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Press release from PR Newswire

Qihoo 360 Reports Second Quarter 2012 Unaudited Financial Results

Tuesday, August 21, 2012

Qihoo 360 Reports Second Quarter 2012 Unaudited Financial Results18:00 EDT Tuesday, August 21, 2012BEIJING, Aug. 21, 2012 /PRNewswire-Asia/ -- 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, 2012.Second Quarter Financial Highlights(1)Revenues were $72.8 million, representing an increase of 107.3% from $35.1 million in the second quarter of 2011. Net income was $7.0 million, compared to $11.1 million in the second quarter of 2011. Net income excluding share-based compensation (non-GAAP)(1) was $20.6 million, compared to $13.2 million in the second quarter of 2011. Diluted earnings per ADS(2) ("EPADS") were $0.06. Diluted EPADS excluding share-based compensation (non-GAAP)(1) were $0.17. Operating MetricsTotal monthly active users of Qihoo 360's PC-based products and services reached a record 425 million in June 2012, compared to 378 million in June 2011(3). User penetration of Qihoo 360's PC-based products was 94% in June 2012, compared to 92% in June 2011(3). Total smart phone users of Qihoo 360's mobile security products and services reached approximately 120 million, representing approximately 70% of the smart phone security market in China(3)(4). Monthly active users of Qihoo 360's browsers were 272 million in June 2012, compared to 209 million in June 2011(3). User penetration of Qihoo 360's browsers was 61% in June 2012, compared with 52% in June 2011(3). Average daily unique visitors to the 360 Personalized Start-up Page and its sub-pages were 83 million in the second quarter of 2012, compared to 42 million in the second quarter of 2011. Average daily clicks on Qihoo360's Personalized Start-up Page and its sub-pages were approximately 368 million in the second quarter of 2012, compared to 124 million in the second quarter of 2011.(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 iResearch survey.(4) Mobile security user data is also based on CCID survey."We are very pleased to report another strong quarter of triple-digit year-over-year growth in what continues to be a challenging macro environment," said Mr. Hongyi Zhou, Chairman and Chief Executive Officer of Qihoo 360. "Monthly active users of our PC-based products and services grew to a record 425 million, covering 94% of the Chinese PC Internet population. While we maintain a leadership position in PC Internet, we are particularly pleased to have made significant progress in the fast growing mobile Internet market during the quarter. The number of smartphone users of our mobile security products already reached 120 million, representing almost 70% of the total market share, according to third party data. We believe our success has largely been driven by our Company-wide focus on product and technology innovation and customer satisfaction. Recently, we introduced our personalized recommendation and comprehensive search engine to the market to provide viable and friendly alternatives for users to access various web services and destinations. These initiatives are transformational to our business model in the long run. As a leader in China's Internet industry, we have demonstrated strong capabilities to effectively execute our open platform strategy. We are confident that the products and services we launched earlier this year will substantially enhance our monetization capabilities in the coming quarters, despite the uncertainty in the Chinese economy," concluded Mr. Zhou.Mr. Xiangdong Qi, President of Qihoo 360, added, "Despite the ongoing macro headwinds in the second quarter, we are pleased to report that we achieved our revenue guidance and internal profitability targets. Our online advertising business delivered solid growth, supported by our continued robust user activity increases on our Personal Start-up Page. Web game operations continued to outpace the industry with a 189% year-over-year increase in revenue, despite seasonally slow trends across the industry. As we continue to deliver solid results in the near term, we have also allocated significant resources to make proactive investments in product and technology development, particularly in areas of mobile Internet, cloud based services, and search engine. We believe these initiatives will support long term, sustainable growth for our Company and drive long-term shareholder value."Second Quarter 2012 ResultsRevenuesRevenues were $72.8 million, representing an increase of 107.3% from $35.1 million in the second quarter of 2011 and an increase of 5.0% from $69.3 million in the first quarter