Qihoo 360 Reports Third Quarter 2013 Unaudited Financial Results

BEIJING, Nov. 24, 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 September 30, 2013.

Third Quarter Financial Highlights¹

• Revenues were $187.9 million, a 124% increase from $84.0 million in the third quarter of 2012.
• Net income attributable to Qihoo 360 was $44.5 million, compared to $12.9 million in the third quarter of 2012.
• Non-GAAP net income attributable to Qihoo 360 ⁽¹⁾ was $61.5 million, compared to $24.2 million in the third quarter of 2012.
• Diluted earnings per ADS⁽²⁾ ("EPADS") attributable to Qihoo 360 was $0.35, compared to $0.11 in the same period last year. 
• Non-GAAP diluted EPADS attributable to Qihoo 360 ⁽¹⁾ was $0.47, compared to $0.20 in the same period last year.

Third Quarter Operating Metrics

• Total monthly active users of Qihoo 360's PC-based products and services reached a record 465 million in September 2013, compared to 442 million in September 2012⁽³⁾.
• User penetration of Qihoo 360's PC-based products was 94% in September 2013, compared to 95% in September 2012 ⁽³⁾.
• Total smartphone users of 360 Mobile Safe, Qihoo 360's primary mobile security product, reached a record 408 million in September 2013, compared to 149 million in September 2012.
• Monthly active users of Qihoo 360's browsers reached a record 342 million in September 2013, compared to 303 million in September 2012 ⁽³⁾.
• User penetration of Qihoo 360's browsers was 69% in September 2013, compared to 65% in September 2012 ⁽³⁾.
• Average daily unique visitors to the 360 Personal Start-up Page and its sub-pages were 126 million in the third quarter of 2013, compared to 89 million in the third quarter of 2012.
• Average daily clicks on Qihoo 360's Personal Start-up Page and its sub-pages were approximately 681 million in the third quarter of 2013, compared to 451 million in the third quarter of 2012.

"We are very excited to report another quarter of success in all key areas of our business," said Mr. Hongyi Zhou, Chairman and Chief Executive Officer of Qihoo 360. "In addition to achieving record revenue and profitability, we strengthened our leadership position in key product categories and made significant inroads into new markets. With our PC security products covering nearly 95% of Chinese PC Internet users, and our mobile security solutions covering approximately 70% of Chinese smartphone users, Qihoo 360 remains the indisputable leader in Internet security in China. In addition, monthly active users of our PC browsers represented almost 70% of the Chinese PC Internet population. As we further established our leadership position in the PC Internet market, we have been making significant progress in the fast growing mobile Internet space. Our Android app store – 360 Mobile Assistant, maintained its position at the forefront of the industry and is increasingly becoming the most effective launch platform for Android app developers, despite the dynamic landscape and fierce competition."

"During the quarter, we continued to gain notable search traffic market share and, based on a third party report, we have already achieved our year-end search traffic share goal several months ahead of schedule. Looking ahead, we will continue to invest in product development and technology innovation, setting the stage for Qihoo 360 to capture a significant portion of the search market in both PC and mobile Internet and eventually reshape this vast industry in China. While our search monetization is still in its early stages, we have made significant progress. We believe that search and mobile monetization will drive substantial long-term growth for our business," concluded Mr. Zhou.

Mr. Xiangdong Qi, President of Qihoo 360, added, "We saw accelerated growth in key business lines in the third quarter. Online advertising revenue grew 107% year-over-year, bolstered by further development of our monetization process and incremental contributions from both search and mobile monetization. Internet value-added services once again outpaced the market and achieved revenue growth of 163% year-over-year with strong momentum in mobile games. While search and mobile monetization are still in their nascent stages, they ramped up faster than expected, and will become major catalysts for future growth. As the competitive environment rapidly changes in China, we will continue to make proactive investments in product and technology development to drive our leadership positions forward and expand our footprint, particularly in mobile Internet and search technology, where we see tremendous opportunities for expansion. Meanwhile, we are gradually building our sales and marketing infrastructure to support our monetization efforts. We believe these investments will fortify our foundation, support sustainable growth and drive long-term shareholder value."

