 2016, we made tremendous effort to upgrade the Search user experience to ensure that users have confidence in the quality of content on our platform. To-date, we have largely completed the process of verifying ICP licenses and enterprise banking accounts for all of our customers.

In the process of this cleanup effort, some portion of our customer base may not be able to meet our stringent requirements and we may experience a short-term reduction in the number of online active customers. The higher standard are healthy and good for our platform.

And customers who comply with our stringent requirements may be able to enjoy a higher volume (8:02) and even more attractive ROI, and in turn, spend more of their budget on our platform, be it through Search, News Feed or our other AI-powered products. Our untapped customer pool also remains vast.

With Search, News Feed, and other products serving both direct response and branded advertising to key accounts, small and medium enterprises, and local merchants. Our value proposition to customers is highly compelling.

With hundreds of millions of user seeking and consuming content on Baidu platform, our content ecosystem is a key focus for investment and innovation. In particular, News Feed is a very exciting AI-powered product that have seen fast user adoption over the past several quarters.

News Feed complement Search by bringing user's fresh, tailored content, creating a virtuous circle of content push and pull. Nearly half of Mobile Baidu version 7.3 and above users engage with News Feed on a daily basis and spend, on average, twice as much time in the app as compared to users who have yet to use News Feed.

This strong traction is encouraging and we look forward to adding new app features and further improving our News Feed product. Another key part of our content ecosystem is our Baidu Brain powered open content platform (9:50) which we launched at the end of September.

The (9:55) content distribution platform creates high-quality contents across media formats such as images, texts, videos, AR and VR, which Baidu host and operate within our ecosystem. Content creators are eager to be part of the (10:15) platform due to our vast user traffic and targeted matching of users to content.

The platform has shown rapid growth with over 200,000 content creators registered. On the customer front, News Feed is showing early signs of being a natural incremental complement to Search. We are very encouraged by the momentum we've gained so far with both users and customers.

And we see strong potential for News Feed to help expand our customer pool and attract more large customers in verticals such as retail and auto, and more SME customers in verticals such as education and local services. Maps and Nuomi continue to support our Search ecosystem by providing reach, local services content.

In the fourth quarter, Baidu Maps, Nuomi, and Local Express added breadth and depth to our points of interest database, bringing users direct access to over 2.4 million merchants as of the end of December, which is a 117% increase year-over- year.

Now, looking to some of our longer term investment areas, we made progress in our autonomous driving initiative and demonstrated our technology at the World Internet Conference in Wuzhen this past November.

Over 200 attendees and journalists experienced Level-4 fully autonomous driving under real-world conditions in our fleet of 18 self-driving cars powered by Baidu AutoBrain, our AI platform for autonomous vehicles. Our teams in Beijing and the U.S.

are making incredible progress on a daily basis with the accuracy of Baidu's vehicular recognition already above 90% and Baidu HD mapping exceeding 90% accuracy with (12:30) level precision. We launched our Baidu Cloud business in the second half of 2016 and have been making solid progress in building out our cloud product offering.

With our AI, Big Data, and Cloud infrastructure at our core, we are able to provide our customers with a highly-differentiated value proposition.

For example, Baidu helped the Taiyuan Railway Administration build up its intelligent logistics cloud platform by leveraging our cloud technologies and real-time Big Data algorithms to help optimize the customer storage, shipment, and drop plan.

We've also introduced advanced solutions such as logistics navigation, image recognition, and IoT offerings. Customer feedback for our Cloud service has been very positive and growth this year has been very encouraging. Our Financial Services business continues to transform the traditional financial services industry.

Here, our AI strength is the crucial advantage for areas such as credit risk management and matching customers with the most appropriate product.

Baidu Wallet, which serves as a user gateway to branch into other financial products expanded its reach with activated user accounts surpassing 100 million as of end of fourth quarter compared to 90 million as of the end of third quarter.

With Baidu's innovative approach to Financial Services product, we are creating new supply and demand and processing new market all the while helping to support the growth of traditional industries such as education, travel, home decoration, and cosmetic surgery. In the education loans, we continue to dominate with roughly 75% market share.

ITE performed very well in the quarter too with revenue and rapid subscriber numbers ramping up nicely. In December of 2016, according to iResearch, ITE's mobile app maintained its industry leadership with 125 million daily active users, 480 million monthly active users, 335 billion minutes monthly user time.

