Why Tiger Global initiates new position in Qihoo 360 Technology
Overview: Tiger Global Management's 13F (Part 3 of 7)
Tiger Global Management and Qihoo 360 Technology
Tiger Global Management’s top new buys were Netflix (NFLX) and Qihoo (QIHU). Top positions sold were apparel retailers Carter’s Inc. (CRI) and The Gap (or GPS). It also sold positions in Coca-Cola Enterprises (CCE) and Motorola Solutions (MSI).
Tiger Global Management initiated a new position in Qihoo 360 Technology Co-ADR (QIHU) that accounts for 1.12% of the fund’s 2Q14 portfolio.
Qihoo 360 Technology Co. Ltd. provides internet and mobile security products in China. Its products and services are supported by its cloud-based security technology. The total monthly active users of the company’s PC-based products and services increased to 496 million in June 2014—compared to 461 million in June 2013. According to iResearch data, Qihoo 360′s user penetration of PC-based products was 93.9% in June 2014—compared to 96% in June 2013.
Results beat estimates, but margins are lower
Qihoo’s latest 2Q14 results beat estimates. Revenues were $317.9 million—a 109.6% increase from $151.7 million in 2Q13. Net income was $39.1 million—compared to $33 million in 2Q13. Diluted earnings per ADS grew to $0.30 from $0.26 in the same period last year.
Qihoo said the growth in revenue was due to strong performance in online advertising and Internet value-added services. The growth was driven by an increase in search and mobile monetization. It was also driven by strong user traffic growth and monetization. Online advertising revenues grew 89% to $171.3 million. They increased 22.3% from the last quarter. The increase was driven by search and mobile advertising. It was also impacted by increased monetization of user activities on 360 Personalized Start-up Pages. Internet value-added service revenues also grew 140% year-over-year (or YoY). The revenues were driven by growth in PC and mobile games.
However, analysts were concerned about the decrease in operating margin to 13.8%—compared to 24.1% in 2Q13 and 14.9% in the last quarter. Qihoo said its operating expenses rose due to increased marketing and promotional expenses, personnel-related costs, and bandwidth and equipment depreciation expenses.
Focus on raising mobile market share
Qihoo’s management said on the earnings call that, “While we continue to target higher market share in PC search we are making strategic shift in focus on resources to mobile search.” They added that mobile currently accounts for a “low-teen to mid-teen” percentage of Qihoo’s search traffic—an increase from ~5% at the beginning of 2014. Qihoo expects this figure to increase to 25% by the end of the year. The company wants to achieve a 35% search engine market share in China by the end of 2014.
For 3Q14, Qihoo expects revenue to be between $306–$365 million. This represents a YoY increase of 92%–94%. It represents a sequential increase of 13%–15%.
Search engine market share
The company faces intense competition from top Chinese Internet company Tencent (or TCEHY) and leading search provider Baidu (or BIDU). A search engine market share report by CNZZ for July 2014 showed that Baidu continued to give ground to Qihoo 360 Technologies and Sogou—backed by Sohu (SOHU) and TCEHY. The research included data for desktop and mobile. Qihoo had a 27.5% market share. This was up from 26.1% in June. Baidu had a 58.3% share.
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