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QIHOO 360 Technology Co. Ltd. (NYSE:QIHU)

Q3 2012 Earnings Call

November 19, 2012 7:00 p.m. EST

Executives

Helen Wu - Director of IR

Hongyi Zhou – Chairman and CEO

Alex Xu – Co-CFO

Analysts

Timothy Chan – Morgan Stanley

Bin Liu – Citigroup

Jiong Shao – Macquarie Research

Wendy Huang – CIMB

George Askew – Stifel Nicolaus

Tian Hou – T.H. Capital

Cynthia Meng – Jefferies & Co.

Chao Wang – Bank of America Merrill Lynch

[Nancy Yang] – 86Research

Thomas Chong – BOCI Research

Kevin Kopelman – Cowen & Co.

Alicia Yap – Barclays Capital

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2012 earnings conference call.

[Operator Instructions]. I must advise you that this conference is being recorded today, Tuesday, the 20th of November, 2012.

I would now like to hand the conference over to your first speaker today, Ms. Helen Wu, Director of Investor Relations. Thank you. Please go ahead.

Helen Wu

Thank you, operator. Welcome, everyone, to our third quarter 2012 earnings conference call. I'm Helen Wu, Director of Investor Relations at Qihoo 360.

Joining me on the call today are Mr. Hongyi Zhou, Chairman and CEO of the company, Mr. Alex Xu and Ms. Jue Yao, co-CFOs of the company. For today's call, management will first discuss operational and financial highlights for the third quarter of 2012, and then we'll open up the call for your questions.

Before we continue, I would like to refer you to our Safe Harbor Statements in our earnings press release which applies to this call as we may make forward-looking statements. This call also includes discussions of certain non-GAAP financial measures. Please refer to our earnings press release which contains a reconciliation of non-GAAP measures to the most directly comparable GAAP measures. Finally, please note that, unless otherwise stated, all figures mentioned during today's conference call are in US dollars.

Now I would like to turn the call over Mr. Hongyi Zhou, Chairman and CEO of Qihoo 360.

Hongyi Zhou

Thank you, Helen. Good morning and good evening, everyone. Thank you for joining us today.

We are very pleased to report another quarter of strong financial and operational achievements. We once again outpaced the industry in a somewhat challenging macro environment. Our success was mainly driven by solid execution of our growth strategy and commitment to technology innovation and best-in-class user experience.

As a leading internet company in China, we continue to enhance our competitive position in the third quarter. Active users of our PC-based products and services reached 442 million in September according to data from iResearch, and our user base represents approximately 95% of the China active PC internet users. Since July we have introduced CPC, CPS and other performance-based advertising service through personalized links and [and the recent] vertical page. We have seen a very positive reaction from our users and advertising customers. This new feature and service will meaningfully enhance efficiency of our traffic monetization over time.

In mid-August, we launched our general search engine. In mid-September we launched our independent search domain name SO.com. While our search engine is still in its early stage, we are seeing encouraging results in terms of search traffic and user reaction. 360 Search is on its way to becoming a strong alternative to the current market leader. A couple of weeks ago we've started to publicly test our search monetization system. We look forward to gaining a meaningful share in this multibillion-dollar search advertising market and become a major search player in China.

Our mobile internet user base continued to expand as Qihoo 360's mobile security solution gained market share amongst smartphone users in China. Total smartphone users of Qihoo 360's key mobile security product 360 Mobile Safe reached almost 105 million at the end of the third quarter, giving us a very clear leadership position. Building upon the popularity of our mobile security solution, we also offer our comprehensive mobile internet product portfolio that will further expand our footprint in mobile internet. 360 Mobile Assistant, our app store for Android has become one of the most popular Android market players in China since its launch last year.

Through these strategic efforts, we have gradually established ourselves as a leading player in China's mobile internet market. We will continue to make investments in product development and technology innovation and expand our coverage in both PC and mobile internet. In addition, we are building our cross-platform reach by providing cloud-based service, which enable users to seamlessly aggregate their digital lives in PC and mobile internet.

