China's Baidu profit falls on higher expenses, tax bill but mobile business grows

BEIJING — China's biggest search engine operator has reported a rare drop in profits as it expands into mobile services.

Baidu Inc. said Thursday profit in the latest quarter fell 4.5 percent to 2.6 billion yuan ($430.8 million). Revenue rose 38.6 percent from a year earlier to 7.6 billion yuan ($1.2 billion) but the company faced higher promotion and other costs and a big tax bill.

China's established search engines such as Baidu that focus on desktop computer-based services face new challenges as Web surfers shift to smartphones and tablets.

"The adoption of our mobile platform gained momentum and mobile monetization improved," said Baidu chairman Robin Li in a statement. "Mobile revenues for the first time accounted for over 10 percent of our total revenues this quarter."

The company said earnings before taxes and interest rose 8.4 percent over a year earlier but net profit was reduced by a jump in the tax rate applied to one of its subsidiaries.

China's population of Internet users grew 10 percent over the past year to 591 million people as of the end of June. The number of users who surf the Web on wireless devices rose at double that rate, climbing 20 percent to 464 million. That growth rate accelerated over the previous year's 18 percent rise in wireless users.

The communist government encourages Internet use for business and education but tries to block access to material deemed subversive or obscene. The rise of Web use has driven the growth of new Chinese industries from online shopping and microblogs to online video.

To gain a bigger mobile foothold, Baidu announced this month it would pay $1.9 billion for 91 Wireless Websoft Ltd., a distributor of smartphone apps.

"Our recent investments have further strengthened Baidu's position in key strategic areas such as search, LBS, app distribution and online video," said Li.

The company "will continue to invest aggressively," said its chief financial officer, Jennifer Li.

Baidu dominates traditional Internet search in China with nearly 80 percent of the market. But it faces tough competition in mobile search, where its market share has eroded.

Baidu's mobile share declined to 66.9 percent in March from 77.5 percent last July. That followed the launch of a rival service in mid-2012 by Qihoo 360, an information security company, which quickly gained a market share of more than 13 percent.