UPDATE 4-Baidu sees strong Q3 on China ads; shares jump

Mon Jul 25, 2011 11:05pm EDT

* Q2 net profit 72c per ADS vs consensus 66c per ADS

* Spending by large advertisers boost growth

* Shares jump 7 pct in after-hours trade on outlook

* Sees higher costs in H2, more social network products

(Adds Baidu comments from conference call)

By Edwin Chan and Kazunori Takada

LOS ANGELES/SHANGHAI, July 26 (Reuters) - China's top search engine Baidu Inc forecast revenue well ahead of Wall Street's expectations as large advertisers increased spending, sending its shares up around 7 percent.

Baidu, which has increased its focus on online video and e-commerce, has steadily grown its search market share since Google Inc curtailed its operations after a fallout with Beijing over censorship.

It was benefiting from higher income from big advertising clients in the world's largest Internet market, which helped nearly double its net profit in the second quarter to $252.6 million.

"The company is pretty confident on the longer term outlook since growth is coming from across the industries," said Dick Wei, an analyst at JPMorgan in Hong Kong.

"Overall we remain positive on Baidu. As the largest search engine in China, they continued to gain market share and are taking more of their advertisers from offline to online platforms."

The search engine, which controls more than three-quarters of China's Internet market, forecast revenue of $611.1 million to $626.6 million in the third quarter, outpacing Wall Street's expected $569.6 million.

Shares in Baidu, which have risen more than 60 percent so far in 2011, were trading at $166.74 after hours after closing up 1.65 percent at $156.54 on the Nasdaq.

"The search market is growing very strongly. It's a rising tide," said Collins Stewart analyst Mayuresh Masurekar. "But Baidu has a lot of irons in the fire. It has a lot of non-search initiatives" that are rounding out its growth.

Baidu's 150 million users in online video, after only about a year, are generating advertising and premium subscription revenue, he said.

Baidu is rapidly making inroads into other markets from online music to video, and it is vying with Youku , Tudou and Ku6 Media for the rights to stream content.

Last week, Baidu inked a landmark deal with record labels to stream music, marking a victory for a global recording industry that has battled piracy for decades.

Baidu Chief Financial Officer Jennifer Li said the firm expected higher costs in the second half, as seen in previous years, with spending most heavy in research and development. Costs from music content purchases are unlikely to affect the overall picture, she added.

Last month, Baidu, whose name comes from an ancient Song Dynasty poem, said it was buying China's leading travel website, Qunar.

SOCIAL NETWORKING

But competition is intensifying. Google's exit from that market has made room for other competitors from Sohu.com and Alibaba Group to Tencent Holdings .

Robin Li, Baidu's chairman and chief executive officer, told analysts in a telephone conference that the firm was looking to bump up its products in the social networking services (SNS) arena.

"In China, there are no dominant SNS. That gives us a big opportunity to innovate and lead in markets like this," Li said.

The company said its second-quarter net income had almost doubled to $252.6 million, or 72 cents per American depositary share, beating analysts' expectations, on average, for 66 cents per depositary share.

Second-quarter revenue rose 78.4 percent to $528.4 million, surpassing analysts' forecasts, on average, for $502.6 million, according to Thomson Reuters I/B/E/S.

Chinese online advertising is estimated to be growing at about 45 percent per year, but some analysts have said companies will be tightening marketing budgets in anticipation of slowing economic growth.

(Additional reporting by Sayantani Ghosh in Bangalore and Lee Chyen Yee in Hong Kong; editing by Bernard Orr and Lincoln Feast)

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