Qihoo 360 Reports First Quarter 2013 Unaudited Financial Results

BEIJING, May 19, 2013 /PRNewswire/ -- Qihoo 360 Technology Co. Ltd. ("Qihoo 360" or the "Company") (NYSE: QIHU), a leading Internet company in China, today reported its unaudited financial results for the quarter ended March 31, 2013.

First Quarter Financial Highlights⁽¹⁾

• Revenues were $109.9 million, a 58.6% increase from $69.3 million in the first quarter of 2012.
• Net income attributable to Qihoo 360 was $5.6 million, compared to $14.1 million in the first quarter of 2012.
• Net income attributable to Qihoo 360 excluding share-based compensation (non-GAAP)⁽¹⁾ was $17.5 million, compared to $25.7 million in the first quarter of 2012.
• Diluted earnings per ADS⁽²⁾ ("EPADS") attributable to Qihoo 360 was $0.04, compared to $0.12 in the same period last year. 
• Diluted EPADS attributable to Qihoo 360 excluding share-based compensation (non-GAAP)⁽¹⁾ was $0.14, compared to $0.21 in the same period last year.

First Quarter Operating Metrics

• Total monthly active users of Qihoo 360's products and services reached a record 457 million in March 2013, compared to 411 million in March 2012⁽³⁾.
• User penetration of Qihoo 360's products was 95.8% in March 2013, compared to 93.4% in March 2012 ⁽³⁾.
• Total smartphone users of Qihoo 360's primary mobile security product ⁽⁴⁾ reached approximately 275 million in March 2013, compared to 74 million in March 2012.
• Monthly active users of Qihoo 360's browsers reached a record 332 million in March 2013, compared to 273 million in March 2012 ⁽³⁾.
• User penetration of Qihoo 360's browsers reached a record 69.6% in March 2013, compared to 62% in March 2012 ⁽³⁾.
• Average daily unique visitors to the 360 Personal Start-up Page and its sub-pages were 94 million in the first quarter of 2013, compared to 77 million in the first quarter of 2012.
• Average daily clicks on Qihoo 360's Personal Start-up Page and its sub-pages were approximately 489 million in the first quarter of 2013, compared to 295 million in the first quarter of 2012.
• Paying users of Qihoo 360's web game platform were approximately 281,000 in March 2013, compared to 139,000 in March 2012.

"We are very pleased with our strong first quarter results as we continue to demonstrate top-line growth and further progress our strategic initiatives," commented Hongyi Zhou, Chairman and Chief Executive Officer of Qihoo 360.  "We have further strengthened our leadership position across our key product categories. Monthly active users of our PC browsers reached a record 332 million, covering almost 70% of the Chinese PC Internet population. Additionally, we expanded our market share in mobile security and the number of Chinese smartphone users of 360 Mobile Safe, our key mobile security product, reached 275 million at the end of March. Our comprehensive mobile product portfolio provides us with a solid foundation to build a leading mobile Internet platform in China."

"During the first quarter, we invested in product development and technology innovation in order to deliver best-in-class user experience, and expanded our sales and marketing efforts to strengthen our brand in mobile Internet and support search monetization. During the quarter, we gained notable search traffic share and began to monetize our search engine through both an internal system and external partnership. We believe we are in an excellent position to capture a significant portion of the search market and help reshape the competitive landscape of this vast industry. As we execute on our search strategy, we believe this will drive substantial long-term growth for our business," concluded Mr. Zhou.

Xiangdong Qi, President of Qihoo 360, added, "Revenue from our online advertising business grew 40% year-over-year, supported by further deepening of our monetization process. Although still in its infancy, our search business already contributed meaningfully to overall revenue. Internet value-added services once again outpaced the market with revenue growth of 119% year-over-year, largely driven by strong momentum in the number of paying web game users. As we make ongoing efforts to leverage the strength of our platform, we expect to achieve accelerated overall growth for the rest of the year, with margin recovery.  We will continue to make proactive investments in 2013 in product and technology development to strengthen our leadership position and expand our footprint, particularly in mobile Internet and search technology where we see tremendous opportunity for future expansion. Meanwhile, we are gradually building up our sales and marketing infrastructure to support our deepening monetization efforts. We believe these investments will fortify our foundation, support sustainable growth and drive long-term shareholder value."

