Earnings Preview: Baidu.com

| About: Baidu, Inc. (BIDU)

WR Hambrecht analysts James Lee and Xiaofan Zhang sent a note to clients today previewing Baidu.com (NASDAQ:BIDU) earnings to be announced after today's close. Key excerpts:

Baidu will be reporting Q4 results after the market close today. The conference call will be at 8PM EST.

Investor Concerns Likely Caused Weakness. The market appears to be concerned about the quarter, with the stock trading down 9% month-to-date and 3% yesterday.

Q4 Results Should be at the High-end of Guidance. We believe that Q4:06 results will come in at the high-end of guidance of $34-$35M in revenues. We anticipate increased spending from mid to large advertisers will more than offset the weakness in smaller businesses moving to cheaper platforms.

Guiding Below Q1:07 Consensus Not Likely, in Our View. We believe the likelihood for Baidu to guide below the current Q1:07 consensus is low. Consensus is looking for $38.4M in revenues, or an 11% Q/Q increase, which is reasonable, in our view, compared with a 27% sequential increase in Q1:05. Although the revenue base had tripled from 2005 to 2006, we feel the deceleration of growth should not be worse than that of the consensus, as the paid search market is still extremely early in China (only ~1% penetration of SMEs). Over the past four quarters, Baidu had Q/Q growth rates of 27%, 42%, 26% and 16% (estimated).

We Expect an Upside in Q1.
We suspect that Q1:07 revenue guidance could provide upside vs. consensus as we anticipate the success in the customer shift will drive ASP, and we expect some smaller customers to return to the Baidu platform given the inferior results from other search engines.

Recent Checks Indicated All on-track.
We spoke with Baidu’s resale agents, who indicated the quarter is on-track with corporate expectations. Our other checks also showed that Baidu has done well in expanding its presence through affiliate websites, including China Netcom and major vertical sites. In addition, the company is working closely with China Unicom to develop mobile search for the carrier. Our checks with key account sales are also strong (brand advertisers), as the company continues to gain traction selling banner ads on its MP3 and video channels. At the same time, the up and coming EMI channel and potentially a news portal create new inventories for banner advertising.