China's Baidu eyes soft fourth quarter as economy bites

SHANGHAI Tue Oct 30, 2012 12:40am EDT

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SHANGHAI (Reuters) - Baidu Inc, China's largest search engine company, posted its slowest quarterly revenue growth in more than two years and forecast softer-than-expected growth this quarter, hurt by weaker sales as China's economic engine sputters.

However, the company -- which still grew revenue by 50 percent in the third quarter -- said it added a record number of new advertisers for the quarter and was focusing on boosting revenue from fast-growing mobile search traffic.

"Their large customers' spending has not been so robust and has been quite flat, but Baidu has done a decent job of bringing new customers online," said Michael Clendenin, managing director of technology consultancy firm RedTech Advisors.

Baidu has dominated China's search market since Google Inc relocated its search engine to Hong Kong in a row over censorship in 2010, and accounts for nearly 80 percent of all online searches.

It posted net income of $478.6 million in the three months ended September 30, up roughly 60 percent year-on-year. Baidu said it earned $1.39 per American Depository Share in the third quarter, excluding stock-based compensation expenses.

Revenue rose 49.7 percent to $994.6 million, and Baidu forecast fourth-quarter revenue of $979.3 million to $1.010 billion, below an average analysts' forecasts of $1.03 billion according to Thomson Reuters I/B/E/S, but up from $715.9 million a year ago.

Despite a slowdown in spending by its big advertising customers, Baidu said it added a record number of advertisers in the third quarter and now had a total 390,000 active online marketing customers.

Credit Suisse downgraded the company in October to "underperform" from "neutral", due to concerns about its ability to monetize its mobile search traffic and worries about the erosion of its search market dominance.

Baidu Chief Executive Robin Li said on Tuesday that the firm's PC search traffic was "not as exciting" as mobile search traffic, which was growing at triple digit rates.

"We are working hard to improve the monetization system for mobile and to educate our customers to take full advantage of mobile," Li told analysts on a phone hook-up.

"But we expect it would take some time to close the gap," he added, referring to both effective monetization and moving advertisers to mobile devices.

Baidu is also facing a challenge from China's top anti-virus software firm, Qihoo 360 Technology. A search engine launched by Qihoo in August has started to gain traction, accounting for 5-10 percent of search traffic since its launch, according to data from research firm Analysys International.

But analysts don't expect Qihoo to peel away much of Baidu's search market dominance because of the sheer size of the incumbent's resources.

"It's been one of these emotional hangovers on the (Baidu) stock but the reality is Qihoo is not monetizing and won't be monetizing probably until Q1 and even then it will be at a very small base," Clendenin said.

Baidu shares have fallen about 2 percent this year on expectations that it will be hurt by slower economic growth in China, underperforming a 14 percent rise on the Nasdaq exchange.

(Additional reporting by Alexei Oreskovic in SAN FRANCISCO; Editing by Richard Pullin)

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