ITE is an important part of Baidu content ecosystem, and we look forward to supporting its further growth. ITE has also recently completed the issuance of US$1.5 billion convertible notes of which Baidu invested US$300 million. Baidu Deliveries also grow rapidly, nearly doubling its GMV year-over-year.

Baidu Deliveries' differentiated go-to-market strategy of choosing select, attractive market combined with our technology driven AI-powered competitive advantage are helping to build a sustainable business for the long-term. As announced in our earnings press release earlier today, Mr.

Greg Penner will step down from our board, having served as a board member since July 2004. On behalf of Baidu's board of directors, I would like to express my gratitude to Greg for his long-standing dedication and invaluable contribution to Baidu. And last but not least, on behalf of the entire Baidu team, I would like to welcome Dr.

Qi Lu, our new Group President and Chief Operating Officer, who is joining our earnings call for the first time. Qi has been appointed as our new Director and Vice Chairman of our board of directors. As you know, Qi is one of the most experienced leaders in the global technology industry, and also a foremost expert in AI.

Qi oversees our product, technology, sales, marketing and operations. I look forward to working closely with Qi to take Baidu's management and technology to the next level.

Qi, do you have a few words to say?.

Thank you very much, Robin, and hello to everyone. It is a real honor to be joining my first Baidu earnings call as Group President and COO. As a leader in China's Internet industry for over a decade, Baidu has built up an incredibly strong set of reinforcing assets in terms of technology, data, talents and insights.

This is a very exciting time, as China plus AI is an enormous opportunity for growth, which Baidu is very well-positioned to lead. We have a great journey ahead of us, and I have already been very energized by the amazing work that's going on here.

I look forward to speaking with you more in the months ahead on many of the initiatives, especially in AI, that are underway. Back to you, Robin..

Thank you, Qi. To conclude, AI represents a revolution in how humans and businesses interact with, and benefit from, technology. China plus AI will be a tremendous field of opportunity that Baidu is well-positioned to lead as a result of our long track record of investment and innovation.

Looking ahead, we will continue to apply our expanding portfolio of AI-based technologies to an ever-widening range of applications, while we strengthen Baidu's role as an essential distributor of dynamic content on the Chinese Internet, from news and images to video, data and connected services.

With that, I will now turn the call over to Jennifer for an update on financials..

Thank you, Robin. Hello, everyone. 2016 was a challenging year and a busy year, with proactive implementation of stringent customer requirements and compliance with the new advertising law impacting our revenue. These efforts are necessary, and will help us build a better user experience and a healthier, more robust platform.

We largely completed our cleanup initiative in the fourth quarter, and believe that the most significant revenue impact is behind us. Revenue in the fourth quarter resets our revenue base, and we look forward to 2017 as a time of gradual recovery and growth. Over the past year, we have carefully reviewed our strategy and business portfolio.

As Robin mentioned, the mobile transition is behind us, and we're at the cusp of an AI revolution. Baidu's strategic focus, organization, and resources have shifted increasingly towards AI, and we are excited to execute our vision in this new era.

Given the strategic shift to capture the opportunities in the new AI era, we do not believe metrics such as mobile search MAU, mobile maps MAU, GMV and Wallet user numbers are indicative of our business performance. As such, this will be the last quarter that we will report that set of operating metrics.

We always seeks to be open and transparent, and we'll continue to update the investment community on the most important metrics to track our progress. In 2017, we'll continue to invest to build our content and service ecosystem and execute our plan to capture the AI opportunity in China.

Content continues to be an important investment area, as we continue to support ITE's growth and build out (21:16), (21:17) content platform to attract content and service partners, Maps and Nuomi, and key relationships with partners such as Ctrip will support our service ecosystem.

Now moving to the financials, all number amounts are in RMB unless stated otherwise. For the fourth quarter, total revenues were RMB 18.2 billion, representing a 2.6% decrease from the corresponding period in 2015, and flat year-over-year, excluding Qunar in the fourth quarter of 2015.

Total revenues for the full-year 2016 were RMB 70.5 billion, a increase of approximately 6.3% from 2015 and a 12% year-over-year increase ,excluding Qunar.

