CORRESPONDENCE
[Letterhead of Baidu, Inc.]
August 31, 2010
VIA EDGAR AND FACSIMILE
Kathleen Collins, Accounting Branch Chief
Melissa Kindelan, Staff Accountant
Stephani Bouvet, Staff Attorney
Matthew Crispino, Staff Attorney
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
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Re:
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Baidu, Inc. (the Company) |
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Form 20-F for Fiscal Year Ended December 31, 2009 (2009 20-F) |
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Filed March 26, 2010 |
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File No. 000-51469 |
Dear Ms. Collins, Ms. Kindelan, Ms. Bouvet and Mr. Crispino:
This letter sets forth the Companys response to the comments contained in the letter
dated August 13, 2010 from the staff of the Securities and Exchange Commission (the Staff)
regarding the 2009 20-F. The comments are repeated below and followed by the response thereto.
Form 20-F for Fiscal Year Ended December 31, 2009
D. Risk Factors
The successful operation of our business depends upon the performance and reliability of the
Internet infrastructure and fixed telecommunications networks in China, page 17
1. We note that you rely primarily on China Telecommunications Corporation and China United
Network Communications Group Company Limited to provide you with data communications capacity
primarily through local telecommunications lines and Internet data centers to host your servers.
Please tell us whether you have any contracts with these entities, and, if so, tell us what
consideration you have given to including a materially complete description of any material
contracts, including the terms and conditions, dates, and consideration furnished in an appropriate
location of your filing, such as the business section. In addition, provide us with your analysis
as to whether you are required to file these contracts as exhibits to your Form 20-F. Refer to
Instruction 4 to the Instructions as to Exhibits of Form 20-F.
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The Company respectfully advises the Staff that it has entered into numerous contracts with
various local branches or subsidiaries of China Telecommunications Corporation (China Telecom)
and China United Network Communications Group Company Limited (China Unicom) to obtain data
communications capacity through local telecommunications lines and Internet data centers. These
contracts were individually negotiated with different local branches or subsidiaries of China
Telecom and China Unicom, and the termination of one contract would have no impact on the other
contracts. The Companys business is not substantially dependent on any of these contracts. For
the year ended December 31, 2009, bandwidth costs incurred under the largest one of these contracts
amounted to approximately 1.6% of the Companys total revenues. Based on the foregoing, the
Company does not believe any of these contracts constitutes a material contract for its business
that would require a detailed description in, or filing as an exhibit to, the 2009 20-F.
In response to the Staffs comments, the Company will expand disclosure in its future Form
20-Fs to clarify that its contracts for data communications capacity were entered into with various
local branches or subsidiaries of China Telecom and China Unicom.
Item 5. Operating and Financial Review and Prospects
Results of Operations
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008, page 62
2. We note from your risk factor on page 15 that you reply on Baidu Union members
for a significant portion of your revenues. We further note that your traffic acquisition costs
increased by 66.7% in the fiscal year 2009 compared to the fiscal year 2008, primarily due to the
growth of revenue contribution from your Baidu Union members. With a view towards providing
enhanced disclosure in future filings, tell us what consideration you have given to including
quantitative disclosure of the revenues generated from your Union members, as well as the increase
or decrease in the number of members participating in the Union. Given that you consider Baidu
Union critical to the future growth of your revenues, consider expanding your disclosure to discuss
how you intend to recruit new members, the status of current recruitment, and the expected impact
of expanded membership on your results of operations.
The Company notes the Staffs comment. However, the Company is very reluctant to provide
quantitative disclosure of revenues generated from Baidu Union members for the following reasons.
First, based on its interactions with investors for the past five years, the Company believes
that investors are primarily focused on traffic acquisition costs as a percentage of total
revenues, instead of total revenues from Baidu Union members. The Company believes that traffic
acquisition costs are a meaningful indicator of the changes of revenues from Baidu Union members
between any two comparable periods, and has disclosed this information in the 2009 20-F.
