Qihoo 360 Reports Second Quarter 2015 Unaudited Financial Results

BEIJING, Sept. 1, 2015 /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 second quarter ended June 30, 2015.

Second Quarter Financial Highlights^[1]

• Revenues were $438.3 million, a 37.9% increase from $317.9 million in the second quarter of 2014.
• Net income attributable to Qihoo 360 was $81.4 million, compared to $39.1 million in the second quarter of 2014.
• Non-GAAP net income attributable to Qihoo 360^[1] was $116.9 million, compared to $69.2 million in the second quarter of 2014.
• Diluted earnings per ADS^[2] ("EPADS") attributable to Qihoo 360 was $0.62, compared to $0.30 in the same period last year. 
• Non-GAAP diluted EPADS attributable to Qihoo 360^[1] was $0.82, compared to $0.50 in the same period last year.

Second Quarter Operating Metrics

• Total monthly active users of Qihoo 360's PC-based products and services reached 514 million in June 2015, compared to 496 million in June 2014^[3].
• User penetration of Qihoo 360's PC-based products was 96.6% in June 2015, compared to 93.9% in June 2014^[3].
• Total smartphone users of Qihoo 360's primary mobile security product^[4] reached a record 799 million in June 2015, compared to 641 million in June 2014^[5].
• The number of monthly active users of Qihoo 360's PC browsers was 388 million and user penetration was 73.0% in June 2015, compared to 345 million and 65.2% in June 2014^[3], respectively.  
• The number of average daily unique visitors to the 360 Personal Start-up Page and its sub-pages was 131 million in the second quarter of 2015, compared to 128 million in the second quarter of 2014^[5].
• Average daily clicks on Qihoo 360's Personal Start-up Page and its sub-pages was approximately 677 million in the second quarter of 2015, compared to 749 million in the second quarter of 2014^[5].

"We are pleased to report another quarter of solid growth," said Mr. Hongyi Zhou, Chairman and Chief Executive Officer of Qihoo 360.  "As we continued to maintain our leadership position in key product categories, we took initiatives to further expand our footprint into some important mobile-Internet-related fields, such as smart hardware and smart phones. During the quarter we launched 360 Auto Guard (automobile data recorder) and a new generation of 360 Kids Guard. These products were well received by users. We believe that smart hardware and IOT (Internet of Things) devices present emerging opportunities to form deeper relationships with the massive number of mobile end users in the future.

"Last week, we launched three smartphone models under the QIKU brand and started to take pre-orders on September 1, 2015. The launch represents an important milestone for us in our efforts to establish QIKU as one of the leading and most innovative smartphone brands in China. The new models are designed and built very well, and we received encouraging positive feedback from users and industry participants. The embedded security features of our smartphones and smart hardware enable us to expand our services and brand influence from online to offline and from virtual to real settings. We view smartphones and smart hardware as critical components of our long-term mobile strategy," concluded Mr. Zhou.

Mr. Xiangdong Qi, President of Qihoo 360, added, "We are heartened to see continued solid growth in our business. Online advertising grew 71.6% year-over-year, supported by strong contributions from search monetization. Internet value added services performed largely in line with expectations, despite continued suspension of online lottery operations. We made further progress in our enterprise security operations and continued to gain traction among potential institutional clients. We will continue to make investments over the next few quarters to strengthen our brand and market position, and to improve our product and technology, particularly in new product and service initiatives. We believe such investments will provide a solid foundation for our future growth."

Second Quarter 2015 Results

Revenues

Revenues were $438.3 million, an increase of 37.9% from $317.9 million in the second quarter of 2014 and 14.0% from $384.4 million in the first quarter of 2015. The strong year-over-year growth was due to continued solid performance in online advertising.

Online advertising revenues were $293.9 million, up 71.6% from the same period last year and 19.8% from the prior quarter. The strong year-over-year increase was primarily driven by incremental contribution from search monetization.

Internet value-added service revenues, which are mainly derived from game platform operations, were $122.2 million, down 16.4% from the same period last year and down 8.6% from the prior quarter. The year-over-year and sequential decline was mainly due to continued suspension of online lottery operations beginning in March.

Cost of Revenues

Cost of revenues were $104.3 million, compared to $66.6 million in the second quarter of 2014 and $79.6 million in the first quarter of 2015, representing an increase of 56.6% from the same period of last year and an increase of 31.1% from the prior quarter.

Operating Expenses

Operating expenses were $260.2 million, compared to $208.3 million in the second quarter of 2014 and $230.4 million in the first quarter of 2015.  Non-GAAP operating expenses^[1] were $232.5 million, compared to $182.6 million in the second quarter of 2014 and $209.7 million in the prior quarter.

