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Baidu Catches a Tax Break

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Baidu's (Nasdaq: BIDU  ) letting the world know why it's a dot-com rock star.

China's leading search engine posted resilient quarterly results tonight. Revenue soared 60% to $858.8 million, comfortably ahead of the $850.8 million the pros were targeting. Net income soared 70% to $436 million -- or $1.24 a share. Analysts were only forecasting a profit of $1.12 a share.

This would seem to indicate a blowout quarter, and the market's initial reaction was to send the shares markedly higher. You don't even need a calculator to realize that $436 million in earnings is slightly more than half of the $858.8 million that it scored as revenue. Yes, net margins topped 50%!

However, the storybook margins begin to come undone on closer scrutiny. Operating profits, after all, only rose 52%. Traffic acquisition costs, R&D expenses, and bandwidth costs all rose faster than revenue.

Why is the bottom line so tasty? Well, it's largely a taxing situation. Baidu's effective tax rate was a mere 7.9% after a reversal of an earlier tax provision that Baidu had booked. China's corporate tax structure is kind to tech, but 7.9% is a far cry from last year's more realistic 14.9% effective tax rate.

This doesn't mean investors need to start worrying about Baidu. The Internet speedster is still growing at a stellar rate. The midpoint of Baidu's fresh revenue guidance for the quarter -- calling for its top line to clock in between $983 million and $1.009 billion -- is heartier than the $988 million that analysts were projecting.

Yes, we could be knee-deep in Baidu's first $1 billion quarter.

Baidu's paid-search platform is also showing no signs of slowing. The average advertising customer is spending 35% more to get noticed on Baidu than a year earlier.

China's been a bit of a minefield lately. Fallen darlings SINA (Nasdaq: SINA  ) and (Nasdaq: SOHU  ) are expected to earn far less this year than they did a year earlier on costly growth initiatives. Baidu didn't do itself any favors last week when New Oriental Education (NYSE: EDU  ) took a hit on accounting fraud suggestions, a material victim since Baidu CEO Robin Li has been on its board since 2006.

However, regardless of whether you side with the 52% pop in operating margins or the tax rate-assisted 70% surge in reported earnings, Baidu's still growing a lot faster than global search leader Google (Nasdaq: GOOG  ) and most Internet companies of its size.

The 60% top-line growth -- and surprisingly robust outlook for the current quarter -- just can't be ignored for a proven Internet leader trading at just 17 times next year's profit targets.

Bullish on Baidu
A bullish call on Baidu has served me well on Motley Fool CAPS over the years. True to the CAPScall initiative, I'm not going to give up on it now. Baidu has soared 1,184% since I recommended it to Rule Breakers newsletter subscribers six years ago, but it's not the only way to gain some overseas sizzle. A new report identifies three American companies set to dominate the world. It's free, but it won't be available forever. Check it out now.

The Motley Fool owns shares of Google and Motley Fool newsletter services have recommended buying shares of, New Oriental Education, SINA,, and Google. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.

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Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

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