China’s leading internet search engine will swap over to a new online marketing technology in early December

Baidu shares dropped sharply on Tuesday after China’s leading internet search engine predicted that its planned switch to a new online marketing technology in early December would squeeze revenues.

The cautious outlook surprised investors after the Nasdaq-listed company revealed higher third-quarter earnings, having benefited from an improvement in the advertising market and bolstered its already dominant market share.

Net income jumped 42 per cent to Rmb493m ($72m) in the third quarter compared with the same period last year, and revenue was up 39 per cent year on year to Rmb1.28bn. Baidu holds 61 per cent of the market in China, while Google has 29 per cent.

But the shares fell almost 11 per cent in the US after the company warned that it would lose advertising revenue temporarily. Some of its customers were not ready to start using Phoenix Nest, a tweaked version of its search word bidding system – whereby companies pay to have their websites listed higher up in Baidu’s search results.

Baidu introduced Phoenix Nest in April, and 70 per cent of its customers that pay for priority search results have started using the platform. The company plans to switch off its old bidding platform in early December.

The company forecast revenues in the fourth quarter would drop to between Rmb1.19bn and Rmb1.23bn, and management said it expected the squeeze to be felt for most of the first half of next year.

“It will probably take a couple of quarters from the date of the switch for ... us to return to a normal growth trajectory,” Shen Haoyu, vice-president, told investors.

Analysts had expected continued strong revenue growth in the fourth quarter.

Robin Li, chief executive, sought to calm investor concerns, saying the switch to Phoenix Nest was the right decision. “Twelve months from now, when we look back we will be happy with the switch,” he said.

Baidu’s initial motive for developing the platform had been to make more money from auctioning search terms.

Last year Chinese state media criticised Baidu, saying its business practices allowed unlicensed medical sites to have top listings on its search engine, hurting consumers and squeezing “legitimate” businesses.

The group quickly responded by terminating services for customers without valid licences. Baidu also said at the time that Phoenix Nest would help make its paid search fairer and more transparent.