China search giant Baidu on Monday missed Wall Street sales expectations and offered a timid outlook for Q4, as concerns mount about new search rival Qihoo 360 Technology (QIHU).
Beijing-based Baidu (BIDU) earned $1.37 a share, up 63% vs. a year earlier and handily topping forecasts for $1.28, according to analysts polled by Thomson Reuters.
Revenue rose 51.9% to $994.6 million. But Wall Street had expected Baidu's first-ever quarter topping $1 billion.
"In the last two years, Baidu was so comfortable because Google (GOOG) backed out of China," said T.H. Capital analyst Tian X. Hou via phone from Beijing on Monday. "They didn't have to do anything, they just had to collect money. But now they're in a situation where they have competition.
Qihoo in August introduced its own search engine, sparking concerns about Baidu's dominance in China. Baidu makes money by placing ads next to search results, just as Google does in the U.S., and the increased competition already seems to be affecting the cost of placing ads, says Hou. Baidu's traffic acquisition costs, or the money that it pays other websites, climbed to 8.6% of sales in Q3 from 8% a year ago.
The competition has taken its toll on Baidu shares, too. The stock is off about 15.5% since Qihoo's search engine launched.
Qihoo in Q3 gained about 8% to 10% of China's search traffic, up from 0%, with at least some from Baidu. The latter still has 65% to 70% of the market, but that's down as much as 10 percentage points from Q2.
Analysts had been modeling Q4 revenue of $1.03 billion. But Baidu said Monday it expects $979.3 million to $1.01 billion.
That cautious outlook means Baidu is taking Qihoo seriously, says analyst Hou, who has a buy rating on both stocks.
Baidu CEO Robin Li in a statement says he's hoping new mobile apps drive more traffic to Baidu's search engine. But that means Baidu will have to step up spending on new technology, probably tightening its margins.
"In the quarters ahead, we will look to accelerate the pace of investment to achieve long-term, sustainable growth," says CFO Jennifer Li.