During the fourth quarter, Baidu had approximately 552,000 active online marketing customers, a 18.6% decrease from the corresponding period in 2015, and a 13.7% decrease from the previous quarter.

Revenue per online marketing customer for the fourth quarter was RMB 35,400, a 14.2% increase from the corresponding period in 2015, and a increase of 13.1% from the previous quarter.

Traffic acquisition cost as a component of cost of revenue in Q4 was RMB 2.6 billion, or 14.5% of total revenues, compared to 14% in the corresponding period in 2015, and 14.2% in the third quarter of 2016. Full-year 2016 tax as a percent of revenue was 14.7%, up from 13.3% for 2015.

Bandwidth and depreciation cost as a percent of revenue in Q4 were 6.8% and 4.5% respectively, compared to 5.4% and 3.7% in the corresponding period in 2015. In 2016, bandwidth and depreciation costs as a percent of revenue increased to 6.7% and 4.4% from 5.6% and 3.9% respectively in 2015.

Operational cost as a component of cost of revenue in Q4 were RMB 1.2 billion, representing 6.5% of total revenues, compared to 6.3% in the corresponding period in 2015. Total operational cost for 2016 were RMB 4.4 billion, representing 6.3% of total revenues compared to 5.8% in 2015.

Content cost as a component of cost of revenue in Q4 were RMB 2.6 billion, representing 14.1% of total revenues compared to 7.4% in the corresponding period in 2015. Total content costs for 2016 were RMB 7.9 billion, representing 11% of total revenue compared to 5.6% in 2015. This increase was mainly due to iQiyi's increased content cost.

In 2017, we expect content cost to step up at a similar pace as 2016. Content cost will be used to invest in high quality, licensed and self-produced content to support ITE and support Search and News Feed products through our (24:59) platform.

SG&A expenses in Q4 were RMB 3.3 billion, a decrease of 26.4% year-over-year, and a decrease of 22% excluding Qunar over the corresponding period in 2015. The decrease was mainly due to a decrease in promotional spending for Transaction Services.

Total SG&A expenses for 2016 were RMB 15.1 billion, a 11.7% decrease from 2015 and a 5.6% year-over-year increase excluding Qunar. In 2017, SG&A will remain at a similar level to that of 2016, with spending shifting to Mobile Baidu and News Feed to further drive user adoption.

R&D expenses in Q4 were RMB 3 billion, an increase of 19.5% over the corresponding period in 2015, and a year-over-year increase of 25%, excluding Qunar in the fourth quarter of 2015. Total R&D expenses for 2016 were RMB 10.2 billion, a 0.2% decrease from 2015 and 12.5% year over increase, excluding Qunar. In 2017, we'll continue to invest in R&D.

Share-based compensation expenses, which were allocated to related operating costs and expense line items, increased in aggregate to RMB 632 million in Q4 from RMB 341 million in the corresponding period in 2015. SBC expenses for 2016 increased 27% over the 2015 level and increase 60% year-over-year, excluding Qunar.

Operating profit for Q4 were RMB 2.2 billion, a decrease of 38.2% over Q4 2015, and a decrease of 40% after excluding Qunar impact in the fourth quarter of 2015. Operating profit for the full-year 2016 decreased 14% from 2015 and 25% year-over-year, excluding Qunar.

Other income net was RMB 1.8 billion in the fourth of 2016, which mainly consisted of the investment gain recognized as a result of Baidu's exchange of Uber China shares with Didi.

Other income net was RMB 24 billion in the corresponding period of 2015, which mainly consisted of the investment gain as a result of Baidu's exchange of Qunar shares with Ctrip. For the full-year, other income net was RMB 3.8 billion in 2016 compared to RMB 24.7 billion in 2015. Income tax expense was RMB 401 million for the fourth quarter.

The effective tax rate for the fourth quarter was 8.9% compared to 12.7% in Q4 2015. The decrease in the effective tax rate was due to the newly-granted preferential tax licenses for certain PRC subsidiaries. For the full-year, our effective tax rate was 20.1% compared to 14.4% in 2015.

Excluding the share exchange transactions impact for the past two years, the effective tax rate was flat year-over-year. For 2017, we expect our effective tax rate to be in the mid to high teens. Net income attributable to Baidu for Q4 was RMB 4.1 billion.

