Baidu gains on strong Q3 revenue targets

SAN FRANCISCO/SHANGHAI (Reuters) - China's top search engine operator Baidu Inc, helped by a surge in new advertisers and lower traffic acquisition costs, is poised to deliver strong results in the coming months following a forecast-beating quarterly performance.

Shares of Baidu, which has raised its China market share following rival Google's spat with Beijing, rose 3.2 percent to $75.64 in after-hours trade following its results. Baidu's stock has soared 90 percent since Google's troubles in China began in January.

Baidu, named from an ancient Chinese poem, didn't discuss Google on its investor call. The company has made incremental gains in market share following the high-profile falling out between Beijing and Google.

Google shuttered its local Chinese search page earlier this year over censorship issues in Beijing. China is the world's largest Internet market with 420 million web surfers.

Analysts said Baidu's strong third-quarter guidance also allayed investors' worries after a recent state media report accused Baidu of promoting bogus drugs.

"The solid guidance helps to alleviate concerns investors might have regarding the potential impact of the recent fake medicine scandal, confirming our view that the incident has limited impact and is very different from the more widespread 2008 event," Citi wrote in a research note.

China Central Television, China's dominant state-run TV broadcaster, recently criticized Baidu for directing users to bogus drug ads. [ID:nN19190047] Similar campaigns have taken a toll on their targets in the past.

Medical and healthcare advertisements are amongst top revenue generators for Baidu.

REV VIEW BEATS STREET

Baidu said it expected revenue between $324.4 million and $333.3 million in the third quarter, ahead of the average analyst forecast for $321.6 million.

The company's solid second-quarter results, which were also well ahead of Wall Street forecasts, were due in part to lower traffic acquisition costs, which fell to 9.7 percent of total revenue from 16 percent a year earlier, said Credit Suisse analyst Wallace Cheung.

"I don't know how much lower they can push it given the competition on the network by players like Taobao," he said, in a reference to China's top online retailer, which bans Baidu from cataloguing most of its content in its search results.

Baidu CFO Jennifer Li echoed that sentiment, telling investors on a conference call that traffic acquisition costs -- the cost of bringing web surfers to its site -- were likely to stay around current levels, but probably wouldn't drop any further.

Baidu said second-quarter net income more than doubled to $123.5 million, or 35 cents a share, from $56.1 million, or $1.61 a share a year ago, before a 10-for-1 stock split. Analysts were expecting earnings per share of 31 cents.

Quarterly revenue totaled $282.3 million compared with $160.7 million a year ago. Analysts, on average, had expected revenue of $276.7 million, according to Thomson Reuters I/B/E/S.

"Baidu continues to outperform across the board driven by a strong search advertising market in China, the launch of its Phoenix Nest (advertising) platform and share gains from Google China," said Kaufman Brothers analyst Mayuresh Masurekar.

Baidu said it had 254,000 active online marketing customers in the second quarter, a 25.1 percent increase from a year ago, and its largest gain since the fourth quarter of 2008.

Baidu owned 70.8 percent of China's search market in the second-quarter, a 3 percentage point increase over the last quarter, said iResearch.

The company and analysts have previously said it should only expect to post modest gains in market share from Google's woes, as rival search engine operators like Sohu and Tencent also look to pick up share.

On July 9, Google said China had given it approval to keep operating its Chinese search page for one year, allowing it to maintain the page that contains a link to its uncensored search page in Hong Kong.

Google's market share in China fell to 27.3 percent in the second quarter from 29.5 percent in the previous quarter.

Baidu has also benefited from its new Phoenix Nest advertising keyword system, implemented in December, which provides a more sophisticated way to track user traffic.

(Editing by Doug Young and Valerie Lee)