While the markets we serve are still weaker than they were a year ago, we see early signs of improvement among our customers. We are confident that the products and service launched earlier this year will provide meaningful enhancements to our monetization capabilities and support our strong growth going forward.

With that, I would like to turn the call to our co-CFO Alex Xu. He will go over some operational and financial details.

Alex Xu

Thank you, Zhou.

Despite continued uncertainties in the macro environment during the third quarter, we were able to exceed our goals and demonstrate strong year-over-year growth in our business both operationally and financially. Total monthly active users of Qihoo 360's PC-based products and services reached a record 442 million compared with 370 million a year ago and 425 million in the prior quarter. User penetration of our PC-based products reached record 95% compared to 89% a year ago and 94% in the prior quarter.

Total smartphone users of Qihoo 360's key mobile security products, 360 Mobile Safe reached approximately 149 million in September. We are very pleased with this progress and continue to see strong momentum in our mobile internet user growth. Monthly active users for 360 browsers were 303 million in September compared to 235 million a year ago and 271 million in June. 360 browsers user penetration rate was 65% in September, compared to 57% a year ago and 61% in June.

Average daily unique visitors to 360 Personal Start-Up page and its subpages in Q3 2012 were 89 million, compared with 55 million a year and 83 million in the prior quarter. Average daily clicks on 360 Personal Start-Up pages and its subpages in Q3 2012 were 451 million compared with 185 million a year ago and 368 million in the prior quarter.

As of September 30, 2012, we had a total of 111 games commercially running on our open game platform. Total game playing user reached 182,000 in December.

Now, moving to the financial performance for the quarter ended September 30, 2012. Revenue were 84 million, an increase of 77% from Q3 2011 and up 15% from Q2 2012. The strong year-over-year growth was driven by both online advertising and internet value-added service, although internet value-added service once again outperformed online advertising in the quarter. No single customer contributed 10% or more of total revenue during the quarter.

Online advertising revenues were 58.4 million, up 66% from Q3 2011 and 15% from Q2 2012. Further, market penetration of our key products such as 360 browsers and personal start-up pages as well as increased user activity attract new advertising customers. Newly-launched features such as personalized links also support additional monetization activities. These were the main drivers behind the stronger-than-expected growth.

Within online advertising, search referral revenue were $5.3 million compared with $7.3 million in the Q3 2011 and $6.9 million in Q2 2012. Search referral revenue were negatively impacted since we launched our own search engine and many of our users set it as their default in mid-August. As a reminder, search referral revenue in Q3 2011, a year ago, included a one-off $2.8 million backed payment from Baidu due to a favorable court ruling for Qihoo 360.

Internet value-added service revenue, which are mainly derived from web games, were $25.5 million, up 111% from Q3 2011 and 8% from Q2 2012. The strong year-over-year performance was mainly driven by solid growth in paying user base, partially offset by the negative impact from the termination of fee-based remote technical support service. Within IMS, game revenue were $20.5 million, up 111% from Q3 2011 and 8% from Q2 2012. The modest quarter-over-quarter growth in IMS primarily reflect normal seasonality in games.

Cost of revenues were $7.9 million compared with $5.3 million in Q3 2011 and $6.6 million in Q2 2012. Gross margin was 90.6% compared with 88.7% in Q3 2011 and 90.9% in Q2 2012. The year-over-year improvement in gross margin was primarily due to the absence of remote technical support revenue which normally generated lower gross margin than corporate average.

GAAP operating expenses were $63.9 million, compared with $31.4 million in Q3 2011 and $56.4 million in Q2 2012. Share-based compensation was $11.3 million compared with $8.6 million in Q3 2011 and $13.6 million in Q2 2012. The year-over-year increase were primarily due to significant increase in the company's talent pool, particularly in product development areas. For Q3 2012, share-based compensation in sales and marketing, product development and G&A were $4.6 million, $5.0 million and $1.7 million, respectively.

