Baidu: Profit Up, Revenue Outlook Weaker

The Associated Press
Wednesday, November 1, 2006; 2:59 AM

BEIJING -- Inc., the leading Chinese Internet search engine, said Wednesday third-quarter profits rose sharply, but shares fell after its fourth-quarter revenue forecast missed analyst expectations as it switched to a new advertising sales system.

Third quarter net income was $10.8 million, up more than 900 percent from the same period last year, as revenues rose 169.1 percent to 239.3 million yuan ($30.3 million), the company said.

"During the quarter, we continued to strengthen our position as the leading provider of Chinese language search," Robin Li, Baidu's chairman and chief executive officer, said in a conference call with analysts.

Fourth-quarter revenues are expected to be 270 million-280 million yuan ($34 million-$35 million), up 135-143 percent over the same period last year, said Sean Wang, Baidu's chief financial officer.

But the forecast was below Wall Street expectations of $36 million, and investors pushed Baidu shares down 3.8 percent to $83.93 in after-hours U.S. trading. That was after shares in regular trading closed down 9 percent at $87.28.

"In absolute terms, this company is growing like gangbusters," said Citigroup analyst Jason Brueschke. "In relative terms, it is now growing near-term slower than people's previous expectations."

Baidu, which makes most of its money from advertising, said results were affected by its adoption of a system that uses multiple rounds of bidding to sell advertising space on its results pages. That is similar to Google Inc.'s system and replaces one with a single round of bidding.

The new system will boost revenues by letting advertisers raise bids for better placement, but Chinese companies were unfamiliar with it at the start and are submitting low bids, Brueschke said.

"If anything, it is bad news for the competition that this company, Baidu, is willing to sacrifice near-term revenue growth ... to make the type of investments and improvements in its core search algorithms and its business model to not only sustain its lead but possibly increase it," he said.

Baidu has 62.1 percent of China's search market, compared with 23.5 percent for No. 2 Google, according to the government's China Internet Network Information Center.

China's Internet market is the world's second-biggest after the United States, with more than 123 million people online.

Baidu announced a deal this month with Viacom Inc. to sell music videos and programs from MTV and the children's channel Nickelodeon over the Internet.

Baidu also is expanding wireless services, modifying its search and other features such as weather and stock market reports for use on mobile phones and other devices, Li said.

"We've seen good results from this early effort and expect this to be an area of growth in the future," Li said.

© 2006 The Associated Press