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Secondly, given the fact that the Company has disclosed the amount of traffic acquisition
costs for each period presented in the 2009 20-F, further disclosure of revenues generated from
Baidu Union members would result in a disclosure of the average revenue sharing ratio between the
Company and Baidu Union members. The Company considers this ratio as highly sensitive and
confidential commercial information, and if this information is publicly disclosed, the Companys
ability to negotiate different revenue sharing arrangements with various Baidu Union members would
be materially and adversely affected, thereby causing substantial harm to the Companys business
and shareholders benefits.
The Company believes that its current disclosure, which contains quantitative information
regarding the number of online marketing customers, the average revenue per customer and the
percentage change in the number of paid clicks, provides investors with sufficient information
about the key drivers of its revenues, whether generated from its own properties or from Baidu
Union members properties.
As to the increase or decrease in the number of Baidu Union members from period to period, the
Company respectfully advises the Staff that revenues generated from Baidu Union members, and
traffic acquisition costs, are not directly linked to the total number of Baidu Union members
because some of the existing or new Baidu Union members may not generate traffic to Baidus website
and contribute any revenues to the Company. The Company believes that the number of the Union
members that have contributed revenues to the Company is more informative. Such number increased
by approximately 70% from 2008 to 2009. In response to the Staffs comment, the Company will
disclose in its future Form 20-Fs the percentage of increase or decrease in the number of Baidu
Union members that have contributed revenues to the Company. In addition, it will also expand its
disclosure to discuss how it intends to recruit new Baidu Union members.
Item 6. Directors, Senior Management and Employees
Directors and Senior Management, page 72
3. Please tell us whether any of your directors are subject to re-election by your
shareholders to your board of directors. If so, please tell us the expiration dates for such
directors current term of office. See Item 6.C.1 of Form 20-F. Please also tell us whether you
have service contracts with any of your directors that provide benefits upon termination of
employment. See Item 6.C.2 of Form 20-F.
The Company respectfully advises the Staff that none of its directors is subject to a fixed
term of office, and that its service contracts with the directors do not provide benefits upon
termination of employment. In response to the Staffs comment, the Company will disclose these
facts in its future Form 20-Fs.
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Item 7. Major shareholders and Related Party Transactions
B. Related Party Transactions
Contractual Arrangements with Beijing Perusal and Its Shareholders, page 83
4. In your discussions of the contractual arrangements with Beijing Perusal and BaiduPay and
their respective shareholders, we note that you have not disclosed the names of the individual
shareholders of these entities, but instead indicate only that the individuals were designated by
you. Tell us what consideration you have given to disclosing the names of the respective individual
shareholders of Beijing Perusal and BaiduPay in your filing. Please also advise us why you have not
filed your agreements with the shareholders of Beijing Perusal and BaiduPay as exhibits to your
Form 20-F. Refer to Instruction 4 to the Instructions as to Exhibits of the Form 20-F.
The Company respectfully advises the Staff that all the individual shareholders of Beijing
Perusal and BaiduPay are employees of the Company. In the event that such a shareholder terminates
his or her employment with the Company, the Company will be able to replace him or her with another
employee. Therefore, the Company does not believe that the names of the individual shareholders of
these entities are material to investors. However, if the Staff requests, the Company will
disclose the names of these shareholders in its future Form 20-Fs.
Since the Company uses the same forms of agreements for contractual arrangements with new
affiliated entities, it has filed these form agreements as Exhibits 4.19 through 4.25 to the Form
20-F for the year ended December 31, 2007 (the 2007 20-F) and has incorporated such exhibits by
reference into its subsequent Form 20-F filings. The 2007 20-F includes the following disclosure
on page 109, Translations of the forms of the agreements that we have entered into with Robin
Yanhong Li for the additional RMB90.0 million loan and with Beijing Perusal, BaiduPay and their
respective individual shareholders are filed as exhibits to this annual report on Form 20-F. We
intend to use these forms, or ones substantially similar to these forms, for our future contractual
arrangements with new consolidated affiliated entities and their shareholders.