Non-GAAP operating expenses, which is excluding share-based compensation, were $52.6 million compared with $22.7 million in Q3 2011 and $42.7 million in Q2 2012. The year-over-year and quarter-over-quarter increases were mainly driven by increased personnel-related expenses, bandwidth costs, depreciation and marketing expenses as we continued to strengthen our technology and product development capabilities and lay the groundwork for new services recently launched.

Non-GAAP operating income, which excludes share-based compensation, was $23.5 million, compared with $19.4 million in Q3 2011 and $23.6 million in Q2 2012. Non-GAAP operating margin was 28% compared with 40.9% in Q3 2011 and 32.4% in Q2 2012. The year-over-year and sequential non-GAAP operating margin decline was as expected and primarily reflect our efforts to expand our product development team in mobile internet and search technology. Incremental build-up of infrastructures to support new services offerings also put pressure on margins.

GAAP net income was $12.9 million compared with $10.9 million in Q3 2011 and $7.0 million in Q2 2012. Non-GAAP net income, which excludes share-based compensation, was $24.2 million compared with $19.5 million in Q3 2011 and $20.6 million in Q2 2012. Non-GAAP net margin was 28.8% compared with 41.2% in Q3 2011 and 28.4% in Q2 2012.

GAAP fully diluted EPADS for Q3 2012 was $0.11. Non-GAAP fully diluted EPADS for Q3 2012 was $0.20. For earning per ADS calculation purpose, weighted average fully diluted ADS shares for the quarter were $122.3 million.

As of September 30, 2012 we had cash and cash equivalent balance of $348 million, net cash provided by operating activities in Q3 2012 were $34.8 million, and capital expenditure were $26.6 million. Adjusted EBITDA, which excludes share-based compensation, was $27.9 million in Q3 2012.

Now I would like to provide a brief business outlook. Taking into consideration of the continued muted macro environment, we're providing conservative outlooks. For the fourth quarter 2012, we expect revenue to be between $93 million and $94 million, representing a year-over-year increase of 49% to 51%. For full-year 2012, we expect revenues to be between $319 million and $320 million, representing a year-over-year growth rate of approximately 98%.

Thank you. And that concludes our prepared remarks. We're happy to take any questions you may have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions].

Your first question comes from the line of Timothy Chan from Morgan Stanley. Please ask your question.

Timothy Chan – Morgan Stanley

Hi, good morning, everyone, and thanks very much for taking my questions. My first question will be, you have a search market share target of over 20%, which is [not moving] from the present level. Could you help us understand how you're going to achieve that?

And regarding your fourth quarter sales guidance, how much would that be contributed by the search business? Thank you.

Alex Xu

Let me first remind you, guys, for the interest of time, we'll limit one question only for each person, then you have to go back to the queue to ask the following question. Let me do the translation for Mr. Zhou.

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Tim, basically Mr. Zhou said that as a new player in the market, obviously we are targeting a higher market share than we are today. It normally takes some time to get there. And our current focus is to really improve the user experience of our search engine and also to provide additional functions within the search such as in different areas of vertical search. And ever since we launched our search engine about three months, I think the market dynamic has -- we have already started to see some changes in market dynamic in terms of the behaviors of each player, particularly the bigger players there. For us it's a gradual step-by-step process move toward our target from this point on.

Regarding the guidance, at this point we're looking at it, we basically baked in very minimal amount of the revenue related to search within the fourth quarter guidance. Because as you know, we haven't officially started monetization yet, so for current guidance we're essentially building very minimal amount of the search-related revenue in there. Thank you.

Timothy Chan – Morgan Stanley

Thank you.

Alex Xu

Next question?

Operator

Your next question comes from the line of Bin Liu from Citigroup. Please ask your question.

Bin Liu – Citigroup

Thanks, Zhou and Alex, for taking my question. My question is focused on the search service. To providing the search business, what do you expect to focus on the sales and distribution channels? Do you have a target of the sales team and how do you monetize your own resources in the next one year? And also the related costs, how do they impact the margin in the next one year from the search service? Just one question. Thanks.