of 2012. The solid year-over-year increase in revenues was mainly due to strong performance in both online advertising and Internet value-added services, driven by continued robust user and traffic growth.Online advertising revenues were $50.8 million, representing an increase of 89.9% from the same period last year and 11.9% from the prior quarter. The modest quarter-over-quarter growth primarily reflected the challenging macro environment and subdued advertising demand.Internet value-added service revenues, which are mainly derived from web game operations, were $21.7 million, representing an increase of 167.2% from the same period last year and 3.5% from the prior quarter. The strong year-over-year growth was mainly driven by solid expansion of the Company's web game paying user base. The relatively modest quarter-over-quarter growth was primarily due to the absence of fee-based Remote Technical Support service and somewhat soft seasonal trends across the web game industry. Cost of RevenuesCost of revenues was $6.6 million, compared with $3.7 million in the second quarter of 2011 and $7.6 million in the prior quarter. Gross margin was 90.9%, compared with 89.5% in the second quarter of 2011 and 89.0% in the prior quarter.Operating ExpensesOperating expenses were $56.4 million, compared with $18.7 million in the second quarter of 2011 and $47.2 million in the first quarter of 2012. Operating expenses excluding share-based compensation (non-GAAP) were $42.7 million, compared with $16.6 million in the second quarter of 2011 and $35.5 million in the prior quarter. The year-over-year and quarter-over-quarter increases in non-GAAP operating expenses were mainly driven by continued expansion of the Company's talent base and infrastructure build related to new service offerings.Operating IncomeOperating income was $9.9 million, compared with $12.8 million in the second quarter of 2011 and $14.4 million in the prior quarter.Operating income excluding share-based compensation (non-GAAP) was $23.6 million, compared with $14.8 million in the second quarter 2011 and $26.1 million in the prior quarter.Operating margin was 13.6%, compared with 36.3% in the second quarter of 2011 and 20.9% in the prior quarter.Operating margin excluding share-based compensation (non-GAAP) was 32.4%, compared with 42.2% in the second quarter of 2011 and 37.7% in the prior quarter.The year-over-year decline in non-GAAP operating margin was due to increased headcount and infrastructure costs as the Company introduced new products and services rapidly. The quarter-over-quarter decline in non-GAAP operating margin mainly reflected the lack of high-margin security project revenue and the absence of fee-based Remote Technical Support service in the second quarter. Net IncomeNet income was $7.0 million, compared with $11.1 million in the second quarter of 2011 and $14.1 million in the prior quarter.Net income excluding share-based compensation (non-GAAP) was $20.6 million, compared with $13.2 million in the second quarter of 2011 and $25.7 million in the prior quarter.Net MarginNet margin was 9.6%, compared with 31.6% in the same period last year, and 20.3% in the prior quarter.Net margin excluding share-based compensation (non-GAAP) was 28.4%, compared with 37.6% in the same period last year and 37.2% in the prior quarter.The year-over-year decline in non-GAAP net margin was primarily due to increased headcount and infrastructure costs and foreign exchange losses. The quarter-over-quarter decline in non-GAAP net margin reflected the combined impact of foreign exchange losses, the lack of high-margin security project revenue, the absence of a divestiture gain, and termination of fee-based Remote Technical Support service in the second quarter.Diluted Earnings per ADSDiluted EPADS for the second quarter of 2012 were $0.06, and diluted EPADS for the second quarter of 2012 excluding share-based compensation (non-GAAP) were $0.17. Both GAAP and non-GAAP weighted average ADSs used in computing diluted EPADS were 122.3 million.Cash Flows and Cash BalanceNet cash provided by operations in the second quarter of 2012 was $18.1 million. As of June 30, 2012, the Company had cash and cash equivalents of $358.9 million.Business OutlookFor the third quarter of 2012, the Company expects revenues to be between $81 million and $82 million, representing a year-over-year increase of 71% to 73%. These estimates reflect the Company's current and preliminary views on its operations and macro environment, which are subject to possible material changes.Conference CallQihoo 360's management will host a conference call to discuss the results at 8:30 p.m. Eastern