Notes to the Consolidated Financial Statements
Note 2. Summary of Significant Accounting Policies
Cash, Cash Equivalents and Short-term Investments, page F-11
5. We note that cash balances deposited by your e-commerce customers are included in
the companys bank account until the customers either use the cash to settle their online
transactions or withdraw the cash. You disclose that as of December 31, 2008 and 2009 there was
RMB4.56 million and RMB19.51, respectively in the companys cash and cash equivalents balance which
was related to the deposits made by customers and designated for settlement of their online
transactions. Please clarify whether these amounts represent the entire amount of restricted cash deposits made by your e-commerce customers. In this regard, tell us whether your customers also
deposit funds that have not been designated to settle an on-line transaction. If so, tell us and
disclose the total amount of customers deposits, (both designated and undesignated), included in
your cash balance for each period presented pursuant to Rule 5-02-1 of Regulation S-X.
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The Company respectfully submits that when customers fund their account in the Companys
e-commerce platform using their bank accounts, the cash deposits are included in the Companys bank
account until customers either use the cash to settle their online transactions or withdraw the
cash. Pursuant to the users agreement of the e-commerce platform, the entire cash deposits are
considered restricted because they cannot be used for the operations of the Company or any other
purpose not designated by customers. The restriction on such cash deposits to the Company exists
regardless whether the deposit funds have been designated for settlement of specific online
transactions by the e-commerce customers or not.
Therefore, the RMB19.51 million and the RMB4.56 million deposits made by the Companys
e-commerce customers as of December 31, 2009 and 2008, respectively, represent the entire amount of
restricted cash deposits made by these e-commerce customers as of the balance sheet dates.
Separate disclosure of the amount of restricted cash deposits on the face of the balance sheets was
not made because the restricted cash deposits represent 0.5%, 0.4% and 0.3% of consolidated cash
and cash equivalent, total current assets and total assets, respectively, as of December 31, 2009
(2008: 0.2%, 0.2% and 0.1%, respectively). The provisions of any restrictions related to the cash
deposits have been made in note 2 on page F-11. The Company will disclose the amount of restricted
customers deposits included in cash and cash equivalent on the face of the balance sheets for each
period presented in its future Form 20-Fs in accordance with Rule 5-02-1 of Regulation S-X.
Note 12. Ordinary Shares, page F-32
6. We note your disclosures regarding the structured share repurchase program and preset share
repurchase programs that you entered into December 2008 and March 2009. Please tell us how you
accounted for the upfront payments made under the preset share repurchase program; tell us the term
of this arrangement (i.e. the agreed period) and tell us whether there were any restrictions on
the upfront payments. Also, tell us what impact each of these arrangements had on your
earnings per share calculations in both fiscal 2008 and 2009. We refer you to ASC 260-10-55-32 and
55-88. In addition, tell us how you considered expanding your disclosures to address this comment.
The Company respectfully submits that the US$10.00 million and US$20.00 million upfront
payments made under the preset share repurchase program were recorded as cash and cash equivalent
of the Company upon making the deposits with the financial institution because (i) the upfront
payments were deposited into an account under the Companys name, had no restrictions and could be
withdrawn by the Company at any time and (ii) the Company had the right to cancel the preset
repurchase program with the financial institution at any time with no penalty so long as the
Company provided a three-day notice to the financial institution. The financial institution, acting as a broker on behalf of the Company, was engaged to repurchase the Companys American
depositary shares (ADSs) in the open market up to an aggregate amount which is equal to the
upfront payments then outstanding, based on a predetermined trading price range over an agreed
period. The US$10.00 million and US$20.00 million upfront payments have a term from January 1,
2009 to February 28, 2009 and April 1, 2009 to April 30, 2009, respectively.
