Qihoo 360’s Monetization Plan Working Brilliantly

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Qihoo 360 Technology Co. Ltd. (NYSE: QIHU) reported first-quarter fiscal 2014 results after markets closed Tuesday. The Chinese Internet and mobile device security products provider reported adjusted earnings per American Depositary Share (ADS) of $0.54 on revenues of $265.1 million. In the year-ago quarter, Qihoo 360 posted earnings per ADS of $0.14 on revenues of $109.88 million. The consensus estimates called for earnings per ADS of $0.34 on revenues of $228.2 million. Every two ADSs represent three Class A ordinary shares.

Over the past 12 months, shares of Qihoo 360 have about doubled, compared with a gain of about 75% at Baidu Inc. (NASDAQ: BIDU) and a loss of about 22% at Sina Corp. (NASDAQ: SINA). Sina recently led an initial public offering for Weibo Corp. (NASDAQ: WB) in which it holds a majority stake. The IPO was less than a smashing success and then the government withdrew two of its publication and distribution licenses for what the government said was “lewd and pornographic content.”

The company claimed 538 million users for its 360 Mobile Safe security product at the end of the first quarter. Qihoo 360 also operates its own Android apps store and claims to have more than 400 million registered users.

Online advertising revenues grew about 121% to $140 million, and value-added services revenue rose 172% to nearly $125 million. The gain in services was attributed to a “strong ramp-up in game operations.”

The non-GAAP operating margin rose from 17.1% in the year-ago quarter to 22.5% in the first quarter of 2014. Sequentially, however, the non-GAAP operating margin fell from a fourth-quarter total of 38%. The company attributed the sequential decline to “normal seasonal spending patterns.”

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Qihoo 360 expects second-quarter revenues to total $300 million to $305 million, about double the revenues in the same period a year ago and up around 14% sequentially. The consensus estimates call for earnings per ADS of $0.58 on revenues of $270.18 million.

The Chinese Internet companies are especially worth watching now as we approach the initial public offering of Alibaba. Baidu, Sina and Weibo have had some recent issues, but the IPO of JD.com Inc. (NASDAQ: JD), a direct Internet retailer, was a significant success, with demand exceeding supply by a factor of 15 and shares closing up about 10% on the first day of trading.

A strong quarterly performance and an equally strong outlook boosted Qihoo 360 shares in premarket trading Wednesday. Shares were up about 7%, at $96.17 in a 52-week range of $40.05 to $124.42. Thomson Reuters had a consensus analysts’ price target of around $133.00 before the results were announced.

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