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Qihoo 360 Technology (NYSE:QIHU)

Q3 2013 Earnings Call

November 25, 2013 7:30 am ET

Executives

Helen Wu

Hongyi Zhou - Co-Founder, Chairman and Chief Executive Officer

Zuoli Xu - Co-Chief Financial Officer and Principal Accounting Officer

Analysts

Jiong Shao - Macquarie Research

Timothy Chan - Morgan Stanley, Research Division

Bin Liu - Citigroup Inc, Research Division

Tian X. Hou - T.H. Capital, LLC

Alicia Yap - Barclays Capital, Research Division

Eric Wen

Dick Wei - Crédit Suisse AG, Research Division

Eddie Leung - BofA Merrill Lynch, Research Division

Cynthia Jinhong Meng - Jefferies LLC, Research Division

Wendy Huang - Standard Chartered PLC, Research Division

Thomas Chong - BOCI Research Limited

Kevin Kopelman - Cowen and Company, LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2013 Qihoo 360 Technology Company Limited Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 25th of November 2013.

I would now like to hand the conference over to your first speaker today, Ms. Helen Wu. Thank you. Please go ahead, ma'am.

Helen Wu

Thank you, operator. Welcome, everyone, to our Third Quarter 2013 Earnings Conference Call. I'm Helen Wu, Director of Investor Relations at Qihoo 360. Joining our 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 the financial highlights for third quarter of 2013, and then we will 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 financial figures mentioned during today's conference call are in U.S. dollars.

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

Hongyi Zhou

Thanks, Helen. Good morning and good evening, everyone. Thank you for joining us today. I'm very pleased that we announced that we delivered another outstanding quarter, our recorded revenue and profitability.

During the third quarter, we achieved robust value growth in all of our businesses. We are particularly pleased with a better than expected results and the mobile monetization, even though [indiscernible] in the early stage.

In the third quarter, we strengthened our position in mobile security and the mobile app store, where we maintain our leadership position in PC security and the browsers. According to a third party study, the number of active user of our PC business progressed on the very rich 465 million in September, covering 94% of the China's active PC Internet user Monthly active users of our PC browser reached to 342 million, covering close to 70% of the China active PC internet users.

During the quarter, we continue to grow our mobile security user base and strengthen our leadership position in smartphones security channel. As of end of September, total smartphone users that have 360 Mobile Safe, our flagship mobile security product reached the 408 million up from 338 million just a few months ago, nearly double the number of users in the beginning of this year.

Since its launch over a year ago, our search engine has gradually been the notable traffic share. By the end of September, we already achieved our internet strategic goal 3 months ahead of our plan. Our game and search traffic was mainly driven by continued improvement in search quality and user experience, as well as potential leverage in the distribution part of our platform.

We launched a cover of mobile search-related product [indiscernible] lower the cost over the next few months. We'll gradually launch a number of new mobile search related for that to strengthen our marketing position in this area.

We made a significant progress in achieving our goal of becoming a major player in China's security search market. Our own monetization system showed a further improvement during the third quarter. At the same time, we continue to build our search advertising network, including direct sales force and agency networks. We certainly are very pleased with the results in search traffic and the monetization.

Our game platform continue to attract game developer and the user activities and advance game. We outpaced the overall market and achieved robust growth in this segment despite it's been a seasonally slow period.

Our Android app store with 15 [ph] mobile assistants attract the user of the rapid pace and continued to be clear leader in this market despite of the rapidly changing competitive landscape.

In the third quarter, we continue to make progress in monetizing our mobile app store through both advertising and mobile game. There's a rapid ramp in mobile game. Mobile monetization is an important part of our overall business strategy, and we expect that this trend to continue well into the coming quarters.

Looking ahead, we will continue to make investments in product development and the technology innovation, and expand our coverage of PC and mobile Internet, as well as cloud-based service. In addition, we plan to try to expand our sales and the marketing network to support a fuller search monetization and mobile penetration.

Our focus on Internet and product innovation has been the cornerstone of our success to date, and we expect that this strategy to further accelerate our efforts in building a Tier 1 PC and a mobile Internet platform in China.

We believe the product and the service that we launched in search and the mobile Internet will enable us to succeed in this fast changing market and for strong growth for the coming, over the long term.

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

Zuoli Xu

Thank you, Hongyi Zhou. Once again, this quarter, we exceeded our internal target and marketing expectations and delivered a strong year-over-year and quarter-over-quarter financial and operational results.