Time on August 21, 2012 (8:30 a.m. Beijing time on August 22, 2012).The dial-in details for the live conference call are:US Toll Free Dial In: +1 866-519-4004US Toll / International Dial In: +1718-354-1231Hong Kong Dial In:+852-2475-0994Passcode: QIHUA telephone replay of the call will be available after the conclusion of the conference call at 11:30 p.m. Eastern Time on August 21, 2012 through 5:30 p.m. Eastern Time on August 29, 2012. The dial-in details for the replay are:International Dial In: +1718-354-1232US Toll Free Dial In: +1866-214-5335Passcode:18517827A live webcast of the conference call will be available on the investor relations section of Qihoo 360's website at: http://corp.360.cnAbout Qihoo 360Qihoo 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 platforms.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, 2012.About Non-GAAP Financial MeasuresTo 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. 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.For investor and media inquiries, please contact:Qihoo 360 Technology Co. Ltd.In China:Tel: +86 10-5878-1574E-mail: ir@360.cnIn the U.S.:The Piacente Group, Inc. ?Brandi Floberg or Lee Roth?Tel: (212) 481-2050E-mail: qihu@tpg-ir.com Qihoo 360 Technology Co. Ltd.Condensed Consolidated Balance Sheets(U.S. dollars in thousands, except for shares and per share data)(Unaudited)December 31,June 30,20112012ASSETSCurrent assets:  Cash and cash equivalents343,731358,895  Trading securities231216  Accounts receivable (net of allowance for doubtful accounts of     $68 and $148 as of December 31, 2011 and  June 30, 2012, respectively)16,74125,670  Prepaid expenses and other current assets12,80816,268  Deferred tax assets ? current8581,482Total current assets374,369402,531Property and equipment, net16,66531,564Acquired intangible assets, net7,8547,237Goodwill4,5804,538Long-term investments15,56128,218Other noncurrent assets4,4155,194Deferred tax assets ? noncurrent514373TOTAL ASSETS423,958479,655LIABILITIESCurrent liabilities:  Accounts payable (including accounts payable of  the consolidated    VIEs without recourse to Qihoo 360 Technology Co. Ltd. of$5,872 and $4,728 as of December 31, 2011 and June 30, 2012, respectively)5,8724,728  Accrued expenses and other current liabilities (including accrued    expenses and other current liabilities of the consolidated VIEs    without recourse to Qihoo 360 Technology Co. Ltd. of $9,469 and $15,792 as of December 31, 2011 and June 30, 2012, respectively)21,28727,809Deferred revenue ? current  (including deferred revenue-current of theconsolidated VIEs without resource to Qihoo 360 Technology Co. Ltd of$9,831 and $12,068 as of December 31, 2011 and June 30, 2012, respectively)12,08914,279  Income tax payable (including income tax payable of the consolidated VIEs    without recourse to Qihoo 360 Technology Co. Ltd. of $3,635 and $3,137    as of December 31, 2011 and June 30, 2012, respectively)7,3128,108Total current liabilities46,56054,924Deferred tax liabilities ? noncurrent507473Long-term payable (including long-term payable of the consolidated  VIEs without recourse to Qihoo 360 Technology Co. Ltd. of$286 and $283 as of December 31, 2011 and June 30, 2012, respectively)286283Deferred revenue-noncurrent (including deferred revenue-noncurrent of the consolidated VIEs without recourse to Qihoo Technology Co., Ltd of$1,589 and $2,309 as of December 31, 2011 and June 30, 2012, respectively5,1135,208TOTAL LIABILITIES52,46660,888EQUITYTotal Qihoo360 Technology Co. Ltd. Shareholders' equity370,853416,997Noncontrolling interest6391,770Total equity371,492418,767TOTAL LIABILITIES AND EQUITY423,958479,655 Qihoo 360 Technology Co. Ltd.Condensed Consolidated Statements of Income(U.S. dollars in thousands, except for shares and per share data)(Unaudited)Three Months EndedSix Months EndedJune 30,2011March 31,2012June 30,2012June 30,2011June 30, 2012Revenues:  Internet services34,89769,15272,75157,503141,903  Sales of third party anti-virus software21412419537143Total revenues35,11169,27672,77058,040142,046Cost of revenues:  Internet services3,6417,5836,6296,34214,212  Sales of third party anti-virus software5829814737Total cost of revenues3,6997,6126,6376,48914,249Subsidy income117135134142Operating expenses:  Selling and marketing3,18311,85413,79927,64225,653  General and administrative3,5337,6297,6816,73115,310  Product and development(a)11,95427,74234,88324,76962,625Total operating expenses18,67047,22556,36359,142103,588Income (loss) from operations12,75314,4469,905(7,457)24,351Interest income, net3551,5121,8465223,358Other income613348259416Exchange gain (loss) 527(99)(1,920)629(2,019)Change on fair