First Quarter 2013 Results

Revenues

Revenues were $109.9 million, representing an increase of 58.6% from $69.3 million in the first quarter of 2012 and an increase of 6.7% from $103.0 million in the fourth quarter of 2012. The strong year-over-year growth in revenues was mainly due to continued momentum in both online advertising and Internet value-added services.

Online advertising revenues were $63.4 million, representing an increase of 39.6% from the same period last year and a decrease of 5% from the prior quarter. The healthy year-over-year increase was primarily driven by increased monetization of user activities among the Company's key products, such as the 360 browsers and Personalized Start-up Pages, despite a soft macro environment. The quarter-over-quarter decline in online advertising reflected normal seasonal trends in certain business verticals.

Internet value-added service revenues, which are mainly derived from web game operations, were $45.8 million, up 118.9% from the same period last year and 30.4% from the prior quarter. The strong year-over-year and quarter-over-quarter increases were mainly driven by solid growth in the Company's paying game user base and expanded game portfolio.

Cost of Revenues

Cost of revenues were $13.9 million, compared to $7.6 million in the first quarter of 2012 and $10.6 million in the fourth quarter of 2012, representing increases of 82.7% and 30.6%, respectively.

Operating Expenses

Operating expenses were $89.2 million, compared to $47.2 million in the first quarter of 2012 and $82.6 million in the fourth quarter of 2012. Operating expenses excluding share-based compensation (non-GAAP) were $77.2 million, compared to $35.5 million in the first quarter of 2012 and $68.6 million in the prior quarter.

The year-over-year and sequential increases in non-GAAP operating expenses were mainly driven by increased marketing expenses, personnel-related costs, professional fees, and bandwidth and equipment depreciation expenses, as the Company continued to enhance its technology and product development capabilities, strengthen its brand in mobile Internet and expand its business initiatives.

Operating Income

Operating income was $6.8 million, compared to $14.4 million in the first quarter of 2012 and $12.1 million in the prior quarter.   

Operating income excluding share-based compensation (non-GAAP) was $18.8 million, compared to $26.1 million in the first quarter of 2012 and $26.1 million in the prior quarter.

Operating margin was 6.2%, compared to 20.9% in the fourth quarter of 2012 and 11.8% in the prior quarter.

Operating margin excluding share-based compensation (non-GAAP) was 17.1%, compared to 37.7% in the first quarter of 2012 and 25.4% in the prior quarter.

The year-over-year and sequential decline in non-GAAP operating margin was due to increased expenses in the abovementioned areas related to new business initiatives in search and mobile Internet.

Net Income attributable to Qihoo 360

Net income attributable to Qihoo 360 was $5.6 million, compared to $14.1 million in the first quarter of 2012 and $12.8 million in the prior quarter.

Net income attributable to Qihoo 360 excluding share-based compensation (non-GAAP) was $17.5 million, compared to $25.7 million in the first quarter of 2012 and $26.7 million in the prior quarter.

Net Margin

Net margin was 5.1%, compared to 20.3% in the same period last year, and 12.4% in the prior quarter.

Net margin excluding share-based compensation (non-GAAP) was 15.9%, compared to 37.2% in the same period last year and 26.0% in the prior quarter. The year-over-year and sequential decline in non-GAAP net margin was also due to increased expenses in the abovementioned areas related to new business initiatives in search and mobile Internet.

Diluted Earnings per ADS

Diluted EPADS for the first quarter of 2013 was $0.04, and diluted EPADS for the first quarter of 2013 excluding share-based compensation (non-GAAP) was $0.14.  Both GAAP and non-GAAP weighted average ADS used in computing diluted EPADS was 125.8 million.

Cash Flows and Balance Sheet

Net cash outflow from operations in the first quarter of 2013 was $27.9 million, compared to net operating cash inflow of $25.8 million in the same period last year and $53.1 million in the prior quarter. Cash capital expenditures were $57.1 million. The operating cash outflow and the increase in capital expenditures during the quarter were mainly due to the second installment payment of the Company's new headquarters. As of March 31, 2013, the Company had cash and cash equivalents of $300.9 million.