Basic and diluted earnings attributable to Baidu per ADS for the fourth quarter amounted to RMB 11.43 and RMB 11.4, respectively. Diluted earnings attributable to Baidu per ADS excluding net gain recognized as a result of Baidu's exchange of Uber China shares with Didi for Q4 was RMB 6.49.

Diluted earnings attributable to Baidu per ADS excluding net gain recognized as a result of Baidu's exchange of Qunar shares with Ctrip for the fourth quarter, last year 2105 was RMB 7.61. Net income attributable to Baidu for the full-year was RMB 11.6 billion. Non-GAAP net income attributable to Baidu for Q4 was RMB 4.6 billion.

Non-GAAP diluted earnings per ADS for Q4 was RMB 13.23. Non-GAAP net income attributable to Baidu for the full-year was RMB 13.2 billion. As of Q4, the company had cash, cash equivalents and short-term investments of RMB 89.8 billion.

Net operating cash inflow and capital expenditure for the fourth quarter were RMB 8 billion and RMB 1.2 billion respectively. Full-year net operating cash inflow and capital expenditures were RMB 22.3 billion and RMB 4.2 billion respectively.

Total head count on a consolidated basis including invested entities as of December 31, 206 was about 45,900, a increase of 2.3% as compared to the end of last quarter. Now, let me provide you with our top-line guidance for the first quarter of 2017.

We currently expect total revenue for the first quarter to be between RMB 16.48 billion to RMB 17.03 billion, representing a 4.2% to 7.6% year-over-year increase, or negative 9.5% to negative 6.5% quarter-over-quarter. 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..

Thank you. Our first question comes from the line of Eddie Leung from Merrill Lynch. Please go ahead..

Good morning. Thank you for taking my questions, and many congratulations in bringing Qi to the team as well. I have a question on News Feed. I think Robin mentioned that so far, you have been seeing some complementary results between Search and News Feed.

Could you share more color with us on how your marketing clients are looking at these two applications, how they are allocating their budgets between Search and News Feed? Should we also see a bit of cannibalizations to some clients as well? Thanks..

Eddie, this is Robin.

I think, when we see that News Feed is complementary to Search and will bring incremental traffic and revenue to Baidu, it really means that many of our marketing clients, especially when I mentioned large clients in the industry of auto and real estate, they were not able to find enough number of (33:14) traffic to show their ads in the Search context, but it's much easier for them to find targeted users in the News Feed context.

And similarly, for providers of local services or education services that got a local focus, it's again easier to use News Feed to target their customers instead of using Search. So, our customers or advertisers can actually find more qualified traffic on the Baidu platform.

Currently, we have seen very good adoption rate, many of the clients, marketing clients, are already coming up with specialty created creatives for the News Feed context, which is a very encouraging sign (34:25) like our News Feed product. And as I mentioned many times before, I think our business is very much traffic bound, not budget bound.

So, the more traffic we can provide to our advertisers, they will have a more budget matching with us (34:49)..

Thank you. Our next question comes from the line of Chi Tsang from HSBC. Please go ahead..

Good morning, good evening. Thank you so much for taking my question. I also want to congratulate you on hiring Dr. Qi Lu, as well as ending 2016 and putting it behind us. I was wondering – I wanted to ask you a little bit about strategy and also about core search.

In particular, I was wondering if you could give us a little bit more detail on some of the strategic imperatives you may put in place over the next few years, and what that game plan might be? And relatedly, I'm wondering if you can give us your current thinking on the importance of O2O? And then on core search, you're guiding to about 6% revenue growth in the first quarter.

I'm wondering what that might indicate for Search revenue? And also, if you can give us some color on just the pace of the recovery of the core Search business this year, that would be very helpful. Thank you very much..

Chi, I'll give you a big picture on the core business and new opportunities, and I'll let Jennifer address the Q1 growth guidance. I think we have entered the era of artificial intelligence, and fortunately, we invested in this area for the past five to six years.

Actually, both the existing, the core business of Baidu and the new opportunities we are addressing, are powered by AI today, especially for Search. Five, ten years ago, when you think about search technology, it was very different. It's basically statistics-based technology.

Today, search is almost all about machine learning, natural language understanding. So it's all about search. And the people will be able to express their interest or queries in a much more natural way.

