DOW JONES NEWSWIRES

Baidu Inc. (BIDU) said Monday in the U.S. its third-quarter earnings jumped 42% as large customers shifted more of their advertising budgets to the leading Chinese search engine's advertising platform.

However, the company disappointed with its fourth-quarter revenue projection of $174 million to $180 million, well below the $205 million expected by Wall Street. Baidu cited the temporary effect of the discontinuation of its older marketing system.

That outlook sent Baidu's American depositary shares plunging 13.2% to $375.99 in after-hours trading. The stock, having nearly quadrupled in value since mid-December, hit a 52-week high of $439.90 earlier Monday.

Baidu reported earnings of CNY492.9 million ($72.2 million), or CNY14.14 per American depositary share, for the three months ended Sept. 30 compared with CNY347.9 million, or CNY10 per ADS, a year earlier. Analysts polled by Thomson Reuters projected earnings of $1.83 an ADS.

Revenue surged 39% to CNY1.28 billion. In July, the company said it expected revenue of $184 million to $189 million, topping Wall Street estimates at the time.

Active online-marketing customers increased 11% to about 216,000, as revenue per customer grew 26%.

On a conference call with analysts, Haoyu Shen, vice president of business operations, said the transition to the new marketing system, called Phoenix Nest, would reduce sequential revenue growth in the fourth quarter by 10 percentage points.

Customers used to the old system may not be ready to switch to the new system by Dec. 1, when Baidu fully transitions to the new system, he said. Therefore the company may temporarily lose their advertising spending.

Shen also said the impact will last through the first quarter of next year or longer.

"It will probably take a couple quarters from the date of the switch for the situation to settle down and for us to return to a normal growth trajectory," he said.

Investors had cause to believe the transition wouldn't be so painful. In August, Baidu Chief Executive Robin Li told the Wall Street Journal that "going forward, Phoenix Nest will have meaningful positive impact to our revenue."

Phoenix Nest was launched in April, in response to widespread criticism that Baidu didn't clearly differentiate advertisements from normal search results. Baidu management says the system also offers tools to advertisers to better measure the return on their advertising spending, and therefore will eventually lead to higher revenue.

Dick Wei, an analyst covering Baidu for J.P. Morgan, said the new advertising system, which has advanced features similar to what is offered by Google Inc. in the U.S., is too complex for some less sophisticated Chinese advertisers, which explains their hesitation to switch over.

Still, Wei said the new system will be positive for Baidu eventually.

"In the longer term, this should be a better monetization system, but I think that there is some near-term risk, for example execution risk, related to this transition," he said.

At the end of the conference call, Baidu's Li attempted to reassure investors about the transition.

"I understand many of you have concerns regarding the switch to Phoenix Nest. I want to assure you that this is a strategic decision made by the management. We did careful calculations and we think, 12 months from now when we look back, we will be happy with the switch," he said.

"We truly believe that Phoenix Nest is a superior monetization system and time will tell that we are making the right decision."

-By Aaron Back and Jay Miller, Dow Jones Newswires; (8610) 6588-5848; aaron.back@dowjones.com