UPDATE 3-Baidu sees new ad system boosting Q3 sales

Fri Jul 24, 2009 12:50am EDT

* Q3 sales seen $184 mln to $189 mln vs Street's $179 mln

* Q2 adjusted EPS $1.71 vs Street's $1.56

* Q2 revenue $161 mln vs Street's $158 million

* Shares down 2.3 percent in after-hours trade (Adds detail from earnings call, bylines, SHANGHAI dateline)

By Alexei Oreskovic and Melanie Lee

SAN FRANCISCO/SHANGHAI, July 23 (Reuters) - Chinese Internet search leader Baidu Inc (BIDU.O) expects sales to grow faster than market forecasts in the third quarter, helped by rising customer acceptance of its new advertising system.

Already, the roll out of the advertisement keyword bidding system -- Phoenix Nest, similar to Google Inc's (GOOG.O) AdWords -- played a part in Baidu's better-than-expected second-quarter revenue growth of 37 percent, along with China's rapidly growing number of Internet users.

For the third quarter, Baidu projected sales of $184 million to $189 million, compared with the average analyst estimate of $178.9 million.

"We expect the benefits of Phoenix Nest to ramp up in the quarter to come, in terms of enhanced monetisation and as well as improved ad relevancy," Chief Executive Robin Li told a conference call.

Phoenix Nest will display paid links and keywords on the right side of Baidu's search page and will provide clients with statistical functions.

"The new bidding system should lead to more targeted results and higher revenue over time," Steve Weinstein, an analyst from Pacific Crest Securities said in a note.

Baidu, the No. 1 search engine in China, controlled 61.6 percent of China's search market in the second quarter, according to Analysys International. The firm is holding off rival Google Inc (GOOG.O), which held 29 percent of the China search market.

Baidu, whose shares surged roughly 140 percent since the start of the year, fell 2.3 percent to $325.00 in after-hours trade on Thursday, amid a decline in most technology stocks following Microsoft Corp's (MSFT.O) weaker-than-expected quarterly revenue.

According to a Deutsche Bank note, web traffic to Baidu increased gradually since late March while traffic to Google China remained flattish.

Analysts expect Phoenix Nest to be a key growth driver for Baidu in the upcoming quarters as China's search market continues to expand at a rapid pace. The market grew 47 percent year-on-year in the second quarter to 18.1 billion yuan ($2.6 billion), according to data from Analysys International.

RISING COSTS

Baidu reported net income of $56.1 million, or $1.61 a share, for the second quarter, compared with $38.6 million, or $1.11 cents a share, a year ago.

Revenue grew to $161 million in the second quarter from $117 million in the year-ago period, beating analysts' average forecast of $158 million.

"During the second-quarter, macroeconomic conditions remained challenging even as we began to see some signs of recovery in the Chinese economy," Li said.

Jennifer Li, Baidu's chief financial officer, said the firm was expecting higher costs in the third quarter because Baidu was hiring more sales people for Phoenix Nest and hosting a forum in that period.

The company said the number of online marketing customers using its site increased 9.7 percent quarter-over-quarter to 203,000 in the second quarter.

Excluding the effects of stock-based compensation, Baidu earned $1.71 a share, above analysts' average expectation of $1.56 a share, according to Reuters Estimates. (Editing by Lincoln Feast and Muralikumar Anantharaman)

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