And we support voice as well as image as queries, and we're seeing increasing number of people using this kind of new form of queries to find what they need. These are all AI-based technologies. And News Feed again is also pretty much an AI, essentially it's the technology that matches user interest with relevant content.

So we find we can leverage our strengths in AI technology to come up with much better products for our users. O2O, again, we reduced the sub fees as well as marketing cost for Nuomi and Baidu Deliveries. But we think this is an integral part of our core business.

People come to Baidu Search for all kinds of things, including information, content and services, and Nuomi provides the perfect content for services.

And we are fine-tuning the Nuomi content as well as services, and make them more friendly to the Mobile Baidu users, and make more opportunities for Nuomi merchants to show up in the Mobile Baidu platform.

So going forward, we think we will be able to see solid growth in both our core products, which now includes Search, News Feed, O2O, and also new initiatives in terms of cloud, financial services, autonomous driving, and a few other AI-related new initiatives..

And Chi, as you recall, last year was a busy year. Lots of the activity, particularly in related to addressing the customer base happened in the middle of the second quarter.

So as we look at 2017, I think thinking about 2016 was a – not a very normal year, maybe looking and thinking about the revenues pattern from a sequential quarter-over-quarter perspective would be more meaningful. And that – I think it's more perhaps an easier way to think about the revenue growth.

As I mentioned earlier, Q4 largely resets our revenue base particularly for Search business. Much of the cleanup activities, the higher requirement for our customers are put in place. And the revenue impact that – as a result is largely behind us.

So as we are going into Q1 and for the rest of the year, I think, the Search – we have been carrying out this business for years and it does have its quarterly pattern. And thinking it in that way as a normal pattern, maybe that's a helpful way to think about the business this year.

And this year, as we are looking towards gradually recovering and we'll drive growth in the Search business, of course, other than the Search, we have the Feed product that is complementary to the core Search business. So that's perhaps, is helpful as you think about the 2017 revenue growth..

Thank you. Our next question comes from the line of Alan Hellawell from Deutsche Bank. Please go ahead..

Thank you very much. And, yeah, I just want to join the chorus to congratulations of the (41:05) senior management changes. Just with regard to ITE, if I'm not mistaken, we talked about a 110% growth in content cost last year. And I believe Jennifer said we should expect a similar degree of growth, and I assume that's a percentage statement.

And if so, would that suggest that there is a further expansion in loss margin or are there things going on in revenues that would somehow lessen that negative contribution.

And then, secondly, I'm just curious, how would we view the margin profile of News Feed versus core Search both in these early days, and then where would they be on a steady state basis. I assume you have content-related expenses associated with procuring news flow. So just curious how those two margins might compare. Thank you very much..

Hi, Alan. Yes, as I indicated earlier, content investment will continue to be a important investment area for us going into 2017. For ITE, over the past two years, we have invested strategically and very successfully in ITE's content.

And as you can see, ITE's subscription user base is growing and that nicely complements its advertising revenue business model. So I think going into 2017, we'll continue to execute on that strategy. ITE has demonstrated, over the years, a high core competency in quality content selection.

And going into 2017, more of the efforts will be spent in self-produced content, and that will help further strengthen and expand our subscription user base. From a margin perspective for ITE, over the past two years, their margin is actually improving, and we expect that it will be the trend going forward.

So ITE is on a solid path, and I think the investment is very warranted, and they have demonstrated good returns for those kind of content investment. Included in 2017 content, as you mentioned, you've correctly pointed out, that we also invest in content for our Feed business.

The Feed business product from a margin profile perspective is different from Search. Related at this early stage part of the investment for Feed is content related and also we will be aggressive in rolling out user adoptions, mechanisms for Feed to be more penetrated into the user base.

So early stage monetization maybe ramping up, but at the same time, we're investing in distribution channels in sales and marketing as well as content for Feed.

Over time, as we mentioned earlier, this is also a integral part of our Search service and that offers a bigger product selections for our advertiser customers, and also very importantly, offers more ad inventory if our users adoption is good.

So early stage for Feed, but it does carry a slightly different margin profile, but overall, it's a complementary and enhancive to our Search service..

Thank you. Our next question comes from the line of Alicia Yap from Citigroup. Please go ahead..

