October 27, 2009 / 7:33 AM / 10 years ago

WRAPUP 1-Baidu's rare stumble offers rivals opportunities

* Switch to new system to hit revenue through Q1 2010

* Q4 revenue to miss Wall St view by more than 10 pct

* Q3 EPS $2.07 vs year-earlier $1.47

* Shares down 13 pct in after-hours

* Sohu, Changyou also offer weaker-than-expected guidance

By Melanie Lee and Doug Young

SHANGHAI/HONG KONG, Oct 27 (Reuters) - Baidu’s (BIDU.O) hasty move to a new Internet ad system marks a rare stumble for China’s dominant search engine, opening a window of opportunity for others salivating for a piece of the country’s fast-growing online market.

Baidu, whose name is practically synonymous with Internet search in China, surprised investors when it revealed transition to its new Phoenix Nest system will lead to softer revenues into next year as customers adjust, sending its stock down sharply.

The news was music to others, such as Sina Corp (SINA.O) and global search leader Google (GOOG.O), looking for a bigger piece of the pie in the world’s biggest Internet market with 235 million search users in June, up about a third from a year ago.

“In the short term Baidu could possibly lose market share to Google,” said JP Morgan analyst Dick Wei.

“From the end user perspective, they aren’t going to see much of a difference, but from the advertisers perspective, if you look at monetisation market share, it (Baidu’s market share) could be a bit lower in the next few months,” he said.

Baidu expects to lose some customers and have lower revenue in the near term after the system is fully rolled out.

Baidu shares, which shed 0.5 percent to close at $432.97 during regular trading hours in New York, fell more than 13 percent in after-hours trade to $375.99 after the company gave its revenue forecast that was well below Wall Street estimates.

The glitch isn’t the first for Baidu, which was previously accused by some of the world’s biggest music companies of allowing illegal trading of copyrighted songs over its system.

But the stumble could have more serious implications as it relates directly to the company’s revenue generation model.

ONLINE PLAYERS

Baidu, whose name comes from an ancient Chinese poem, is just one of a growing field of upstart firms seeking to cash in on China’s rapidly growing Internet, home to a search market valued at 1.8 billion yuan ($264 million) in the second quarter.

Online game companies such as Shanda Games GAME.O and NetEase (NTES.O) vie for dominance in the country’s Internet gaming market worth nearly $1 billion in the second quarter, while portal operators such as Sina and Sohu.com (SOHU.O) also spar for dominance in the portal space.

In an Internet market where two or three names usually control each space, Baidu stands out because of its single-handed dominance of China Internet search.

Several Chinese Internet firms such as NetEase, Perfect World PWRD.O and Baidu, have seen their share prices skyrocket this year. However, softer-than-expected fourth quarter guidance from two other companies may further dampen investor sentiment.

Sohu and its recently listed gaming unit Changyou.com (CYOU.O) warned on Monday that current-quarter revenue would come in below Wall Street estimates, sending their shares down. [ID:nBNG513965]

Baidu had 61.6 percent of China’s search market in the second quarter, according to Analysys International, compared with Google’s 29 percent. Baidu controls 29.4 percent of all Web advertising in China, while Google gets 13.9 percent.

Baidu, which will discontinue its old keyword bidding system and fully implement its new Phoenix Nest advertising system on Dec 1, said its fourth-quarter revenue will come in at $174-$180 million, more than 10 percent below the average analyst estimate of $204.7 million, according to Thomson Reuters I/B/E/S.

“We still feel that in Q1 there will be a material impact from this switch,” a top Baidu executive said in an earnings conference call on Tuesday after the company reported its results, adding it will take a few quarters for the situation to normalise.

SOARING SHARE PRICE, STELLAR Q3

Baidu’s shares have more than tripled since the start of the year, as the company appeared positioned to benefit from the economic recovery and a pick-up in advertising spending in China, the world’s largest Internet market.

Revenue in the three months ended Sept. 30 totaled $187.3 million, a tad below the average analyst estimate of $189 million but nearly 40 percent higher than the 135.4 million a year earlier.

Third-quarter net income rose to $72.2 million, or $2.07 a share, from $51.2 million, or $1.47 a share, a year ago.

Baidu CEO Robin Li said in a statement that the move to a single bidding system will more efficiently use company resources and relieve customers from the burden of maintaining two systems.

“With 70 percent of our customers already using Phoenix Nest, we believe this is the right time to complete the switch to the new system,” Li said.

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