Sunday, October 29, 2006

Baidu to report earnings

Baidu will announce 3rd quarter earnings after market close on Tuesday.

A webcast will be held at 8pm US eastern time.

We expect Baidu will have another excellent quarter.

Revenue should grow 35 to 40% this quarter over last quarter which is about 2 to 3 million higher than Baidu's guidance of about $31 million dollars.

A few things contributed to higher revenues this quarter:

1. Continue market share gains
2. Significant increase of display ads across the two most significant properties of and
3. Continue strength in keyword pricing

One uncertain factor might have affected result is the replacement of channel partners with Baidu's own salesforce mainly in Beijing area. It definitely helps Baidu in expandng revenue in northern China regions but a strain relationship with channel partners could negatively impact revenue growth in other regions as those partners were heavily courted by Google at the same time.

Other positive developments during the quarter includes rollout of, a blog service and several partner agreements including the distribution agreement with Viacom's MTV.

There are also several negative development during the quarter:

1. Layoff of enterprise software division employees. The event was covered heavily and expanded by Baidu's competitors. To Baidu's end, it was done less appropriately and Baidu now decides to sue one of the former employee for defamation which we think is very unwise.

2. CTO resignation. The reason of Mr. Liu's resignation was quoted as "strong desire for starting a new business". Translation - I don't like my boss and want to be my own boss.

3. Over monetization concerns. Many search result pages have whole page of sponsored links when Baidu thinks a user was looking for a product. In near term, since many Chinese users could not differentiate a sponsored link from a natural result, Baidu can profit handsomely. Longer term, it degrade Baidu's user experience and could open up opportunities for Google to regain market shares.

There are also several challenges facing Baidu:

1. Capex. With very limited financial resources, how Baidu can compete with Google long term is a big question. Baidu should consider listing in domestic market as a source for more capitals.

2. Missiong links such as email program. Email is probably one of the most sticking application of all web applications. Baidu should consider taking over Netease which owns one of the most widely used email program.

3. Missing English contents. Though there are growing (but still very limited) English contents in Baidu, a joint venture or collaboration with a English search engine could give Baidu much needed boost since many academic users in China are using Google as their second choice of search engine. Once Google's China division starts to deliver localized content with their recently hired one hundred talented Chinese engineers, many could decide to stay with Google for searches in both languges.


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