Thank you. Good morning, Robin, Jennifer, and Qi. Thanks for taking my questions. So my questions also related to News Feed.

Wanted to get a sense, does the 1Q guidance that you provided include any expectations from the News Feed ad contributions? And what is management expectation and target regarding how fast and how big the News Feed could achieve in 2017? And also given your comment on shifting to AI and all this content platform, and Jennifer you just mentioned about some spending.

Just roughly, could you get a sense of how much the investment spend that we should expect related to this News Feed ads initiative? Thank you..

Alicia, thank you for the question. For Q1, specifically, there is a – News Feed is a product that we launched for a few quarters now and early stage in monetization. So, for Q1 guidance, we do have a small part that is contributing from Feed.

It will roll over the years over the quarters into 2017 as we're growing the user base, users time on it, the advertiser pool, and we expect News Feed to add more contributions to our overall revenue contribution.

For investment related to News Feed, I mentioned earlier, content is one specifically related to building out the ecosystem and provide a rich content and good user experience as our users use the product and engage with our service. For News Feed investment, I also mentioned about sales and marketing related expenses.

So, this is more for user adoption. The investment in AI particularly are more in the technology side and that has to do mainly with R&D expenses.

And therefore, as I mentioned earlier, we'll continue to invest in R&D steadily and – that is more gradual, its competency build up, its talent, so – but that's not different from the way that we have been approaching R&D investment over the years..

Thank you. Our next question comes from the line of Alex Yao from JPMorgan. Please go ahead..

Hi, good morning, everyone. Thank you for taking my questions. I have a question on the core Search business. The mobile search MAU this quarter, the growth rates slow down to 2% on a year-over-year basis.

As you guys mentioned in the past that Search is a traffic-bound business, now that the mobile search traffic is slowing down and PC most likely is declining, how should we think about Search growth outlook for the next two to three years? Thank you..

Yeah. I think the MAU for mobile search have to slow down because we basically penetrated almost all the Internet users here in China. And Internet penetration rate when that's (48:22) more than 50% growth rate will inevitably slow down.

What we're hoping is that we will continue to innovate in search technology to enable people to ask questions or – and have queries in more natural ways, such as asking questions in natural language or in the form of voice or when they take a picture, they can use that picture to search. This will increase the dependency of users to our product.

So I think, overall, the traffic growth for mobile will slow down, but we think it should be able to continue to grow over the next two to three years..

Thank you. Our next question comes from the line of Juan Lin from 86Research. Please go ahead..

Hi. Good morning, Robin, Jennifer, Dr. Qi Lu, and Linda. Thank you my questions.

Actually I have one follow-up question on News Feed, I am wondering if you could share with us some metrics in terms of News Feed advertising? What is the current pricing policy fixed rate (49:46)? And what is our strategy to compete for user time spend with our News Feed product particularly in terms of user experience when competing against market leader? Thank you..

Yeah, I think we allow users to create designated creative work for News Feed advertisement. Therefore, the advertisers have the power to name their own price. If they don't do that, I mean, when they show the same creative for both Search and News Feed, we will typically apply a smart discount to the cost-per-click on the News Feed.

So, on average, the click price for News Feed is meaningfully lower than that of Search. We are thinking about probably half of the Search related click price. Right now the ad load on our News Feed is relatively low and user experience has been very good with our Search-related customers at those creative dedicated for News Feed..

All right. Thank you. Our next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead..

Thank you for taking my question. Jennifer, you talked about MAU and GMV being less relevant for gauging success of business.

What would be the relevant metrics you'd look at going forward? And could you give us a sense of which ones are the ones that you would share with us going forward? And a question for Robin, Robin you made them push into software and hardware AI applications including the acquisition of Raven Technology and the establishment of few business units.

How do you see this evolve, and could we talk about the shape and size of this opportunity? Thank you..

Yes, with regards to the operating metrics as we mentioned earlier, the mobile transition is pretty much behind us. And our services are very much penetrated into the current Internet population in China.

And also related to Nuomi services, it helps provide a service related content for our Search ecosystem and GMV won't be a meaningful target or objective for us. And so, we will always seek to be transparent and open with our business performance and provide relevant indicative metrics to give you insights into our business.

