QIHU Qihoo 360 Technology Co. Ltd. American Depositary Shares, Every 2 of Which Representing Three Class A Ordinary Shares

Qihoo 360 Technology (QIHU) reported fourth-quarter 2013 earnings per ADS of 16 cents, missing the Zacks Consensus Estimate of 29 cents due to higher-than-expected expenses.

Revenues

Qihoo’s total revenue was $221.6 million, up 17.9% sequentially and 115.3% year over year. Reported revenues were above management’s expected range of $206.0 to $208.0 million. The increase was due to continued momentum in both online advertising and Internet value-added services, driven by strong user traffic growth and further penetration of performance-based advertising on 360 Personal Startup Page. Additionally, better-than-expected ramp-up in search and mobile monetization aided revenue growth.

Online advertising revenues were $142.4 million, up 18.0% sequentially and soared 112.9% from the year-ago quarter. The increase was driven by increased monetization of user activities on 360 Personalized Start-up Pages and strong contribution from search and mobile advertising.

Internet value-added service revenues were $78.9 million, up 17.7% sequentially and surged 124.4% year over year. The increase was driven by strong ramp-up in mobile games and healthy performance in PC game operations.           

Margins

Reported gross margin for the quarter was 86.4%, up 20 basis points (bps) sequentially but down 340 bps from the year-ago quarter.

Qihoo reported operating expenses of $184.9 million, which were 123.9% higher than the year-ago quarter’s $82.6 million. As a percentage of sales, selling & marketing (S&M) expenses and product development decreased from the year-ago quarter, while general and administrative expenses increased. The net result was an operating margin of 4.0%, down from 11.8% in the year-ago quarter.

Non-GAAP net income attributable to Qihoo 360 was $21.01 million or 16 cents per ADS, compared to $45.6 million or 35 cents in the prior quarter. Non-GAAP net income excludes the interest expense of convertible senior notes but includes the share-based compensation expense.

Balance Sheet

Qihoo exited the quarter with cash and cash equivalents of $1,013.5 million versus $1,003.6 million in the prior quarter. Accounts receivables were $23.6 million, flat sequentially.

Net cash generated from operations was $76.8 million, compared to $53.1 million in year-ago quarter and $75.0 million in the prior quarter. Cash capital expenditures were $18.8 million.

Guidance

For the first quarter of 2014, Qihoo expects revenues between $117.8 million and $228 million, representing an increase of 106–107% year over year and 2–3% sequentially.

Recommendation

We believe Qihoo posted decent fourth-quarter results with revenues registering strong growth, both on a year-over-year as well as sequential basis.

Moreover, the company continues to solidify its position as the indisputable leader in the Chinese Internet market with its PC security products covering nearly 95% of Chinese PC Internet users and the mobile security solutions covering approximately 70% of Chinese smartphone users.

Qihu expects to make investments in product development and technology innovation as well as to expand its coverage of PC and mobile Internet, going forward. Its consistent focus on Internet and product innovation has been the cornerstone of its success to date.

However, with intensifying competition, Qihoo’s prospects might be affected if it fails to expand and innovate its product keeping in mind the changing tastes and preferences of the market.

Currently, Qihoo has a Zacks Rank #2 (Buy). Other stocks that can be considered to be attractive investment options this season are Smart Technologies Inc. (SMT) with a Zacks Rank #1 (Strong Buy), 58.com Inc. (WUBA) and Bazaarvoice, Inc. (BV), both with a Zacks Rank #2.

 
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