Baidu Profit Beats Estimates as Smartphones Lure Ad Buyers

Baidu Inc., owner of China’s largest Internet search engine, reported second-quarter profit that beat analysts’ estimates as advertisers spend more money to reach customers surfing the Web with their smartphones and tablets.

The Beijing-based company reported net income of 2.64 billion yuan ($431 million), compared with the 2.6 billion-yuan average of eight analysts’ estimates compiled by Bloomberg. Revenue rose 39 percent to 7.56 billion yuan, according to a statement released today.

New York-listed Baidu this month agreed to buy a third-party store for smartphone apps in its biggest announced acquisition, and it invested heavily on promoting new products to challenge nearest rival Qihoo 360 Technology Co., Chief Financial Officer Jennifer Li said in an earnings call today. Web portals from Google Inc. to Facebook Inc. are introducing new products and services to grab market share as consumers shift from PCs to mobile devices.

“Internet companies that used to be very focused on personal computers all need to invest to set their foothold in mobile devices,” Jodie Ding, an analyst at Shanghai-based Internet consulting group IResearch, said by phone. “Mobile devices are playing an ever important role as users spend more time and money on it.”

Higher Spending

The higher spending on acquisitions and advertising contributed to a 4.5 percent decrease in net income from 2.77 billion yuan a year earlier, the company said. The costs to attract more traffic to its platforms rose 94 percent from a year earlier to 880 million yuan.

“Selling and administration costs were big drivers in expenses,” said Ricky Lai, an analyst at Guotai Junan International Holdings Ltd. in Hong Kong. “In order to increase traffic volume, Baidu also had to launch different kinds of promotions.”

More than 10 percent of revenue in the quarter came from mobile devices, with most of that generated through advertising sales on its search app for smartphones and tablets, Li said.

“We see very significant growth in mobile traffic and monetization,” Chief Executive Officer Robin Li said. “We do expect that kind of growth will continue.”

Seeking Acquisitions

Baidu boosted its workforce by 2,100 people to 24,000 by the end of June through new hires and the purchase of PPStream Inc. in the past quarter, Jennifer Li said.

“In the mobile space, we have many M&As the team is working,” she said. “We will always keep an open mind to look at what fits for us.”

Qihoo, owner of China’s second-biggest search engine, is in initial talks to tie up with competitor Inc.’s Sogou unit. The two companies may be joining forces to compete with Baidu for mobile and desktop users.

Google, owner of the world’s most-popular Internet search engine, reported second-quarter sales and profit July 18 that fell short of analysts’ estimates as advertising tied to mobile devices crimped average prices.

Facebook capitalized on the increasing shift to mobile devices from PCs, reporting second-quarter sales and profit yesterday that exceeded estimates. Shares of the world’s most popular social-networking service rose as much as 21 percent in extended trading.

Tencent, Alibaba

The number of people who accessed the Internet via mobile devices rose 10 percent to 464 million in China by the end of June from the end of December, according to the China Internet Network Information Center. That’s greater than the population of any other country except India.

“The mobile monetization potential is huge,” Jennifer Li said.

Baidu competitors Tencent Holdings Ltd. and Alibaba Group Holding Ltd. are investing heavily in apps and shopping services to tap demand in the world’s largest mobile-phone market.

The American depositary receipts of Baidu gained as much as 17 percent in extended trading. They rose 3.2 percent to $113.37 at yesterday’s close in New York.

Baidu forecast third-quarter revenue of between 8.73 billion yuan and 8.96 billion yuan. That compares with the 8.33 billion-yuan average of 13 analyst estimates compiled by Bloomberg.

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