Total monthly active users of Qihoo 360's PC-based of products and services reached a record 465 million compared to 442 million a year ago. Total smartphone users of our key mobile security products, 360 Mobile Safe, reached a record of 408 million in September compared to 149 million a year ago and 338 million in the prior quarter.

According to multiple third party studies, we continue to maintain a clear leadership position in Chinese smartphone security market, a segment that continues to grow rapidly, along with the smartphone penetration rates in China.

Monthly active users of our 360 browsers were 342 million in September compared to 303 million a year ago and 330 million in June. The user penetration rates of 360 browsers was approximately 69% in September compared to 65% a year ago and 69% in June.

Average daily unique visitors to our 360 Personal Start-up Page and its sub-pages were 126 million in Q3 2013 compared to 89 million a year ago and 114 million in the prior quarter. Average daily clicks on our 360 Personal Start-up Page and its sub-pages were 681 million in Q3 2013 compared to 451 million a year ago and 590 million in the prior quarter.

As of September 30, 2013, we had over 500 games commercially running our game platform. The total number of paying game accounts grow to approximately 560,000 compared to 440,000 in the June quarter.

Now let's review our financial performance for the third quarter. Revenue were $187.9 million, up 124% from Q3 2012 and up 24% from the prior quarter. The strong year-over-year growth was driven by solid performance from both online advertising and Internet value-added service, with IVAS continued to outperform.

Additionally, both search and the mobile monetization ramp is better than we expected during the quarter. No single customer contributes 10% or more to total revenue during the quarter.

Online advertising revenue were about -- were $100.7 million, up 107% from Q3 2012 and 33% from the prior quarter. The solid year-over-year growth was mainly driven by strong search monetization and a further expansion of performance-based advertising. The better-than-expected search monetization also helped boost sequential growth.

We are very pleased that with the progress we have been making in search monetization and the trend looks very encouraging, we have received broad-based positive response from our users and business partners. By the end of Q3, we had significantly expanded our agency network and advertising customer base. We expect our search business to continue to ramp rapidly going forward.

That said, our monetization system is still in its early stage, and there is a clear gap between our system and that of the industry leader in terms of commercial coverage and efficiency. There's also a clear gap between our search revenue share and search traffic share. We intend to gradually narrow those gaps in the coming quarters.

Internet value-added service revenue, which are mainly derived from our game platform were $67 million, up 163% from Q3 2012 and up 10% from the prior quarter. The strong year-over-year improvement was driven by solid growth in playing game accounts, the expansion of our game portfolio and healthy ramp in mobile games.

Within IVAS, game revenue were $54.2 million, up 164% from Q3 2012 and up 12% from the prior quarter.

Cost of the revenue was $25.9 million compared to $7.9 million in Q3 2012 and $17.8 million in the prior quarter. Gross margin was 86.2% compared to 90.6% in the Q3 2012 and 88.2% in the prior quarter. The year-over-year and sequential decline in gross margin was mainly due to a cost reallocation related to continued search monetization, which we have noted in previous calls.

GAAP operating expenses were $111.2 million compared to $63.9 million in Q3 2012 and $97.2 million in the prior quarter. Share-based compensation was $15.9 million compared to $11.3 million in Q3 2012 and $18 million in the prior quarter.

For Q3 2013, share-based compensation in sales marketing, product development and G&A were $2.7 million, $10 million and $3.2 million, respectively. The year-over-year increase in share-based compensation was mainly due to headcount increases, particularly in product development-related area.

Non-GAAP operating expense, which excludes share-based compensation were $95.3 million compared to $52.6 million in Q3 2012 and $79.3 million in the prior quarter. The year-over-year increases were mainly driven by increased marketing expense, then with cost, depreciation, personnel-related costs, as we expanded our sales and the marketing efforts to support our search monetization and mobile Internet penetration while further strengthening our technology and product development capabilities.

Non-GAAP operating income, which excludes share-based compensation was $66.7 million compared to $23.5 million in Q3 2012 and $54.5 million in the prior quarter.

Non-GAAP operating margin was $35.5 million -- sorry, 35.5% compared to 28% in Q3 2012 and 36% in the prior quarter. The year-over-year non-GAAP operating margin increase was primarily due to operating leverage from robust revenue growth where we continue to make necessary investment to support our growth.

Our view -- our full year margin structure has improved compared to 3 years -- 3 months ago. GAAP net income was $44.5 million compared to $12.9 million in Q3 2012 and $33 million in the prior quarter. Non-GAAP net income was $61.5 million compared to $24.2 million in Q3 2012 and $51 million in the prior quarter. Non-GAAP net margin was 32.7% compared to 28.8% in Q3 2012 and 33.6% in the prior quarter.