We will – as we develop and focus on the ecosystem for Search, the service of the Feed product, information such as you know what we commented on how many parties are registered with (53:43) that helped build our content ecosystem.

We talked about how much of our Mobile Baidu users are using the Feed products and we might share more insights as our product is tracking and giving us – giving the indicative insights into the business.

So with meaningful metrics that we feel is reflective of our business, we will be very open and transparent about that, as we have always been doing so..

Yeah, on the hardware-software integration, I think this is one of the most important characteristic of AI era. With this kind integration, lot of innovations become possible, and the user experience is significantly improved based on that. That's why we are investing in both hardware and software for AI-related technologies.

That its true for the mobile platform, but it's also true for the home environment as well as auto environment. For example, when you're at home, we mentioned we have collaborated with (55:15) when you're watching a TV show, you can instantly ask "who is that actor" in natural language will be able to find the answer for you.

And in car environment, we have CoDriver, we have CarLife, which integrate a lot of Internet and AI voice-based command in those environment. That's just a couple of examples, when you integrate software with hardware, what could be possible going forward..

Thank you. Our next question comes from the line of Natalie Wu from CICC. Please go ahead..

Hi, good morning, management. Thanks for taking my questions. So I've got question regarding your Transaction and related service. I think that the GMV declined sequentially by RMB 1.3 billion, but you also mentioned that your Transaction Service reduced operating margin by 21.8% versus 23.8% last quarter.

So, just wondering, why is it that the related losses expanded while GMV scale contracted? And also, what's the management guidance for the margin for this year? Any color would be helpful. Thank you..

For Q4, I think the margin impact from Transaction Services is also have to do with the overall base business. As you recall, our Search service – our service is sequentially a slight decrease. Normally in Q4 we would have increased, but because of all the activities going on, we didn't grow our revenue in Q4 per se.

So I think that sets the base, and the component for Transaction Services, even if it stays similar with our continued investment in R&D and all that, that would translate into a bigger impact. At the same time, just looking at the Transaction Services, within it, we have reduced the spending for Nuomi-related promotional expenses.

But at the same time, we see good traction on the Takeout Delivery service, that continues to do well. And also included in Transaction Service is Financial Services, and we're growing that business very nicely too. And so, I think our strategy is quite clear, and components of the Transaction Services, different elements are performing differently.

And I think, as we go into 2017, it is quite clear. I think it's not the whole package that you're focused on GMV and Nuomi can help Search ecosystem on the service content side, and both Takeout Delivery service and FSG, Financial Services, can also take advantage of the AI technology and enable business growth, and also good user experience..

Thank you. Our next question comes from the line of Evan Zhou from Credit Suisse. Please go ahead..

Hi. Good morning, Robin, Dr. Lu, Jennifer, and thanks for taking my question. The question is regarding our paid subscription business on ITE. So you've been actually sharing with the – some updated paid subscribers numbers, I remember by 2Q last year, we have reached the target of roughly 20 million, which is the leader across the sectors.

I was wondering if you can provide an update on that.

And also, regarding the comments about the cost structure possibility for ITE, I think – are we looking into the possibility that ITE can be close to breakeven in the next year or two? And also, a quick follow-up on the content spend guidance comments you have just now regarding the similar level of increase, is it related to the – referring to the percentage terms increase year-over-year, or about absolute amount of incremental cost run rate hike? Thank you..

On the ITE membership question, number of subscribers continue to grow at a very rapid rate. And we believe we are solidly number one in terms of subscription revenue, and will continue to go very fast..

Yeah. I think, on your other comment, specifically for content cost for 2017, what we were trying to provide you some color is, it will increase at the same rate, very similar rate compared to last year. So over the past two years, steadily, content cost have been following similar increase in investment levels.

ITE, as we mentioned, ITE is doing well in its business, both on the user front as well as revenue front, and we are the market leader. So, I think the business has demonstrated a two-engine – two-powered engine revenue source.

And I think in near term, we'll continue to invest in content and differentiate ITE as a service, and it's tracking very well..

Thank you. Our next question from the line of Ella Ji from China Renaissance. Please go ahead..

Thank you for taking my questions. I have a question for Dr. Lu Qi. So I just wonder after you have joined the company for several weeks, what do you think would be your to do list for 2017.