Alex Xu

Bin, there's a certain part of the question I didn't quite hear. How do we monetize what? The last sentence of the first part of the question I didn't quite get.

Bin Liu – Citigroup

How do you monetize this through your own resources, like your sales team, number of sales team target in the next one year? And also any plans for the distribution [inaudible] the agencies? This is the part of my question.

Alex Xu

Okay. Thank you.

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Bin, basically from monetization perspective, we are in the process, as you know, of actually testing the monetization system as we're speaking. The one thing that we will do a little bit different from probably the rest of the market is that we're still putting user experience first to provide, I would say, a trusted and a safe search results through our search engine, and even after we're doing monetization.

And in terms of sales team, we are in the process of building our search sales team. The sales person we're hiring right now, they are still in the process of understanding the products and build the relationship with the -- or re-establish relation with the customers. Certainly we're in very close contact with a lot of agencies, advertising agencies in China. They have been showing very strong interest ever since we launched our search engine. Eventually we will build our own sort of agency and network to do the monetization.

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Regarding the search-related investment, obviously search, as you know, it's a very long-term sort of a project that we need to continue to invest in resource and manpower to improve the products and gaining more market share. In the past few years we have built a fairly strong foundation through our technology accumulation and through our talent team build. That gives us a very strong footing in terms of move forward.

And the other way is that, if you look at the way we do our search, we'll take a little bit different approach from the rest of the field. We follow a very much open platform strategy, particularly on the vertical search side, we'll use as much as we can, team up with our partners to offer the vertical search service. This kind of philosophy basically will improve the efficiency of utilizing the resources and utilizing the capitals. So, from general speaking, we believe the way the capital usage or the return of our capital usage will probably be better than some of our peers in this field. Thank you.

Bin Liu – Citigroup

Thank you, Alex.

Operator

Your next question comes from the line of Jiong Shao from Macquarie. Please ask your question.

Jiong Shao – Macquarie Research

Good morning. Thank you very much for taking my question. Could you please elaborate a bit on your Q4 guidance? In terms of the segment growth, how much growth do you think you are looking for embedding your guidance, you are looking for your ad business and for your IVAS business? And particularly for your ad business, what's embedded in terms of the price increases, volume growth and contributions from personalized links? Thank you very much.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Jiong, thanks for the question. Basically if you look at the fourth quarter, there are a few things you need to keep in mind. Number one, fourth quarter typically is a seasonally strong quarter for our business because a lot of holiday-related activities happening in China. Since we're not doing branding advertising, we're doing more result-driven advertising, so whenever there's activity or intense activity online, we'll benefit from that. So, generally speaking, we see both online advertising and -- what do we call it -- internet value-added service see the strong growth.

On the online advertising side, pricing, as you know in the third quarter we raised prices a little bit in the single-digit range, in the fourth quarter we still see some price increase on a sequential basis. And more importantly, the performance-based advertising system we launched, which is a CPC, CPS-based system we launched in July, has seen very good reaction or traction among our customers.

And just to give you a little bit color, from the second to the third quarter, the incremental advertising revenue we generated off the link-based advertising, close to 40% of that increment are actually coming from our new CPC and CPS or performance-based system. So that's a very good starting point. And we continue to see that part gaining traction. That will provide additional growth to our advertising business in the fourth quarter.

And on internet value-added service side, as you know, fourth quarter typically is a stronger quarter for game business just because of holiday and users tend to, for whatever reason, play more in that quarter. So that certainly gives us a better growth outlook for the game business as well in that quarter.

As I mentioned earlier, in the fourth quarter, at this point, we haven't really baked in any search engine related business. There will be some very small residual search referral business coming through the fourth quarter. But other than that, we haven't baked in any search engine related monetization in the fourth quarter guidance. Thank you.