GAAP fully diluted EPADS for Q3 2013 was $0.35. Non-GAAP fully diluted EPS -- EPADS for Q3 2013 was $0.47. For earnings per ADS calculation purpose, weighted average fully diluted ADS for the quarter was $131.3 million.

During the quarter, we successfully completed an offering of $600 million convertible senior notes with a conversion price of 110.96 [ph]. The notes will accrue interest rate -- interest at an annual rate of 2.5%.

As of September 30, 2013, our cash and cash equivalent balance was approximately $1 billion. Net cash generated by operating activities in Q3 2013 was $75 million. And cash capital expenditure was $32.2 million. Adjusted EBITDA, which excludes share-based compensation was $78.9 million in Q3 2013.

Now I would like to provide a brief business outlook. For the fourth quarter of 2013, we expect the revenue to be between $206 million and $208 million, represent a year-over-year increase of 100% to 102% and a sequential increase of 10% to 11%. This guidance incorporates a couple of negative factors that happened in the fourth quarter that impact our fourth quarter revenue.

For the full year of 2013, we expect revenue to be between $655 million to -- and $657 million, representing a year-over-year increase of approximately 100%. Again, as reminder, these estimated reflect our current and preliminary view, which is subject to possible material changes.

Thank you, and that concludes our prepared remarks. We're happy to take your questions. [Operator Instructions] With that, we would like to open the call for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Alex Yao of JPMorgan.

Unknown Analyst

This is Vin [ph] calling on behalf of Alex. Question is on the competitive landscape of China's Android app store market. I'm just wondering if management can share your view on how do you see the China's Android app store market will evolve, especially after the Baidu and the 91 Wireless acquisition. Do you have a target in terms of both revenue market share and traffic market share of your app store for the next 2 years?

Zuoli Xu

Okay. I'll first do the translation to Mr. Zhou [Chinese]

Hongyi Zhou

[Chinese] I think the -- first of all, obviously, there's a lot of noise in the market regarding the -- who is having the market share of what. But really, if you look at the recent example in terms of app distribution in the market, particularly with all these high-profile games launched in the last few months, we are clear leader in the Android app distribution in the real battle basically. And despite that leadership position, we still continue to improve our products and also leverage on our overall platform strengths, as well as other products strengths, aiming to gaining more share on the traffic side and particularly on the revenue side given that we are starting late compared to our competitors in terms of monetizing the app store.

Operator

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

Jiong Shao - Macquarie Research

My question is about search. Could you tell us what's sort of the traffic query market share you think you would now have for PC search? And remind us, please your target for next year, particularly in light of the recent merger between Tencent and Sogou, how that may or may not impact your target thank you.

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese] So from our internal look, we're tracking our traffic, obviously, on a daily basis and also look at the market dynamic of some of our peers, we believe we are comfortably above 20%. I think, the level which we observe right now is probably in the 22% kind of a range in terms of internal observation, which is consistent with some of the outside observers as well. And if you look at the Sogou's/social combination, we don't really see any kind of a meaningful impact to our search business. If you look at -- at the time when they announced the deal in mid-September, the combined entity, Sogou plus Soso, was somewhere in the 13% to 14% traffic, and we were at about 18% to 19% or maybe 19% to 20% something like that in -- according to the CNZZ. And then, today, if you look at their number, the combined entity between Sogou and Soso already dropped to the 12-percent-ish, less than 13%, where our share already move up to the average of -- to the 22%, kind of a percent level. So basically, we are continuing to gain in share even after those 2 combined. Because in any given market really -- given the search market really, there is basically a 2 players market and there's simply no room for the #3 player in global and in search market. So we are -- we will continue to actually get our strategy to move forward. And also some of our competitors started to talk about the blended market share, essentially the PC/mobile combined market share and in some way to emphasize mobile or de-emphasize their market share loss in PC. I think, for us, mobile is a very important area for next year and we will have multiple mobile search-related products launched throughout over the course of the next few months and the quarters, and that will probably help us on the mobile side to really gaining significant traction in that area. [Chinese] I just want to add one point. If you look at the current mix of each parties market share, for us, we are 100% organic. In other words, we don't have -- we haven't build our traffic union yet. So it's all generated from the organic traffic, the user using us. Where you look at the other players, on average, they have a very significant, somewhere around the -- sort of the traffic is actually coming from acquired traffic civil union member. Normally, the acquired traffic's quality and the value is less than the organic traffic. So that basically tells you that we have a significant potential, even just by this comparison. Just back to your early question, next year, we do have the official target out, it's 30% by the end of next year.

