- Qihoo 360 beat earnings estimate for the 4th straight quarter.
- This has come due to the company's success in controlling its costs.
- Qihoo's transition to mobile search appears to be working with Haosou enjoying strong adoption.
- Qihoo 360 shares are a good long-term investment.
Qihoo 360 Technology (NYSE: QIHU) has delivered yet another strong quarter beating consensus earnings estimates for the 4th straight quarter. Qihoo posted revenue of $438.3 million, good for 37.9% Y/Y and 14.0% Q/Q growth. Online ad revenue, the company’s biggest revenue segment representing 67% of revenue, increased 71.6% Y/Y to $293.9 million. The company’s non-GAAP EPS of $0.82 was 64% higher than the prior year’s reading and beat estimates by $0.11. Meanwhile, the company’s gross margin fell 300 basis points sequentially to 76.2% while operating expenses grew 27% to $232.5 million, considerably slower than top line growth. Monthly active users--users who drive search/homepage traffic--increased by 12 million Q/Q and 43 million Y/Y to reach 388 million.
Qihoo stock price gained a modest 3% on the earnings beat. Prior to the report, Qihoo shares had been selling off, a reflection of the low expectations surrounding the company and, of course, the ongoing turmoil in the Chinese market. Qihoo shares are down 13.45% YTD.
Qihoo 360 Five-Day Share Return
Source CNN Money
Climbing a wall of worry
Qihoo shares have fallen out of favor with investors as it climbed a wall of worry due to a sluggish bottom line and swelling costs. The company has been investing heavily in mobile search as it seeks to challenge Baidu’s (NASDAQ:BIDU) dominance in the space. Qihoo launched Haosou, a mobile search engine, in January. The heavy mobile investments have been pressuring the company’s profitability. But Qihoo now appears to have entered the consolidation phase. Operating expenses grew just 27% during the last quarter compared to 35% during Q1 2015.
Haosou has been coming along nicely, with one Qihoo official saying that the search engine garners 300 million searches daily, which translates to 30% internet search market share. That compares well with Baidu’s 50% market share. Perhaps one reason why Haosou is enjoying strong growth lies in its Online Shopping Compensation Scheme. Through the scheme, Qihoo compensates Qihoo users who use the browser to purchase goods online but fail to receive the goods. The company also offers fraud compensation for fraudulent websites as well as flight tickets compensation. No other competing browser offers these kinds of compensation packages.
Strong growth by Haosou is likely to lead to lower traffic acquisition costs, or TAC, for Qihoo. Although Qihoo does not usually break out details about TAC, they can be huge as evidenced by Google (NASDAQ:GOOGL) TAC. Google spent 21% of its revenue during the last quarter paying companies such as Apple (NASDAQ:AAPL) to become the exclusive search engine on their safari Browser. The more people use Haosou, the less Qihoo will have to fork over to competing browsers.
Mobile transition takes a hit on margins
The transition to mobile search, however, appears to be coming at a cost. Qihoo’s gross margin fell 300 basis points during the last quarter, which could be a sign of lower CPC. It’s quite likely that Qihoo will continue seeing some degree of margin contraction as its mobile segment grows. Mobile CPC is typically lower than that by PC. Google has been seeing falling CPC rates for about 12 straight quarters, and only manages to grow its ad revenue by maintaining strong growth in volume of clicks.
Qihoo is also likely to see some margin contraction even if its newly launched smartphones become a hit. The company, jointly with CoolPad, launched three Android smartphone models as it seeks to create a complete mobile ecosystem. Android mobile phones have a reputation for sporting thin margins and this is likely to impact Qihoo 360’s margins.
Qihu Long term outlook remains good
Even though Qihoo failed to provide guidance for the current quarter in keeping with the current practice by other Chinese companies due to the uncertainty surrounding the Chinese markets, the long-term outlook for the company remains good. All of the company’s revenue segments are showing good growth while the company has managed to control its costs. Meanwhile, the growing popularity of the company’s search engine should improve its mobile monetization in the future. Qihoo 360 shares are a good buy.
Following is Our Qihoo earnings preview published on August 6
Qihoo 360 earnings for Q2 2015 are scheduled to be released on Aug. 24, 2015.
