Baidu revenue forecast casts doubts on growth, hammers shares

Wed Apr 25, 2012 12:55am EDT

An employee walks past the Baidu company signage outside its headquarters in Beijing, July 26, 2011. REUTERS/Soo Hoo Zheyang

An employee walks past the Baidu company signage outside its headquarters in Beijing, July 26, 2011.

Credit: Reuters/Soo Hoo Zheyang

(Reuters) - Baidu Inc (BIDU.O), China's leading Internet search company, set off alarm bells on Wall Street after a disappointing second-quarter revenue forecast raised doubts on its growth prospects and knocked down its shares more than 10 percent after hours.

The tepid outlook from Baidu, which had consistently blown past investors' expectations thus far, brought up questions on whether emerging competition from the likes of Alibaba Group would wear it down and if it could make a success of recent moves into other lucrative Internet sectors such as ecommerce.

Baidu posted on Tuesday first-quarter results that were in line with analysts' estimates. But the second-quarter revenue forecast was at the low end of Wall Street's expectations, with the midpoint of the range at $857.1 million against the $862.8 million seen by analysts polled by Thomson Reuters I/B/E/S.

"At the end of the day, people expect these companies to beat numbers. They have a track record of usually beating," said Raymond James analyst Aaron Kessler.

On a quarter-on-quarter basis, the revenue forecast showed 25-28 percent growth.

"Baidu has never done anything below 35 percent sequential growth in the second quarter, so to guide in the high-twenties is certainly a significant revenue deceleration," said Hong Kong-based Nomura analyst Jin Yoon.

Baidu's already dominant position in China's Internet search market was cemented further when Google Inc (GOOG.O) decided in 2010 to relocate its search engine to Hong Kong after a standoff with the Chinese government over Internet censorship.

Although Baidu is not in danger of losing its pole position in the Chinese search market, it has to contend with other strong rivals such as Alibaba Group and Sohu.com Inc's (SOHU.O) Sogou search engine that are growing rapidly and battling with Baidu for online advertising dollars.

In the first quarter, Baidu had 30.9 percent of the online advertising market while Alibaba had 17.9 percent. In just the search market, Baidu had 78.5 percent of the market while Google had 16.6 percent, according to data from technology consultancy Analysys International.

NON-CORE BUSINESS WOES

Baidu's phenomenal lead in search glosses over a deeper issue - its difficulties in expanding outside its core business that could bode ill for future growth.

Last week, Japanese online retailer Rakuten Inc 4755.OS said it would close the Internet shopping website it operates in China with Baidu due to sluggish sales.

That comes after Baidu shut down and spun off its loss-making ecommerce platform Youa with the aid of venture capital funding late last year.

Baidu has also had limited success in the social-networking space, shutting down its microblogging product Shuoba in August.

"Internet companies are very dominant in one particular vertical...They have a very hard time transforming that leverage into other areas of the Internet," Yoon of Nomura said.

Baidu's ventures into online travel and online video have fared better but are still either barely profitable or loss-making.

"Baidu has not made much progress yet (on outside its core areas) but management has been capturing the trends and making the right investments," said Credit Suisse analyst Wallace Cheung.

Baidu said revenue in the second quarter will range between $847.2 million and $867 million. Revenue in the first quarter was up 75 percent at $677 million, in line with what analysts expected.

Net income in the three months ended March 31 increased roughly 76 percent year-over-year to $299 million, or 85 cents per American Depositary Share.

Baidu shares fell more than 10 percent in after-hours trading to $121.50 from a close of $135.83 on the Nasdaq. The shares, a favorite of long-only funds and hedge funds, have gained 16.6 percent since the start of the year.

(Editing by Andre Grenon and Muralikumar Anantharaman)