Jiong Shao – Macquarie Research

Any comments on the personalized links traffic?

Alex Xu

No. I already said, the personalized link essentially is a part of that CPC and CPS-based, what we call performance-based advertising. That's just part of that. Like I said, actually pretty well-received both from user perspective as well as from advertising customer perspective. Thank you.

Jiong Shao – Macquarie Research

Okay. Thanks again. Thank you, guys.

Operator

Your next question comes from the line of Wendy Huang from CIMB. Please ask your question.

Wendy Huang – CIMB

Hi. Thanks for taking my question. I just wonder, apart from the traffic share target, do you have any revenue share target in mind for the next three years? And also, what kind of traffic share or revenue share do you think can enable you to break even in the search business? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Wendy, obviously when we launched our search service, our goal is not to be just a marginal player. We want to be gaining more and more market share in that area. Right now we have a 10% traffic share. We will start to monetize pretty soon. And from my perspective, I think initially there will be a gap between traffic share and revenue share perspective, but as we move forward in terms of gaining more and more traffic share, the gap will be closing. And eventually to a certain point, then the traffic market share will be in very similar number with the revenue market share.

Thank you.

Operator

Your next question comes from the line of George Askew from Stifel Nicolaus. Please ask your question.

George Askew – Stifel Nicolaus

Great. Thank you. Regarding your mobile business, can you describe your strategy for gaining mobile users and what's changed there or what we might expect looking forward? And when do you expect to begin monetizing your mobile user base? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

George, basically for us on the mobile side strategy, number one is Android focus. And as you know, in China, probably globally, there's still a lot of security issues within the mobile internet, in particular smartphone becoming one of the most intense privacy information holder for that matter. For us, provide better protection of privacy information on your phone is one of the key functions of the security solution we offer. So we're still using security as a getting point to getting users, which we have been pretty successful so far.

And above that, we believe marketplace or app store is a very important access point to mobile internet. Through marketplace or app store, you can [search] --

[Audio Gap]

Alex Xu

-- we're looking at given the size of the screen limitation, compared to advertising versus gaming, at least from Mr. Zhou's personal perspective, game is more favorable in terms of monetization at this stage. So we already see some of the mobile game part of the business already see some kind of improvement -- some kind of a takeoff in China. That's certainly one area we are very interested in looking at. Of course, at least for today, a vast majority of users playing mobile games, starting point is mobile app store or marketplace. So that gives us a very good advantage there. So that's to your question.

Just one follow-up to the previous question, Wendy asked about the breakeven --

[Audio Gap]

Alex Xu

-- in terms of more efficient, and we believe our breakeven point for our search engine as a standalone business will probably be lower than most other players in this market. Thank you.

Operator

Your next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.

Tian Hou – T.H. Capital

Good morning. I've just got a couple of questions. The first one is regarding the number of advertisers. And in Q3 you started CPC model, so, performance-based. And I was wondering how many total advertisers do you have among that. How many of them are actually the CPC and performance-based advertisers. That's number one question.

Number two, as you're going to roll out your own search monetization engine, what do you see the margin trend going forward? That's two questions.

Alex Xu

Okay.

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Yeah. Tian, basically from advertising perspective, in third quarter we had approximately 600 advertisers actually paying us during the quarter, which is a significant increase compared to 300 advertisers in the second quarter. As we expected, once we launch this performance-based advertising system, we will see a significant increase in the number of advertisers. And of which, obviously the 300 incremental advertisers, almost all of them are performance-based. Even the existing 300 advertisers in the past, pretty big chunk of that, I would say majority of them, are also taking the performance-based portion of the advertising system as well. So that's why we said that the performance-based advertising system we see very good traction among our customers.

And secondly, regarding the margin structure, I think -- right now we're looking at it. This quarter, the third quarter we did non-GAAP operating margin about 28%, which is actually better than we had expected at the beginning of the quarter. If you recall, we mentioned we want to see 25-ish kind of a margin. But on a full-year basis, we're looking at it -- our outlook still not changed. We still believe on a full-year basis we should see somewhere around 29% and 30% non-GAAP operating margin for 2012. And again the assumption right now is that we don't have any search-related revenue built in on the top line.