Third Quarter 2013 Results

Revenues

Revenues were $187.9 million, representing an increase of 124% from $84.0 million in the third quarter of 2012 and an increase of 24% from $151.7 million in the second quarter of 2013. 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 $120.7 million, representing an increase of 107% from the same period last year and an increase of 33% from the prior quarter. The strong year-over-year increase was primarily driven by increased monetization of user activities on 360 Search and Personalized Start-up Pages. The robust quarter-over-quarter growth was also due, in part, to a strong ramp-up in search monetization.

Internet value-added service revenues, which are mainly derived from game platform operations, were $67.0 million, up 163% from the same period last year and 10% from the prior quarter. The strong year-over-year increase was mainly driven by solid growth in the Company's paying game user base and expanded games portfolio.

Cost of Revenues

Cost of revenues were $25.9 million, compared to $7.9 million in the third quarter of 2012 and $17.8 million in the second quarter of 2013, representing increases of 228% and 45%, respectively.

Operating Expenses

Operating expenses were $111.2 million, compared to $63.9 million in the third quarter of 2012 and $97.2 million in the prior quarter. Non-GAAP operating expenses were $95.3 million, compared to $52.6 million in the third quarter of 2012 and $79.3 million in the prior quarter.

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

Operating Income

Operating income was $50.8 million, compared to $12.2 million in the third quarter of 2012 and $36.6 million in the prior quarter.   

Non-GAAP operating income was $66.7 million, compared to $23.5 million in the third quarter of 2012 and $54.5 million in the prior quarter.

Operating margin was 27.0%, compared to 14.5% in the third quarter of 2012 and 24.1% in the prior quarter.

Non-GAAP operating margin was 35.5%, compared to 28.0% in the third quarter of 2012 and 36.0% in the prior quarter.

The year-over-year increase in non-GAAP operating margin was mainly due to strong revenue growth while the Company continued to invest in new products and business initiatives.

Net Income attributable to Qihoo 360

Net income attributable to Qihoo 360 was $44.5 million, compared to $12.9 million in the third quarter of 2012 and $33.0 million in the prior quarter.

Non-GAAP Net income attributable to Qihoo 360 was $61.5 million, compared to $24.2 million in the third quarter of 2012 and $51.0 million in the prior quarter.

Net Margin

Net margin was 23.7%, compared to 15.4% in the same period last year and 21.8% in the prior quarter.

Non-GAAP net margin was 32.7%, compared to 28.8% in the same period last year and 33.6% in the prior quarter. The year-over-year improvement in non-GAAP net margin was mainly due to strong revenue growth.

Diluted Earnings per ADS

Diluted EPADS for the third quarter of 2013 was $0.35, compared to $0.11 in the third quarter of 2012 and $0.26 in the prior quarter.

Non-GAAP diluted EPADS for the third quarter of 2013 was $0.47, compared to $0.20 in the same period last year and $0.40 in the prior quarter.

Both GAAP and non-GAAP weighted average ADS used in computing diluted EPADS was 131.3 million.

Cash Flows and Balance Sheet

Net cash generated from operations in the third quarter of 2013 was $75.0 million, compared to $20.7 million in the same period last year and $86.4 million in the prior quarter. Cash capital expenditures were $32.2 million. As of September 30, 2013, the Company had cash and cash equivalents of $1,003.6 million.

Business Outlook

For the fourth quarter of 2013, the Company expects revenues to be between $206 million and $208 million, representing a year-over-year increase of 100% to 102%. For the full year 2013, the Company expects revenues to be between $655 million and $657 million, representing a year-over-year increase of approximately 100%. These estimates reflect the Company's current and preliminary view, which is 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 November 25, 2013 (8:30 p.m. Beijing time on November 25, 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 November 25, 2013 through 7:00 a.m. Eastern Time on December 3, 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 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 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.

[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 September 2013.

SOURCE Qihoo 360 Technology Co. Ltd.