New technology hurts Baidu outlook

Baidu (NASDAQ: BIDU - news) shares dropped sharply on Tuesday after China's leading internet search engine predicted that its planned switch to a new online marketing platform in early December would squeeze revenues.

The cautious outlook came as a surprise to investors after the Nasdaq (NASDAQ: news) -listed company, which has benefited from a recovery in the advertising market, revealed higher earnings and bolstered its already dominant market share.

Net income jumped 42 per cent to Rmb493m ($72m) in the third quarter compared with the same period last year, and revenue was up 39 per cent year-on-year to Rmb1.28bn. Baidu has just over 60 per cent of the market in China, while rival Google (NASDAQ: GOOG - news) has just under 30 per cent.

But the shares fell more than 13 per cent in after-hours trading in the US after the company warned that it would lose some advertising revenue temporarily as some of its customers were not ready to start using Phoenix Nest, a tweaked version of its search word bidding system.

Baidu introduced Phoenix Nest in April, and 70 per cent of its online marketing customers - companies paying to have their websites listed higher up among search results on Baidu - have started using the new platform. The company plans to switch off its old bidding platform in early December.

The company forecast revenues in the fourth quarter would drop compared with the third quarter to between Rmb1.19bn and Rmb1.23bn, and management said it expected the squeeze would be felt for most of the first half of next year.

"It will probably take a couple quarters from the date of the switch for the situation to settle down and for us to return to a normal growth trajectory," Shen Haoyu, vice president, told investors.

Analysts had expected continued strong revenue growth in the fourth quarter.

Robin Li, chief executive, sought to calm investor concerns, arguing time would tell that the switch to Phoenix Nest was the right decision. "Twelve months from now when we look back, we will be happy with the switch," he said.

Baidu's initial driver for developing a new platform had been to make even more money from auctioning search terms to the highest bidder