As we move forward on a quarterly basis, as -- when we start to float into search-related revenue, we might start to see some kind of improvement on the margin structure on a quarterly basis going forward once we start to monetize it. So that's how we look at the margin structure. Longer term, we still believe the search engine business should be able to support a 40% non-GAAP operating margin in the long run. We just need to gradually move toward that target. Thank you.

Operator

Your next question comes from the line of Cynthia Meng from Jefferies. Please ask your question.

Cynthia Meng – Jefferies & Co.

Good morning. Thank you, Alex; thank you, Zhou. My question is, is there any update on your agreement with Google China for the cooperation -- for the action of cooperation? And then also for fourth quarter, should we assume that the search referral revenue from Google will be very minimum to zero? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Cynthia, basically, as you know, we have a pretty long relationship with Google in terms of search referral and other areas. The search referral part is still ongoing, although, as you know, the search referral is a volume-driven business. So when we switch up from Google search to our own search, the volume dropped significantly. So in the fourth quarter you basically will see very minimum contribution from search referral revenue from Google.

And we are also exploring other opportunities to continue to work with Google or team up with Google. And at this point, all the other options are still moving forward in terms of discussion and process. We just move forward as we planned. Thank you.

Operator

Your next question comes from the line of Chao Wang from Merrill Lynch. Please ask your question.

Chao Wang – Bank of America Merrill Lynch

Hi, good morning. Thanks for taking my question. I have a follow-up question on your mobile strategy. So, how do you leverage your PC user base to promote your mobile products and what is the estimated conversion rate? And also, could you provide any user metrics of your [ad market] products on both Android and iOS? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Basically, obviously we have one very big advantage compared to other mobile internet players, that is we have almost 400 million PC-based users and many of them are in the stage of switch from feature phone to smartphone. We certainly want to have a very natural transition or conversion from our PC users to our mobile users. For example, in our newer version of the PC security products, we have a function already built in, you can actually do your mobile sort of security service or chat through PC. That certainly creates a kind of a link between our mobile users and PC users.

And also our mobile marketplace, the reason it's gaining popularity very fast is because in China most users when they're downloading different kind of apps, they're not going in open-air downloading, it's because it's more expensive, because that takes a lot of traffic and it costs a lot of battery power. So the Mobile Assistant basically, the Android marketplace, we essentially help users to complete all their tasks on the PC side. That certainly basically creates a bridge between the PC user and the mobile. So that's just two examples there.

Right now there is still not an official third-party data to serve the marketplace users. So we certainly hope at some point in the near future there will be something official coming from third parties out there in terms of mobile marketplace shares. Thank you.

Operator

Your next question comes from the line of [Nancy Yang] from 86Research. Please ask your question.

[Nancy Yang] – 86Research

Thank you for taking my question. My question is around mobile search. We've noticed that you launched a mobile search engine recently. What are you seeing in terms of user search behavior on mobile? Are users searching more within mobile browsers or is there a search activity shifting to apps? Do you see a mobile browser as basically the equivalent of a mobile search app? And is mobile browser as important as that on desktop? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Nancy, basically, obviously we are looking at mobile search. As you know, we launched really not that long ago, just a few days ago, so it's still too short of a time to give you any kind of a pattern. It's a starting point. But certainly one thing for sure, that the mobile search behavior will probably be different, pretty different, from the PC side of search. And it's not just launch a mobile search website, just essentially copy the PC search, it won't do the work. So, both us as well as other players in this market are still trying to figure out what's the best way to do mobile search.

Browser, it certainly plays a role, but probably not as important role in the mobile search as in PC. And for us, we believe this actually gives us a very good opportunity because the mobile search, no dominant player in this area, it's essentially an open field, in early stage. That gives us an opportunity to really crack into this market and getting more shares for that matter in the long run. Thank you.

