Tuesday, October 27, 2009

Baidu Sales Take Hit On New Ad System, Shares Sink

. Tuesday, October 27, 2009

By stockOzone team

China's top search engine Baidu Inc (BIDU.O) said a bumpy introduction for its new system to sell search-based advertising will hit its business into the first quarter of next year, sending its shares tumbling more than 10 percent.

The bumpy ride marks a rare stumble for Baidu, China's homegrown search leader with about two-thirds of the market, and could open the door for envious rivals, most notably Google (GOOG.O), to grab some of its share in the world's largest Internet market by users.

Baidu, which will discontinue its old keyword bidding system and fully implement its Phoenix Nest advertising system on Dec 1, said its fourth-quarter revenue will come in at $174-$180 million, more than 10 percent below the average analyst estimate of $204.7 million, according to Thomson Reuters I/B/E/S.

Baidu shares, which shed 0.54 percent to close at $432.97 during regular trading hours in New York, tumbled more than 13 percent in after-hours trade to $375.99.

"We still feel that in Q1 there will be a material impact from this switch" a top Baidu executive said in an earnings conference call on Tuesday after the results came out, adding it will take a few quarters for the situation to normalise.

The weak fourth-quarter guidance came as a surprise, but in the longer term, the better efficiencies from Phoenix Nest, which works similar to Google's AdWords, should benefit the company, said JP Morgan analyst Dick Wei.

"It is just short term pain, the long term fundamentals of the company are still strong," he said.

Baidu, named after a line in a classical Chinese poem said Phoenix Nest customers contributed about 20 percent to its third quarter revenue.

Management declined to give a forecast for the hit on first-quarter revenue as a result of the transition and noted that the first quarter is also a weaker period for advertising spending.


Baidu's shares have more than tripled since the start of the year, as the company appeared positioned to benefit from the economic recovery and a pick-up in advertising spending in China, the world's largest Internet market.

Revenue in the three months ended Sept. 30 totaled $187.3 million, a tad below the average analyst estimate of $189 million but nearly 40 percent higher than the 135.4 million a year-earlier.

Third-quarter net income rose to $72.2 million, or $2.07 a share, from $51.2 million, or $1.47 a share, a year ago.

Baidu had 61.6 percent of China's search market in the second quarter, according to Analysys International, compared with Google's 29 percent share.

Baidu CEO Robin Li said in a statement that the move to a single bidding system will more efficiently use company resources and relieve customers from the burden of maintaining two systems.

"With 70 percent of our customers already using Phoenix Nest, we believe this is the right time to complete the switch to the new system," Li said.

Disclosure: Author does not own any of the stocks discussed here.

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