The year-over-year and sequential increases in non-GAAP operating expenses^[1] were mainly driven by increased marketing and promotional expenses, personnel-related costs, and bandwidth and equipment depreciation expenses, as we continued to strengthen our brand and market position and enhance our technology and product development capabilities into new initiatives.

Operating Income

Operating income was $81.1 million, compared to $43.9 million in the second quarter of 2014 and $75.9 million in the prior quarter.   

Non-GAAP operating income^[1] was $108.9 million, compared to $69.7 million in the second quarter of 2014 and $96.5 million in the prior quarter.

Operating margin was 18.5%, compared to 13.8% in the second quarter of 2014 and 19.7% in the prior quarter.

Non-GAAP operating margin^[1] was 24.8%, compared to 21.9% in the second quarter of 2014 and 25.1% in the prior quarter.

The year-over-year increase in non-GAAP operating margin^[1] was mainly due to leverage from revenue growth while the Company continues to invest in new product and business initiatives. The modest sequential decline in non-GAAP operating margin^[1] reflected incremental expenses in marketing and promotional activities.

Net Income attributable to Qihoo 360

Net income attributable to Qihoo 360 was $81.4 million, compared to $39.1 million in the second quarter of 2014 and $53.0 million in the prior quarter.

Non-GAAP net income^[1] attributable to Qihoo 360 was $116.9 million, compared to $69.2 million in the second quarter of 2014 and $81.9 million in the prior quarter.

Net Margin

Net margin was 18.6%, compared to 12.3% in the same period last year, and 13.8% in the prior quarter.

Non-GAAP net margin^[1] was 26.7%, compared to 21.8% in the same period last year and 21.3% in the prior quarter.

Diluted Earnings per ADS

Diluted EPADS for the second quarter of 2015 was $0.62, and non-GAAP diluted EPADS^[1] for the second quarter of 2015 was $0.82. The GAAP weighted average ADS^[1] used in computing diluted EPADS was 143 million.

Cash Flows and Balance Sheet

Net cash generated from operations in the second quarter of 2015 was $128.8 million, compared to $57.7 million in the same period last year and $72.9 million in the prior quarter. Cash capital expenditures in the second quarter of 2015 were $31.6 million. As of June 30, 2015, the Company had cash and cash equivalents of approximately $1.2 billion.

Recent Developments

On June 17, 2015, the Company announced that its board of directors had received a preliminary non-binding "going-private" proposal from a group of investors led by Mr. Hongyi Zhou, chairman and chief executive officer of the Company.

On June 19, 2015, the Company's board of directors formed a special committee consisting of three independent, disinterested directors, Dr. Eric Chen, Dr. Jianwen Liao and Dr. Ming Huang, to consider the abovementioned non-binding "going private" proposal.  Dr. Eric Chen will chair the special committee.  The special committee has retained Skadden, Arps, Slate, Meagher & Flom as its U.S. legal counsel, and J.P. Morgan Securities (Asia Pacific) Limited as its financial advisor, to assist it in this process.

The Board cautions the Company's shareholders and others considering trading in the Company's securities that no decision has been made on the response to the proposal. 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. The Company does not undertake any obligation to provide any updates with respect to this or any other transaction, except as required under applicable law.

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 that express the Company's current opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (the "Act").  The following cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefit of the "safe harbor" provisions of the Act.   You can identify these forward- looking statements by terminology such as "will," "expects," "believes," "anticipates," "intends," "estimates," or in each case, their negatives or other variations or comparable terminology.  These forward-looking statements include all matters that are not historical facts.  They appear in a number of places throughout this press release and include statements regarding the Company's intentions, beliefs or current expectations concerning, among other things, its results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which it operates. 

By their nature, forward-looking statements relate to events that involve known and unknown risks and uncertainties and are based on current expectations, assumptions, estimates and projections about Qihoo 360 and the industry in which it operates. Potential risks and uncertainties include, but are not limited to, those under "Risk Factors" in the Company's most recent annual report on Form 20-F filed with the SEC, and the following: 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.  Although the Company has based these forward-looking statements on assumptions that it believes are reasonable when made, it cautions you that forward-looking statements are not guarantees of future performance and that the Company's actual results of operations, financial condition and liquidity, and the development of the industry in which it operates may differ materially from those made in or suggested by the forward-looking statements contained in this press release.  In addition, even if the Company's results of operations, financial condition and liquidity, and the development of the industry in which it operates, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements.  Any forward-looking statement that the Company makes in this press release speaks only as of the date of such statement, and the Company undertakes no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments.

About Non-GAAP Financial Measures

To supplement our financial results presented in accordance with U.S. GAAP, we use non-GAAP financial measures, which are adjusted from results based on U.S. GAAP to exclude share-based compensation expenses and interest expense of Convertible Senior Notes. 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 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.

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SOURCE Qihoo 360

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