Key Takeaways From Qihoo 360's Earnings Report

Qihoo 360 had a blowout quarter. What investors need to know.

Mar 9, 2014 at 1:30PM

Qihoo 360 (NYSE:QIHU) released its fourth-quarter earnings on Thursday. The company beat analysts' expectations on both the top and bottom lines, and it raised its first quarter guidance above analysts' forecasts. Shares were volatile after hours even though there were few causes for concern.

Qihoo drives the majority of its revenue through online advertising, where it competes primarily with Baidu (NASDAQ:BIDU). Both companies have been investing heavily to grow revenue. In mobile, Qihoo has been successfully leveraging its popular security software and web browser to grow its mobile app store, but still faces strong competition from Baidu and Tencent (NASDAQOTH:TCEHY).

The bottom (and top) line

Metric

Qihoo's Report

Analysts' Expectations

Q4 Revenue

$221.6 million

$209.7 million

Q4 EPS

$0.70

$0.43

Q1 Revenue Guidance

$226 million-$228 million

$203 million

Revenue grew 115.3% year-over-year. Online advertising revenue growth lagged just slightly, increasing 112.9% to $142.4 million. Most of that growth came from improved monetization of users on its 360 Startup Page. It's worth noting, however, that despite 30% year-over-year growth in unique homepage visitors, that number is down 7% sequentially.

Game platform operations helped grow Internet value-added services revenue 124.4% to $78.9 million. That number is also up 17.7% sequentially.

Non-GAAP net income grew 260% year-over-year and 56.6% sequentially. The earnings growth of 218% represents a steep acceleration over the last two quarters, which saw growth in the 130% range.

Key takeaways
Qihoo continues to make progress in penetrating the web search market. CEO Hongyi Zhou cited a third-party study that found the company's search engine, So.com, took 23% of Chinese search traffic. Chinese research firm CNZZ reported Qihoo took 24.9% of search traffic in January while Baidu captured 58.3%.

Despite taking a significant chunk of the valuable Chinese search market, Qihoo hasn't had as much success monetizing its users. As noted, most of its online advertising revenue came from start-up page ads. In January, Qihoo hired John Liu, a former Google China exec, to help monetize search. If the company can better leverage its search traffic, it should have more blowout quarters like its last one.

Qihoo continues to outpace Baidu in its mobile reach. The fourth quarter saw its mobile users climb to 467 million (for its mobile safe application). Comparatively, Baidu's mobile search app reached 400 million users last quarter.

Mobile search is certainly easier to monetize than Qihoo's mobile safe, but Qihoo is leveraging its market lead to feed into other mobile businesses like its app store. The value of a security app is evident, as Baidu entered the market last year with its Baidu Mobile Guardian app.

Its app store is another area of strength. Zhou cited another third-party study in the company's conference call stating Qihoo 360 Mobile Assistant accounted for 40% of Android app distribution. Baidu claims that it captured 41% between its namebrand app store and recently acquired 91 Wireless. Both companies are spending heavily to promote and improve their app stores.

Tencent, meanwhile, has invested in app distribution as well. Daily downloads through all of its distribution channels has climbed to 50 million, and management believes it can reach 100 million by the end of 2014. Comparatively, Baidu and Qihoo 360 combined garner just 90 million daily app downloads.

Tencent's focus is mostly on building social platforms like WeChat and Mobile QQ. The company has been able to leverage its user base to distribute games, which are often the most profitable app downloads. If Tencent is successful in its initiative, it could mean slower growth for both Baidu and Qihoo in their app stores.

Searching for growth
Despite its blowout quarter, a lot of the upside for Qihoo was already priced in after the stock climbed more than 27% in the last month. Still, Qihoo shares can continue to move higher from here as the company increases its search traffic share and better monetizes its users. Additionally, its penetration of the mobile market is strong and its app marketplace is competing well with Baidu's. As the Chinese Internet population continues to grow and online spending grows with it, Qihoo ought to continue its stellar profit growth.

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