Baidu, Inc. ((ADR) NASDAQ: BIDU) announced its 3rd quarter results today, and 3rd quarter earnings were up 42%, but according to Reuters the company’s Q4 forecasts were below expectations and sent the stock price tumbling 13% in after-hours trading. Baidu forecasts Q4 revenues to be around US$174-180MM, below analysts’ consensus of US$205MM.

One of the main reasons cited for the low forecast was the full implementation of the new Phoenix Nest search advertising system which had been in existence for the last 8 years and will fully replace the company’s previous bid ranking system by December 1st 2009.  According to Baidu, the new Phoenix Nest system, which has been in operation since April of this year, currently serves 70% of Baidu’s 216,000 advertisers.

“During the quarter, Phoenix Nest, our new online marketing system, continued to gain customer traction and showed promising trends in key monetization metrics.

…With 70% of customers already using Phoenix Nest, we believe this is the right time to complete the switch to the new system.The move to a single upgraded bidding platform will more efficiently utilize company resources and relieve customers from the burden of maintaining two systems. We are confident that Phoenix Nest will deliver tremendous benefits to our users, customers and Baidu.”
– Robin Li, Chairman and CEO, Baidu

Last year Baidu was heavily slammed by CCTV (website in Chinese and in English), the Chinese state television, for allowing rampant fraudulent ads on its bid ranking platform. The fact that ad results are not clearly distinguished from organic search results was perhaps the most central issue, as certain keywords resulted in full pages of paid search results which users often mistook for organic search results. Baidu seems to have been on a PR campaign since then to repair its damaged reputation, and efforts included heavy sponsorship for the CCTV Chinese New Year Gala (which led to some netizens speculating that CCTV had used the same “coercive marketing” tactics that it had accused Baidu of using). The new Phoenix Nest system directly addresses the issue of mixing paid search and organic search results.