Is there any specific strategy that you can share with us? And then, as an ordinary user as we use Baidu product, what should we expect to see differently going forward? Thank you..

First of all, thank you very much for your question. It seems I've been here only for few weeks. I would say, I've been able to spend lot of time with Robin thinking about our overall company's long-term strategy, particularly in the context of AI and China.

And the focus is to land the opportunity in concrete user experience and concrete economic opportunities. And that will take some time to unfold and evolve, as I mentioned a little bit earlier. I look forward to the opportunity of – in coming months speaking to many of you about those ongoing initiatives.

And I have full confidence over time, they will generate real user values and economic opportunities for company. And that's perhaps what I'm able to say at the time for now, but I do very much appreciate your question..

Thank you. Our next question comes from the line of Wendy Huang from Macquarie. Please go ahead..

Thank you. So, I have three housekeeping questions. The first, can you give us update about the Search revenue breakdown between the mobile and PC? And also how has the pricing gap between the two actually evolved over time in terms of CPM? And secondly, the number of advertisers seem to be the lowest point in the past 10 quarters.

I assume that was partly due to the seasonality, partly due to the lingering impact from the medical adscene advertising law.

So, going forward, how should we expect the number of advertisers to churn in Q1, and when should we expect the advertiser base to normalize? Lastly on the ITE, you recently did a CD, but I notice Baidu only contributed US$300 million out of US$1.5 billion.

So, previously, Baidu hold about 80% in ITE, so what would be the Baidu holding after this? Thank you..

Yeah, Wendy, I think we reported on the mobile revenue contribution for our total revenue. So, for the fourth quarter, it stands at 65% and continue to grow.

And obviously, we're living in the mobile age and it's undoubtedly, mobile is contributing more and we do see monetization power on the mobile front growing at a much faster pace compared to PC, and it's close to be – we expect that to exceed PC's monetization capability, not very soon.

On the customer front, yes, I mean, I think you understand last year we went through the whole review of our customer base, have much higher and stringent requirements for our customers.

And for particularly, the ICT license and the bank account validation for enterprises, basically we block out individuals who do business, search engine marketing business on our platforms. So having raised the bar is no doubt that some of the customers may not meet that requirement.

But we know it's good for our user experience, it's good for the business long-term, and that's what we'd do. At the same time, we know the addressable market for the customers that we can service is vast and we are innovative on the product side.

So not only Search with Feed products, there is much more inventories for advertisers and that can serve both brand players as well as the smaller players. So we expect our customer pool to be able to grow.

We will continue to have the high requirement for our customers and gradually build up our customer base, assuring that we have high quality advertisers with us. For ITE, yes, Baidu will continue to strongly support ITE, and ITE is a very important content provider for our Search ecosystem.

With this transaction, Baidu continues to have a majority ownership of ITE..

All right. Thank you. Our last question comes from the line of Thomas Chong from BOCI. Please go ahead..

Hi, Robin, Jennifer, Dr. Lu, thanks for taking my questions. I have got quick question about the (1:07:43) headcounts in 2017. Given that we are investing in R&D, and in particular, in AI, are we going to hire a lot more talent in China or from overseas.

And Jennifer, can you give us some color about the headcounts trend on a overall basis in 2017? Thanks..

Yes. We have steadily invested in talent and R&D capabilities is really a key differentiating and competitive advantage Baidu has over the years. And we have steadily investing in R&D talent. As I mentioned earlier, particularly in the AI age, with many of the AI-enabled services that we are working on, we will continue to invest in R&D.

But I think from a overall head count perspective, if you look at last year, the head count overall has not materially changed. Obviously, with more mature business, we look to the business to produce (1:08:58) more efficiently and therefore getting more efficiency and productivity out of existing business.

But at the same time redirect resources to invest in new areas. So, overall, I think our R&D expenses will be a bigger component of the overall head count and that is how we deploy and allocate the human capital.

So, I think 2017 we should expect R&D trending in normal patterns compared to a lot before as we invest in AI, but at the same time, the company is approaching a workforce planning with the disciplined approach and getting productivity out of the whole way we approach business..

Thank you. Ladies and gentlemen, we are now approaching the end of the conference call. Thank you for your participation. This end today's conference. You may now disconnect. Good day..