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The structured share repurchase program represents a contract in which the Company made an
upfront cash payment to a financial institution in exchange for the right to receive either the
Companys own ADSs or cash at the expiration of the agreement, depending on the closing price of
the Companys ADSs at the maturity date whilst the preset share repurchase program represents a
contract in which the Company engaged a financial institution to act as a broker on behalf of the
Company to repurchase ADSs in the open market based on a predetermined price range over an agreed
period. Settlement of the contracts in cash or in shares is solely driven by the trading price of
the Companys ADSs. The preset share repurchase program and the structured share repurchase
program do not meet the definition of an accelerated share repurchase program pursuant to ASC
505-30-25-5 since both of the transactions do not permit the Company to repurchase a targeted
number of shares immediately with the final repurchase price of those shares determined by an
average market price over a fixed period of time. The number of shares to be repurchased, if any,
under the preset share repurchase program and the structured share repurchase program was unknown
at the inception of the contracts. The repurchased shares are cancelled under Cayman Islands law
upon repurchase and would reduce the number of the Companys ordinary shares outstanding.
Although the structured share repurchase program and the preset share repurchase program are
contracts that may be settled in stock or cash, settlement of the contracts in cash or in shares is
solely driven by the trading price of the Companys ADSs, which is outside of the control of the
Company and the financial institution. The Company concluded that ASC 260-10-55-32 (i) was not
applicable to the preset share repurchase program because the preset share repurchase program was
accounted for as cash and cash equivalent instead of an equity instrument pursuant to ASC 815-40-25
and ASC 260-10-55-32 (ii) was not applicable to the structured share repurchase program because the
Company does not have a stated policy or the past experience that provides a reasonable basis to
believe that such contract will be paid partially or wholly in cash. Thus, ASC 260-10-55-32 had no
impact on the Companys earnings per share calculations for the years ended December 31, 2009 and
2008.
In accordance with ASC 260-10-45-45, the Company presumed that the structured share repurchase
program and the preset share repurchase program would be settled in ordinary shares but the
resulting potential ordinary shares to be repurchased under these programs were excluded from the
computation of diluted earnings per share in the years ended December 31, 2009 and 2008, as their
effects would have been anti-dilutive. The Company will expand the disclosure on the impact
contracts that may be settled in stock or cash had on the Companys earnings per share calculations
in its future Form 20-Fs.
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Note 16. Segment Reporting, page F-37
7. We note that the Companys revenues and long-lived assets are primarily derived
from and located in the PRC and Japan. Tell us how you considered providing a breakdown of revenues
and long-lived assets between those attributed to your country of domicile (PRC) and those
attributed to all other foreign countries (Japan). We refer you to ASC 280-10-50-41.
The Company respectfully submits that the breakdown of revenues and long-lived assets between
those attributed to the country of domicile, the PRC, and those attributed to all other foreign
countries, primarily Japan, is not included because revenue and long-lived assets attributed to all
other foreign countries as a percentage of total consolidated revenues and long-lived assets were
insignificant as of and for the years ended December 31, 2009 and 2008. Long-lived assets and
revenues attributed to Japan and other foreign countries represent only 3.9% and 0.1% of
consolidated long-lived assets and revenue, respectively, as of and for the year ended December 31,
2009 (2008: 7.8% and 0.1%, respectively). A breakdown of revenues and long-lived assets between
those attributed to the country of domicile and those attributed to all other foreign countries
will be disclosed in the segment reporting note in its future Form 20-Fs in accordance with ASC
280-10-50-41.
The Company hereby acknowledges that
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the Company is responsible for the adequacy and accuracy of the disclosure in
the filing; |
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Staff comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the filing; and |
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the Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of the
United States. |
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If you have any additional questions or comments regarding the 2009 20-F, please contact the
undersigned at (86 10) 8262-1188, Ext. 8807 or the Companys U.S. counsel, Julie Gao of Skadden,
Arps, Slate, Meagher & Flom, at (852) 3740-4850.
Thank you very much.
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Very truly yours,
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/s/ Jennifer Li
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Jennifer Li |
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Chief Financial Officer |
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cc:
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Robin Yanhong Li, Chairman and Chief Executive Officer, Baidu, Inc. |
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Z. Julie Gao, Esq., Skadden, Arps, Slate, Meagher & Flom, Hong Kong |
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Joe Tsang, Partner, Ernst & Young Hua Ming, Beijing |
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