Qihoo 360 Closes China Internet Search Gap With Baidu

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Chinese Internet companyQihoo 360 Technology ( QIHU ) still lags well behind the leader in China's search engine market, but the company showed last week that it's determined to make a game of it.

Qihoo provides Internet and mobile security products. Although it established its reputation in China with mobile security software, the company has spent the past couple of years investing heavily in new mobile gaming and search technology.

Its search engine launched in August 2012 as a direct competitor toBaidu ( BIDU ), China's No. 1 search engine. Although Baidu dwarfs Qihoo in market cap and annual revenue -- Baidu had $5.2 billion in revenue last year vs. $671 million for Qihoo -- the battle for market share is becoming increasingly competitive.

According to data from CNZZ, a Chinese research firm, Qihoo handled about 25% of China's Web search traffic in January vs. Baidu's 58.3% share.

Staking A Place In Search

By the end of last year's third quarter, Qihoo had already hit its year-end goal of 20% of China's search traffic. The company aims to grow that figure even more this year.

"Our goal is to achieve 30% search traffic at the end of 2014. As we deepen our reach within the PC search market, we are also capturing additional share (in) mobile search," Chief Executive Hongyi Zhou said on a conference call following Qihoo's fourth-quarter earnings report last week.

The company also looks to keep expanding its base of search advertising revenue.

During the fourth quarter, Qihoo reported that online ad revenue more than doubled from a year earlier to $142.4 million. Most of that came via advertising appearing on users' startup pages.

Qihoo has been aggressive in its efforts to monetize its search business. In January it made headlines when it hired John Liu away fromGoogle ( GOOG ) China, where he served as a vice president. Liu, installed as Qihoo's chief business officer, will work to build more revenue out of Qihoo's search traffic.

Qihoo also has plans to rapidly expand its sales force.

"We will continue to build our search advertising sales network, including the direct sales force and agency networks," CEO Zhou said on the conference call. "We certainly are very pleased with our results in search traffic and the monetization thus far, and we're seeing even greater potential ahead of us."

The company handles about 15% of search ads sold in China, Jefferies analyst Cynthia Meng noted in a report. She expects new products in Qihoo's search pipeline this year to "further diversify its ad placement channels and attract more ad dollars."

Qihoo also sees a big opportunity in mobile gaming. At the end of 2013, it had more than 800 games running on its game platform. The total number of paying gaming accounts grew to about 700,000 vs. 560,000 in the prior quarter.

"Our game platform continues to attract game developers and the user activities under one scheme," CEO Zhou said. "We are pleased with the overall market and achieved robust growth in this segment despite the cooling off in PC games and increased competition in mobile games."

Games Move To Mobile

A rising number of gamers in China has switched to mobile from traditional desktop gaming. In a report, analyst Tian X. Hou of T.H. Capital noted that mobile gaming revenue in China grew 59% to $515 million between the third and fourth quarters of 2013.

"Qihoo is well-positioned to enjoy robust growth in the mobile game industry," Hou said. "Based on our assessment of industry data, we believe Qihoo could outperform the industry growth-wise."

The story regarding mobile search is a little fuzzier for Qihoo. Following the company's Q4 earnings report, Zhou conceded that the company doesn't have any revenue from mobile search yet.

Analyst Hou notes that Qihoo's search monetization is "still in an early stage when compared with peers," though Qihoo's growth "is more rapid" than that of its peers.

Qihoo posted fourth-quarter revenue of $221.6 million, up from $103 million the prior year and above views for $209.7 million. Earnings more than tripled to 70 cents a share vs. analyst estimates for 43 cents.

Growth was driven by "solid performance" from both online advertising and Internet value-added services, CFO Zuoli Xu said on the conference call.

Qihoo gave revenue guidance of $226 million to $228 million for the first quarter of 2014, above Wall Street's consensus estimate of $203 million.

Analysts polled by Thomson Reuters expect the company to post Q1 earnings of 31 cents a share, up from 14 cents a year earlier. Profit for all of 2014 is seen climbing 34% to $2.33 a share.

Qihoo shares touched a record high of 124.42 on Friday and currently trade near 117. Qihoo, Baidu,NetEase ( NTES ) andNQ Mobile ( NQ ) ( profiled in IBD's The New America on Wednesday) were among Chinese tech firms pulling back in the stock market this week after customs officials in China reported a drop in February exports.

Hou calls 2014 a "critical year" for many Internet companies in China because of growth opportunities in mobile platforms and other sectors. Major Internet companies plan to spend a lot of money on investment and marketing. "Qihoo, as one of the major online traffic distributors, will benefit significantly from such budget flow," Hou said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: QIHU , BIDU , GOOG , NTES , NQ

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