Operator

Your next question comes from the line of Timothy Chan of Morgan Stanley.

Timothy Chan - Morgan Stanley, Research Division

I'm actually interested in your view on hardware development as some of your peers are now focusing on the development of hardware such as smartphone, smart TV box and also smart TV as a way to tap into the mobile Internet and retail users. So related to that, I also want to hear from you on your earlier experience in developing the mini-routers and also the child protection GPS devices.

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese] Okay. So as you know, with the smartphone penetrating China getting broader and broader, people's attention start to switch to a so-called smart hardwares beyond the smartphone as the access point to mobile Internet. I think, the first or the foremost of this new trend is the disruption to the traditional hardware model. In other words, they're selling hardware for profit model were probably being disrupted along the way where the hardware become a bridge and the interface to basically bring the service to users to increase the brand recognition, to increase the users loyalty and stickiness to your service. And for us, most of the -- our hardware efforts there is through some kind of a partnership with the hardware vendors because we've been -- ourselves, do not want to get into this very complicated logistic kind of issues by making and selling in distribution hardwares. So through partners, achieve that. So far, for example, this year as we did the portable WiFi, which is very popular, already have multi-million shipments out there and pretty soon, we'll have our sort of innovative design router coming to the market. In terms of the kids kind of a guard, basically, the kids wearable device, we will officially launch it in terms of products availability next month. The initial 10,000 units, we will select 10,000 families in China so they can try it, and hearing their feedback and improve our products. To summary that, basically, on this line we will continue to keep innovative ideas and put into the new series of hardwares and soon the partnership with the vendors.

Operator

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

Bin Liu - Citigroup Inc, Research Division

I have a question on the mobile search part. It seems in the mobile parties, difficult to find some of the content -- lack of WeChat information and also, it's a more apps-driven for many applications. What will be the -- a more ideal way to arrange this search user experience? And also, basically a question for Hongyi Zhou, how do you see this in the long term? Is the mobile search kind of supported a more effective or better monetization solution compared with PC search?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese] First, to your second question, I think at this stage, at least from our perspective when we are doing mobile search in this stage, it's more about basically increase the user's attachments to our service overall or through our overall search service and increase the user's stickiness and the brand recognition. Monetization, there's still not a very good kind of a way to monetize mobile traffic at this point, at least in China. So that's probably more a little bit secondary consideration for the entire industry at this point. And so getting users or getting traffic on mobile, that's a #1 priority. And then in terms of mobile search, yes, search app and search content is important. But many of those functions already can be achieved, for example, in terms of chat through our mobile system, the app store. And there's other -- there are other areas that need mobile search: for example, entertainment-related; for example, the point of interest-related and live activity related to those things. So we will design our products along those lines and launch it whenever it is ready over the course of next few months and quarters, basically.

Operator

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

Tian X. Hou - T.H. Capital, LLC

Yes, Tian Hou. [Chinese] I have a question. Since everyone asked about mobile, so I want to ask about the question on your navigation page. So while your mobile grow really rapidly, the navigation page revenues also growing rapidly and your traffic into the users. So I wonder what is the outlook for this part of the business for next 1 to 2 years? [Chinese]

Hongyi Zhou

[Chinese]

Tian X. Hou - T.H. Capital, LLC

[Chinese]

Hongyi Zhou

[Chinese] So I guess from the PC navigation page product perspective, as we mentioned in the past many times, essentially, our goal is to make this thing a combination or some kind of integration of navigation and search and also provide a function of not just navigation and search, it's actually part of the function of personalized recommendation. We already make a lot of effort in terms of product design in those -- along those lines, and some of them already you can see from our products. And -- but this is not the end road yet. We haven't finished all the job yet since there are a lot of work we can do there. As you can see from the traffic-wise, the PC side of the traffic continue. At least on the navigation side continue to grow very rapidly, mainly because these kind of innovative design actually attract or to retain a lot of the user's activity that, in the past, they never use it or use it less. And also, in addition to PC, we also think the mobile side of the navigation, contrary to what most people think, still has some kind of a market or value there. And we will also work on that area as well.

Operator

Your next question comes from the line of Alicia Yap of Barclays.