- The company has lately been experiencing a worrying slowdown in both its top and bottom lines.
- This, however, might change as Qihoo starts to consolidate on the gains it has been making.
- Even though the performance of Qihoo shares over the short-term might be impinged by the Chinese market crisis, their long-term outlook looks good.
Qihoo 360 Technology (NYSE: QIHU) is slated to report second quarter earnings on Aug.24, 2015.After enjoying a long uninterrupted streak of rapid top and bottom line growth, China's largest Internet security company, Qihoo has lately been struggling with slowing growth as it continues to diversify its revenue model and enter new markets. Qihoo's top line growth slowed from 94% during the fourth quarter of 2014 to just 45% during the first quarter of 2015.
Meanwhile, the company has been spending heavily to improve its mobile search platform, Haosou, and has consequently managed to steal significant market share from Baidu (NASDAQ: BIDU), the market leader. But Qihoo has been having a hard time monetizing its traditional PC search platform, which has led to shrinking margins and slowed bottom line growth. Qihoo’s gross margins have fallen from the low 90s percentages two years ago to the current high 70s percentages. Meanwhile, EPS growth has fallen from triple-digits to single-digits. The slowed growth, coupled with the tepid Chinese stock markets, has kept QIHU shares depressed this year.
Long Earnings Beat Streak
Qihoo has managed to beat earnings projections for the company for 16 straight quarters. The consensus EPS for the second quarter is $0.50, which represents 67% growth. Qihoo managed to beat consensus EPS forecast by 30% during the last quarter, and might extend its winning streak to the current quarter.
Mobile and PC search monetization rates expected to improve
It’s encouraging to note that Qihoo’s top line slowdown has been caused by temporary setbacks and not due to a deterioration of its core online advertising business. Online advertising revenue (63.8% of overall revenue) jumped 75% during Q1 2015. The healthy growth is expected to continue for the rest of the year.
Qihoo’s gaming segment, which it reports under the Internet Value-Added segment, contributes 35% of the company’s revenue and was the main cause for the disappointment during the last season. The segment grew just 7% compared to its average growth rate in the 20s percentages. The slower growth was caused by a temporary suspension in online lottery games, and dragged down the entire company’s performance due to its size. Growth for the segment during the second quarter is, luckily, expected to return closer to its historical norm, which should give a nice boost to Qihoo’s top line growth.
Qihoo’s strong revenue growth is likely to continue over the remaining quarters due to its growing strength in search even as China’s search market continues to grow rapidly. iResearch, one of the leading market research and insights companies in China, pegged the industry revenue at 15.64 billion Yuan ($2.52 billion) during the first quarter of the current fiscal year, which represents 34.6% Y/Y growth.
A lot of this growth is being powered by mobile search even as PC search continues to contract. Qihoo’s Haosou mobile search engine, which the company launched only in January this year, has already managed to grab a 3.5% market share, compared to Baidu’s 81.4% share and Google China’s 9.3% slice. Mobile search now accounts for 42.5% of total search revenue. What’s really interesting is the pace at which this market is growing--198% during the first quarter. As more and more marketers continue to shift their marketing spend from PC to mobile, Qihoo’s new mobile search platform will soon become a very significant growth driver for the company.
Qihoo is now in the consolidation stage after a period of heavy spending as it tried to carve a niche for itself in the highly competitive world of search. Operating expenses increased at a significantly slower clip than revenue growth during the last quarter, which was an encouraging sign. The company’s gross margins have started improving after falling for several quarters.
Chinese Internet companies tend to be judged heavily on EPS growth, and contracting operating expenses will allow Qihoo’s bottom line to start growing rapidly again. The company is likely to beat EPS estimates for the quarter, which is likely to give its shares a small upside, mainly being limited by the ongoing crisis in China’s stock markets. In the event of a slight miss, it’s not likely that Qihoo shares will slip by a big margin either. The shares appear to be rather cheap which limits their downside.
But what really makes Qihoo a compelling long-term play is its new-found success in mobile search, a rapidly-growing market with strong growth runways.
Note: You might be interested in our Qihoo 360 stock analysis video.