Baidu sees strong Q4 sales driven by ad spend

Thu Oct 27, 2011 11:40pm EDT

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(Reuters)- Top Chinese search engine Baidu Inc forecast strong sales that topped Wall Street estimates, after reporting robust quarterly earnings, shrugging off concerns that a weak economy could hit advertisers.

Baidu said spending by large customers was significantly better than it expected in the third quarter and its 80 percent rise in quarterly net profit was driven by spending by online retailers.

Shares of Baidu were up 7.2 percent at $148.50 in after-hours trade. Chinese Internet companies Sohu.com Inc and Sina Corp were up more than 4 percent.

China, with more than 485 million users, is the world's largest Internet market. Yet, with Internet penetration hovering around 36 percent and user sophistication outside the big cities still low, the potential for growth is huge.

"Search marketing continues to be very resilient despite the macro uncertainties. Across the board there hasn't been any weakness in any sector and they are really benefiting from the growth in e-commerce, they are firing on all cylinders," said Nomura's Hong Kong-based analyst Jin Yoon.

Baidu has solidified its position as the dominant search engine in China since Google Inc's decision in 2010 to relocate its search engine to Hong Kong following a standoff with the Chinese government over Internet censorship.

Baidu said it expects fourth-quarter revenue of $691.4 million to $711.0 million, above analysts' forecasts of $649.5 million according to Thomson Reuters I/B/E/S.

The company's forecast of up to 8.6 percent sequential revenue growth in the fourth quarter outpaced the 4.8 percent increase expected by analysts.

"Baidu should be able to grow strongly despite any slowdown in the China economy because online advertising is gaining share from traditional advertising, it's a secular shift," said Collins Stewart analyst Mayuresh Masurekar.

For the third quarter, Baidu reported net income of $295 million, or 84 cents per share. On an adjusted basis, the company earned 86 cents a share.

Analysts on average expected a profit of 83 cents a share.

"One source of strong revenue growth was once again the e-commerce sector. In particular, the revenue contributed by the online retail sector retained impressive momentum, growing over 100 percent year over year," Baidu's Chief Executive Robin Li said on an earnings conference call.

Total revenue rose 85 percent to $654.7 million, above its own forecast of $611.1 million to $626.6 million.

GROWTH AND COMPETITION

Baidu recently launched its mobile application development platform that is seen as a prelude to the firm's full-fledged operating system.

The company has expanded into online video and travel to seek out fresh revenue streams.

Baidu is facing competition from Alibaba Group and Tencent Holdings Ltd, the two other Chinese Internet giants seeking to make inroads in the lucrative search market dominated by Baidu.

"They are continuing to gain market share in China and their monetization systems are seeing improvement and that is providing some upside too," said Hong Kong-based JPMorgan analyst Dick Wei.

In the third quarter, China's online search market grew 77.8 percent to 5.51 billion yuan. Baidu had a 77.7 percent share of the market, while Google had 18.3 percent, according to data from Beijing-based consultancy iResearch.

In August, Baidu suffered a barrage of negative publicity after China Central Television ran programs accusing the company of having lax approval processes on its paid-advertising platform and slamming it for not policing its message-board product Tieba for "slanderous" remarks.

Analysts said the criticisms did not have a negative material impact on the company and was driven mostly by competitive pressure.

Shares in Baidu, whose name is taken from an ancient Chinese poem, closed up 6 percent at $138.39 on Nasdaq on Thursday. They have gained 36 percent so far this year.

(Reporting by Melanie Lee in SHANGHAI and Alexei Oreskovic in SAN FRANCISCO; Additional reporting by Soham Chatterjee in BANGALORE; Editing by Vinu Pilakkott)

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