value of trading securities6154(68)61(14)Gain on disposal of Long-term investments and subsidiaries-3,5661,460-5,026Income before income tax expenseand income ( loss) from equity method investments13,75719,81311,305(6,186)31,118Income tax expense(2,925)(5,043)(3,400)(4,386)(8,443)Income (loss) from equity method investments273(680)(878)226(1,558)Net income (loss)11,10514,0907,027(10,346)21,117Less: Net loss (income) attributable to noncontrolling interest5(24)(30)11(54)Net income (loss) attributable toQihoo 360 Technology Co. Ltd.11,11014,0666,997(10,335)21,063Accretion of Series A convertible participating  redeemable preferred shares---203-Accretion of Series B convertible participating  redeemable preferred shares---313-Accretion of Series C convertible participating  redeemable preferred shares---255-Net (loss) income attributable to ordinary shareholders11,11014,0666,997(11,106)21,063Net income per ordinary share-basic0.060.080.04(0.09)0.12Net income per ordinary share-diluted0.060.080.04(0.09)0.12Weighted average shares used in calculating net income per ordinary share- basic (in millions)171176176122176Weighted average shares used in calculating net income per ordinary share-diluted (in millions)176182183122183(a) From Q3 2011, the Company changed the "Research and development expenses" to "Product development expenses" in the statements of operations. This is mainly because the business has been growing rapidly and along with the development of new products, the Company has devoted more resources in enhancing its existing products, by which the Company believes using "Product development expenses" will better reflect the nature of such expenses.  The Product development expenses include costs associated with new product development and enhancement for existing products, such as salaries and benefits, including share-based compensation expenses, costs of bandwidth and utilities, license and technical service fees, and depreciation of equipment and amortization of acquired intangible assets. Qihoo 360 Technology Co. Ltd.Condensed Consolidated Statements of Cash Flows(U.S. dollars in thousands)(Unaudited)              Three-months period endedJune 30, 2011June 30, 2012Cash flows from operating activities:Net income11,105?7,027Share-based compensation2,07913,647Depreciation and amortization7833,034(Gain) loss on equity method investment(273)878Gain on disposal of long-term investments-(1,460)Unrealized holding (gain) loss on trading securities(61)68Provision of allowance for doubtful accounts35-Changes in operating assets and liabilities3,188(5,049)Net cash provided by operating activities16,85618,145Cash flows from investing activities:Purchase of property and equipment and intangible assets(2,964)(14,652)Payment for the purchase of other assets(369)-Consideration paid in connection with business acquisition(1,465)(185)Payment for trading securities and long-term investments(450)(9,018)Proceeds from sale of a cost-method investment-1,500Dividends received  from an  investee 313Net cash used in investing activities(5,248)(22,042)Proceeds from initial public offering (net of cost)233,282-Proceeds from exercise of stock option-514Net cash provided by financing activities233,282514Effect of exchange rate changes576(986)INCREASE IN CASH245,466(4,369)CASH, BEGINNING OF PERIOD63,456363,264CASH, END OF PERIOD308,922358,895 Reconciliations of Non-GAAP Financial Measures to Comparable GAAP MeasuresThree Months Ended June 30, 2011Three Months Ended March 31, 2012Three Months Ended June 30, 2012GAAPAdjustment(b)Non-GAAPGAAPAdjustment(b)Non-GAAPGAAPAdjustment(b)Non-GAAPOperating expenses$18,670($2,077)$16,593$47,225($11,679)$35,546$56,363($13,647)$42,716Income from operations$12,753$2,079$14,832$14,446$11,683$26,129$9,905$13,647$23,552Operating margin36.3%42.2%20.9%37.7%13.6%32.4%Net income attributable to Qihoo 360 Technology Co. Ltd.$11,110$2,079$13,189$14,066$11,683$25,749$6,997$13,647$20,644Net margin31.6%37.6%20.3%37.2%9.6%28.4%Diluted earnings per ADS(c)$0.09$0.11$0.12$0.21$0.06$0.17Six Months Ended June 30, 2011 Six Months Ended June 30, 2012GAAPAdjustment(b)Non-GAAPGAAPAdjustment(b)Non-GAAPOperating expenses$59,142($30,113)$29,029$103,588($25,326)$78,262(Loss) income from operations($7,457)$30,118$22,661$24,351$25,330$49,681Operating margin-12.8%39.0%17.1%35.0%Net (loss) income attributable to Qihoo 360 Technology Co. Ltd.($11,106)$30,118$19,012$21,063$25,330$46,393Net margin(19.1%)32.8%14.8%32.7%Diluted (loss) earnings per ADS(c)($0.14)$0.17$0.17$0.38(b) Adjustment to exclude the share-based compensation expense of each period.(c) 1 ADS = 1.5 Ordinary SharesSOURCE Qihoo 360 Technology Co. Ltd.