China's Baidu Reports a Rare Drop in Profit

Baidu's profits were down as it invested more in research and development and marketing

Baidu reported a rare drop in profits Wednesday as the company invests more in research and development to help it stay on top of the Chinese search market.

Baidu's profit for the second quarter ended June 30 was 2.6 billion yuan (US$420 million), down 4.5 percent from a year earlier. Its profit growth started to slow dramatically at the start of the year, and prior to that Baidu had been reporting big profit increases every quarter.

Its revenue, however, continues to rise. It was up 38.6 percent in the quarter to 7.6 billion yuan, meeting the upper end of its forecast.

Baidu is China's biggest search company, but it has been spending more lately on research and development, as well as marketing, as it focuses more on China's fast-growing mobile computing market. That has been eating into its profits.

Its R&D expenses were up 72.6 percent in the quarter, while its selling and administrative expenses were up 83.5 percent, due to increased spending on promotions for its products.

Despite the drop in profits, CEO Robin Li said in a statement the company had made "solid progress" in the quarter, adding a record 58,000 customers for its online advertising. Revenue from its mobile business accounted for more than 10 percent of its total revenue for the first time.

Baidu is facing fierce competition in the local market. It has long dominated PC-based search in China, but a rival search engine from a local firm, Qihoo 360, has started to slowly eat into its market share.

Baidu has also yet to develop a major social networking application for mobile devices, a business where other Chinese Internet firms are thriving.

Last week, Baidu announced it would spend $1.9 billion to acquire two major app stores in China. In mobile, its search engine is already pre-installed on most smartphones in the country. In addition, Baidu has launched its own apps for browsing, mapping and online video, among others.

For this year's third quarter, Baidu projects its revenue will reach between 8.7 billion and 9 billion yuan, amounting to a year-over-year increase of between 39.7 and 43.3 percent.

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