Data: In Q3 2007, search queries on Baidu.com were up 4% quarter-over-quarter (QoQ), according to our tracking of ~1,000 highly monetizable keywords.
Methodology: The keywords we selected represent all the major industries including finance, IT, real estate, transportation, apparel, chemicals, machinery, sports, e-commerce, and so on. The appendix is the data on a portion of the ~1,000 keywords tracked by China Analyst. To verify the accuracy of our tracking, please visit Baidu Index, where the company discloses search query data.
Analysis: Below is our interpretation of the data we collected:
1. QoQ traffic growth slowed down due to tough comparison. The 4% QoQ growth in Q3 is much lower than the 16.2% QoQ growth in Q2. The reason: Q1 is typically the weakest quarter of a year for Internet usage in China, as Internet users participate in various activities during the Chinese New Year holiday, spending much less time on their PCs. Traffic in Q2 is typically a lot higher than in Q1, as people spend more time on PCs and the Internet than they do during the Chinese New Year holiday. When it comes to Q3 vs. Q2, the comparison is much tougher than Q2 vs. Q1, because Q2 is typically a very strong quarter for Internet usage in China.
2. Traffic not the only revenue driver. For a search engine, Paid Search Revenue = Total Searches (Traffic) x Click-through Rate (CTR) x Cost-per-Click (CPC). This shows traffic is not the only revenue driver for Baidu. In fact, in Q2 2007, Baidu's total revenue was up 47.6% QoQ while its traffic only increased 16.2%. This means the other two factors jointly contributed 27.0% QoQ growth, as shown in this equation: 147.6%=(1+16.2%)x(1+27.0%).
2. Implications for meeting Q3 guidance. Baidu's Q3 revenue guidance ($64.6M-$66.5M) implies a 23%-26% QoQ growth. To meet the mid-point of this guidance (24.5% QoQ growth), the other two factors, CTR and CPC, need to jointly have 19.7% QoQ growth, based on the 4% QoQ traffic growth. The following equation shows the underlining math: 124.5%=(1+4%)*(1+19.7%). As long as CTR and CPC performed well, Baidu will still be able to meet the guidance.
3. Click-through Rate (CTR) in Q3. We believe CTR will increase in Q3 vs. Q2, but the QoQ increase will be much less than Q2 vs. Q1. The reason: Q1 was seasonally weak due to the Chinese New Year, when many advertisers halted business and adversiting activities. Advertisers did come back in Q2. As a result, there are much more ads showing on Baidu, resulting in a much higher CTR by search users. Q2 and Q3 are both strong quarters for the paid search business in terms advertiser participation, so we will not see a big jump in the number of ads running on Baidu.com. Therefore, the CTR will not increase as much as it did in Q2. Having said that, we still think the CTR will be slightly higher because the number of advertisers (and ads) are still growing on Baidu.com.
4. Cost-per-Click (CPC) in Q3. Historically, Baidu has been able to raise CPC, leveraging its dominant traffic market share. For example, in June and September 2006, Baidu changed its ads ranking algorithm twice. The result was a much higher average CPC and a much slower growth rate in number of advertisers. In the past several quarters, the increase in CPC more than offset the slower growth in advertisers, as evidenced by the strong growth in average spending per advertiser. For CPC in Q3 2007, we suggest that readers visit this blog for some CPC tracking results in the past. The author observed a more than 25% CPC increase from Jun 6, 2006 to Oct 17, 2006. This should be close to the CPC growth in 3Q06 vs. 2Q06. We think QoQ growth in 3Q07 should be lower than the 25%+ in 3Q06 because Baidu did not change ads ranking algorithm in 3Q07 while they changed it in June and September of 2006.
Note: To see a sample of the data we collected, follow this link.
Other reports in our Baidu 3Q07 Preview Series:
(1): Baidu Maintained 4-1 Traffic Lead Over Google China
(3): Baidu Expanded User Market Share to ~70%
(4): Baidu Has 2x Google China's Advertisers
(5): Historical Trading Pattern Reveals Key Metrics to Watch
(6): Baidu Q3 Revenue Estimated to Be $66.7M by Analysys International
Related: Latest Research on Baidu; Compare 19 China Internet Stocks
