Chinese technology company Qihoo 360 (NYSE:QIHU.DL) reported earnings on Tuesday evening that came in well ahead of expectations. While the earnings beat means that the company now trades for a very reasonable 18 times earnings and 21 times free cash flow, there are still questions about the company that need to be answered before the stock price can reflect its impressive earnings growth as of late.
The good news
Analysts were expecting Qihoo to report non-GAAP earnings of $0.72 per share, but the company blew those expectations away, registering $0.82 per share. The real strength came from on-line advertising, where revenue grew by 72%, to $294 million. This segment accounted for two-thirds of all revenues during the past three months.
Qihoo was able to really juice its profit because, while total revenue grew by 38%, non-GAAP operating expenses jumped just 27%. As a result, net profit margins exploded, from 11.64% last year to 16.43% during the past three months.
In addition, the company saw several key metrics show impressive growth. Qihoo's mobile security product saw its number of users grow by 25% during the past year, to roughly 800 million. And the company launched three smartphone models for sale in China with embedded security features under the QIKU brand.
The not-so-good news
Prior to 2015, online advertising revenue was just Part One of Qihoo's one-two punch. The other was from "Internet value-added services" -- which is fancy speak for the company's gaming platform. Prior to 2015, the gaming platform was growing by more than 20% per year. Last quarter, however, that growth slowed to 7%.
This quarter, the growth came to a screeching halt, with revenues actually shrinking 16%. Because the company did not hold a conference call (more on that below), the only comment shareholders received was from company president Xiangong Qi, who said in a press release, "Internet value added services performed largely in line with expectations, despite continued suspension of online lottery operations."
Qihoo's quest to be much more than just a security company hit some snags, as well. Unique daily visitors to the company's start-up page were up only 2.3%. And average daily clicks on the page were actually down 10%. Just as important, the company offered no guidance on the performance of its newly launched Hausou mobile search engine -- a key driver for the company's mobile ambitions.
The elephant in the room
The biggest reason that a company growing earnings by 64% is trading for just 12 times forward earnings is uncertainty. On June 17, the company's founder and CEO Hongyi Zhou -- along with a group of investors -- offered to take the company private. The offer was reportedly made for about $77 per share, a 54% premium to today's trading price.
All the company had to say about that offer was that it had formed a special committee to evaluate it, and that it had retained both lawyers and financial advisors to assist in the process. It further stated that, "There can be no assurance that any definitive offer will be made, that any agreement will be executed, or that this or any other transaction will be approved or consummated."
Wall Street doesn't like that type of uncertainty, especially when the stock market in China is tanking. Add in the fact that the company refused to either hold a conference call, or offer up guidance for the current quarter, and you can see why the stock isn't budging on the earnings beat.
Until some type of definitive decision is made on the go-private offer, investors should expect such uncertainty to weigh heavily on the company's shares.