This High-Flying Chinese Internet Company Can Get Better

Qihoo 360 Technology (NYSE: QIHU  ) is a fast-rising player in the Chinese Internet industry. The company has successfully challenged market leader Baidu (NASDAQ: BIDU  ) , and is aiming to gain market share going forward. In addition, Qihoo is seeing impressive growth in mobile and gaming. So, Qihoo is pulling the right strings in a highly competitive market, and a look at its recent results and strategies show why it should get better going forward.

Terrific growth
In the just-reported first quarter, Qihoo's revenue increased 141%, year over year, while net income jumped from less than $6 million in the year-ago quarter to $49 million in the first quarter. The company saw growth across its business lines, but better-than-expected mobile monetization was a key growth driver. During the first quarter, Qihoo strengthened its position in mobile security and mobile apps.

The company's main mobile security product, 360 Mobile Safe, reached 538 million users. This is a remarkable increase from just 475 million just a few months ago, and almost double what it was 12 months back. Qihoo is focusing on its mobile search-related products, including an all-in-one content search platform, a new mobile browser, and a new mobile search app. These products should help it improve monetization from mobile and attract new customers. 

Monetization moves
Qihoo's monetization system is improving as the company is adding more advertisers. It is now looking to bolster its monetization system to close the gap on Baidu, driven by a build-out of its search advertising sales network, direct sales force, and agency networks.

Mobile monetization is crucial to Qihoo's business. The company plans to make significant investments to strengthen its brand in mobile security to enhance its monetization network. Qihoo will focus on user experience and product innovation. Moreover, new products and services should also enable Qihoo to support its growth in the long run.

The company's moves to improve its position in the Chinese search market have reaped dividends so far. It had already captured 25% of the search market in China at the end of the previous quarter, with its gains mainly driven by continued progress in search quality and user experience. The company has now set its sights on achieving 35% of the search market in China by the end of 2014, further eating into Baidu's share. 

Up against Baidu
So far, Qihoo has done well competing against Baidu. At the end of last year, Qihoo's share of the Chinese search market was almost 23%. Baidu was the leader with a 63% share, but this was down from the 72% share it commanded at the end of 2012. Considering the moves that Qihoo has in store, it should continue gaining on Baidu going forward. But this is easier said than done.

To maintain its lead, Baidu is trying to improve its offerings and strengthen distribution channels. Its moves have been productive so far, leading to an increase in daily active mobile search users from 130 million a couple of quarters back to 160 million in the last quarter. Moreover, to improve the product experience, Baidu is focused on generating faster load speeds.

The company has also optimized ad formats on the search page, and has added features such as click-to-call and click-to-download buttons, and has made location extensions more prominent. Qihoo will need to continue innovating in order to keep challenging Baidu successfully.

The takeaway
Qihoo has made a mark for itself in the Chinese Internet industry. The company has brought down Baidu's market share remarkably, and considering its strategies and product development moves, it should be able to sustain its performance going forward. Analysts are highly optimistic regarding Qihoo's performance going forward, expecting its earnings to grow at a compound annual growth rate of 40% for the next five years. All in all, Qihoo looks like a solid growth pick.

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