Business Outlook

For the second quarter of 2013, the Company expects revenues to be between $142 million and $144 million, representing a year-over-year increase of 95% to 98% and a quarter-over-quarter increase of 29% to 31%. These estimates reflect the Company's current and preliminary view, which are subject to possible material changes.

Conference Call

Qihoo 360's management will host a conference call to discuss the results at 7:30 a.m. Eastern Time on May 20, 2013 (7:30 p.m. Beijing time on May 20, 2013).

The dial-in details for the live conference call are:

A telephone replay of the call will be available after the conclusion of the conference call at 10:30 a.m. Eastern Time on May 20, 2013 through 07:30 p.m. Eastern Time on May 27, 2013. The dial-in details for the replay are:

A live webcast of the conference call will be available on the investor relations section of Qihoo 360's website at: http://corp.360.cn.

About Qihoo 360

Qihoo 360 Technology Co. Ltd. (NYSE: QIHU) is a leading Internet company in China. The Company is also the number one provider of Internet and mobile security products in China as measured by its user base, according to iResearch. Qihoo 360 also provides users with secure access points to the Internet via its market leading web browsers and application stores. The Company has built one of the largest open Internet platforms in China and monetizes its massive user base primarily through online advertising and through Internet value-added services on its open platform.

Forward-looking Statements

This press release contains statements of a forward-looking nature. These statements are made under the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward- looking statements by terminology such as "will," "expects," "believes," "anticipates," "intends," "estimates" and similar statements. Among other things, the management's quotations and the "Business Outlook" section contain forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about Qihoo 360 and the industry. Potential risks and uncertainties include, but are not limited to: the Company's ability to continue to innovate and provide attractive products and services to attract and retain users; the Company's ability to keep up with rapid changes in technologies and Internet-enabled devices; the Company's ability to leverage its user base to attract customers for our revenue-generating services; and the Company's dependence on online advertising for a substantial portion of our revenues; and the Company's ability to compete effectively. All information provided in this press release is as of the date of the press release, and Qihoo 360 undertakes no obligation to update any forward-looking statements to reflect subsequent occurring events or circumstances, or changes in its expectations, except as may be required by law. Although Qihoo 360 believes that the expectations expressed in these forward-looking statements are reasonable, it cannot assure you that its expectations will turn out to be correct, and investors are cautioned that actual results may differ materially from the anticipated results. Further information regarding risks and uncertainties faced by Qihoo 360 is included in Qihoo 360's filings with the U.S. Securities and Exchange Commission, including its annual report on Form 20-F dated April 19, 2013.

About Non-GAAP Financial Measures

To supplement our financial results presented in accordance with U.S. GAAP, we use non-GAAP financial measure, which is adjusted from results based on U.S. GAAP to exclude share-based compensation expenses. Reconciliations of our non-GAAP financial measures to our U.S. GAAP financial measures are set forth in tables at the end of this earnings release, which provide more details on the non-GAAP financial measures.

Our non-GAAP financial information is provided as additional information to help our investors compare business trends among different reporting periods on a consistent basis and to enhance investors' overall understanding of the historical and current financial performance of our continuing operations and our prospects for the future. Our non-GAAP financial information should be considered in addition to results prepared in accordance with U.S. GAAP, but should not be considered a substitute for or superior to U.S. GAAP results. In addition, our calculation of this non-GAAP financial information may be different from the calculation used by other companies, and therefore comparability may be limited.

For investor and media inquiries, please contact:

 (a): 3 Ordinary Shares = 2 ADSs

(c): Adjustment to exclude the share-based compensation expense of each period.

(1) Non-GAAP measures and related reconciliations to GAAP measures are described in the accompanying sections titled "About Non-GAAP Financial Measures" and "Reconciliations of Non-GAAP Financial Measures to Comparable GAAP Measures" at the end of the press release.

(2) American Depositary Shares, which are traded on the NYSE. Every two ADSs represent three Class A ordinary shares of the Company.

(3) User and market penetration data is based on data from iResearch as of March 2013.

(4)  Referring to 360 Mobile Safe, the Company's primary mobile security product.

SOURCE Qihoo 360 Technology Co. Ltd.