Operator

Your next question comes from the line of Thomas Chong from BOCI. Please ask your question.

Thomas Chong – BOCI Research

Hi, good morning. I have a quick question regarding the revenue contribution of your front page to your total advertising revenue. Should we expect the front page contribution to decline when you guys ramp up your performance-based advertising? Thanks.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Thomas, I think, generally speaking, you comment is right, the front page contribution will gradually come down. But just keep in mind, in the future this measure may not be as meaningful as in the past because you have so many performance-based advertising revenue coming through the personalized links, coming through the vertical pages, and in the future also the search-related business also, if you wanted to find it, is actually also coming from front page. So this kind of a percentage mix will become less meaningful. But just from kind of for the numbers per se, yes, it's gradually coming down just gradually. Thank you.

Operator

Your next question comes from the line Kevin Kopelman from Cowen & Co. Please ask your question.

Kevin Kopelman – Cowen & Co.

Hi. Thanks a lot. I just had a question about your search engine. Can you comment at all about how much traffic you're generating from the standalone search portal that you launched versus from your startup page? Thank you.

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Kevin, basically at this point, the vast majority of the search traffic is still coming through our browsers, the boxes within the browsers. And yes, we launched So.com in mid-September, but if you noticed, we haven't really spent a lot of effort to do any kind of a marketing campaign to promoting SO.com to the public. So right now the SO.com contribution is still a pretty small percentage. With our -- we probably will do something to promoting the brand going forward. And as more and more people know So.com and understand SO.com, we believe the So.com traffic will gradually move up percentage-wise.

Just want to do a little bit color on So.com, the meaning of the SO.com. S basically stands for safe. As a security company, we are sort of in the position to provide a safe and trusted search to Chinese internet users. And O stands for open. We believe the search engine business at its origin is supposed to a content-neutral business, essentially is a fast way to basically redirect users' traffic to whatever the third-party service is. But later on, a lot of our peers built that business to a vertical integrate model which is we believe is not the right way to do it. So we would rather follow an open platform strategy, team up with all these third-party content providers, and to build those vertical search services. So that's -- O stands for open basically. Thank you.

Operator

Your final question comes from the line of Alicia Yap from Barclays. Please ask your question.

Alicia Yap – Barclays Capital

Hi, good morning. Congratulations on solid results. I wanted to get your view for your current search service, what is the area that you think you have achieved decent user experience results? And what are the product areas that you think you still need improvement of left behind competitors? So in other words, another kind of related question is, wanted to get a sense, you know, for your current users that are using your search, do they kind of like stay within your search or they kind of like switch back and forth between your search versus your competitor search?

Alex Xu

[Chinese language spoken]

Hongyi Zhou

[Chinese language spoken]

Alex Xu

Alicia, basically if you look at it according to multiple third-party service, our search market share traffic-wise has been stabilized around 10% in the past almost two months now, which is indication basically for those users we initially switched after the initial kind of volatile trend, they're stabilizing and their behavior essentially is fixed. So they're not sort of switching back and forth between our search engine and somebody else's search engine.

And second, I think the best -- the better part of our search is really we believe, from a search relevancy perspective, for vast majority of the internet users, when they do regular search, we are in the comparable relevancy compared to Baidu, Google or other search engines out there. But the good thing about us is really the clean search results. Number one, we get rid of all of these sort of fraudulent search results. We get rid of the phishing or malicious website. And that gives a user a much safer feeling and a better user experience.

And of course we haven't really started to do any monetization yet. Even if we start to do monetization, we'll probably do a more reasonable monetization. In other words, we will not over-monetize the search engine. So that probably will set us apart compared to other major players in this market in terms of user experience of the search engine. Thank you.

Operator

I'd now like to hand the call back to today's presenters. Please continue.

Hongyi Zhou

Thanks for everybody coming in and participating in the call. And we look forward to communicating with you in the future. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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