Qihoo Search Gain, Q2 Mobile Outlook Offset Q1 EPS Fall

Investor's Business Daily

Qihoo 360 Technology (QIHU) jumped to a new high Monday as the Beijing company gained more ground in Q1 in its search battle vs. Baidu and predicted that revenue this quarter will nearly double on strong mobile sales.

Q2 revenue should jump to $142 million to $144 million, up 97% at the midpoint. Mobile gaming will lead the way, co-CFO Zuoli Xu told analysts on a conference call. Wall Street had expected $125.5 million.

"The game-hosting business is growing really rapidly," T.H. Capital analyst Tian X. Hou said via phone from Beijing. "This is the start of mobile monetization, and that's going to contribute more revenue starting in Q2.

In Search Of ... Search

Mobile gaming revenue is a boon for Qihoo, but investor interest seems to hinge on the company's search engine, which it launched last August to battle market leader Baidu (BIDU). Qihoo started monetizing search late last year after quickly capturing about 10% of the overall market.

By the close of Q1, it had captured 15% of the market.

"By year-end they want to have 20%," Hou said via phone from Beijing. "That's doable.

Any market share Qihoo gains will come at the expense of Baidu and Google (GOOG), which has a small search presence in China and also has partnered with Qihoo on search ads. Qihoo's building its own search advertising network, and is expected to ditch Google when that network's launched.

U.S.-traded Qihoo shares rose nearly 8% to 44.19 Monday, after hitting 45.11 intraday, the third straight all-time best. Baidu shares got a 6% lift off of Qihoo's strong advertising sales.

Qihoo said in a Sunday earnings report that Q1 revenue grew 59% to $109.9 million, the slowest pace in 10 quarters. But it nonetheless topped the expected $106.3 million, according to Thomson Reuters.

Online advertising revenue rose 40% to $63.4 million, solid growth despite a traditionally soft Q1 in Chinese ads, said Hou.

Monetizing Mobile

Mobile gaming and apps revenue leapt 119% to $45.8 million.

Qihoo's mobile app store now has some 110,000 offerings, mak ing it China's largest Android app store, said analyst Hou. About 33,000 apps are Qihoo-hosted mobile games. Paying gamers more than doubled to 281,000. Qihoo's flagship mobile security app has 275 million users.

The cost of investing in new markets drove Qihoo's Q1 earnings down 33% to 14 cents per share excluding items. That marked the first profit decline since the company started trading in April 2011.

But executives say they're confident that current investments will lead to increased revenue.

"This new business is going to make a significant contribution to our total revenue in 2013," CEO Hongyi Zhou said on the conference call.

The battle between Qihoo and Baidu over search in China is turning into an all-out spending war.

Qihoo operating expenses shot up 89% to $89.2 million in Q1, mostly marketing. Baidu in Q1 similarly upped its research spending by 83% and its marketing spending by 77%.

But Baidu had about $5.45 billion in cash at the end of Q1. Qihoo had just $301 million.

Both companies now are trying to grow their mobile users, with an eye on monetizing that traffic in the future.

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