Alicia Yap - Barclays Capital, Research Division

I have 2 very short questions. Number one is that I wanted to get management's view in terms of how WeChat, as a game distribution center, compete or compare with the more broader mobile app store? And then second is on the use of cash. Given the recently fund-raising from the CB, can management update on the potential use of cash?

Hongyi Zhou

[Chinese]

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese] I think the -- first of all, in terms of WeChat, they have been -- tried a few different angles in the -- so far is that, first of all, they try to use that is through the HTML 5 kind of the apps. In other words, the web apps. It didn't really slide out well. And also because that Weixin itself is a chatting software to begin with, so they have been very much focused on the -- they had to really deliver the user experience on the Chinese side. That's why Tencent has been very careful to use Weixin only for distribute their own content and also in their work as premium content and high-quality content. If you're talking about third-party distribution, whether it's the apps or games, I think they have their own app store. It's called eLong there. And their app store is actually a relatively small player in the market, probably around about the top 10 kind of a position. So that's the WeChat position. And then in terms of cash usage. We, historically, never did any large deal size of acquisition. Our acquisition or investment has mainly focused on technology and products and the teams. And we'll continue to focus on effort in those area. But that said, we obviously keep an eye open. And if there's probably about 23 out there, whether big and small, we'll definitely studied it. As you may know, given that what happened in last few months, the -- essentially those kind of obvious opportunities are -- or obvious targets are already gone. And so with -- again, we'll keep an eye open. And as long as the target is right and the price is right, we will pull the trigger.

Operator

Your next question comes from the line of Eric Wen of China Renaissance.

Eric Wen

My question is can you comment on the sequential growth rate of mobile game and web games, respectively? And given that Weixin's entry into the mobile game market in Q3 and the emergence of those mobile game publishers, which are more focused on hard-core games, how do we plan to maintain the growth rate of a mobile game business into the next year?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese] I guess one of the very clear characteristics about the mobile game market is really -- there are really tons of -- or hundreds of thousands of developers out there developing thousands, if not tens of thousands, kind of game in the market. So it's much more diversified than the PC MMORPG game and also than the PC web game. So because of that dynamic, no matter whether you're WeChat or you are a publisher, it's very, very difficult, something close to impossible, to control the content. In other words, you won't be able to sort of control all the good contents on your platform or on your kind of the business. So for us, we believe, right now, the stage of the mobile game growth is still in the overall kind of a growing high kind of stage. In other words, everyone will get a decent size, and those will get that very decent kind of growth rate without really eating into each other's position. So I think we certainly see our business growing at a very rapid pace, as you can see from the numbers. I think this trend will probably continue for the foreseeable future.

Operator

The next question comes from the line of Dick Wei of Credit Suisse.

Dick Wei - Crédit Suisse AG, Research Division

I had a question on mobile games. When -- how many of the mobile games are using the cooperation model versus the advertising model? If you can just give some sense of how is it bigger, maybe by revenue or by number of games, and then how is the trend going forward?

Zuoli Xu

I will take this question. I think the -- there is a mix there. But overall, speaking, like I said, for the quarter, we have over 500 games generating billions with us. And I will say a majority, a clear majority of that is on sharing part of our business, and a very small percentage of it are on the sort of -- you can calculate that as a kind of the downloading part of the business. That's basically -- I can't provide the precise number, but a clear, clear majority is on the sharing side, basically.

Operator

Your next question comes from the line of Eddie Leung of Merrill Lynch.

Eddie Leung - BofA Merrill Lynch, Research Division

Just a quick follow-up on your mobile game business as well. Could you comment on the margin profile and the product life cycle of your mobile game business versus web games? And also, any trouble like color on potential cannibalization between these 2 business?

Zuoli Xu

Okay. I will take the second part first. And it's, so far, we don't see the cannibalization between cost of buying mobile game. If you look at our PC, the web game business, the third quarter number, I will say roughly, it's more or less in line with normal seasonality. In the last year, for example, the third quarter versus second quarter, our web game grew about single -- low-single digit, low to mid-single digits. And this year, it's the same thing. It's close to -- essentially about flat, maybe up a little bit. And so it's more or less in line with the normal seasonality. And we don't see that really a lot of our user's activity change. Of course, the conclusion cannot be drawn until we see the fourth quarter's numbers, because fourth quarter is supposed to be a seasonally pickup quarter for web game. We will wait and see whether that pickup is happening. And if it happens then, which means that probably the cannibalization is not there yet. So we will obviously keep a very close eye on the fourth quarter number. And then secondly, regarding your question about the margin, basically, there's not very much difference between the PC game margin and the mobile game margin. The reason for that is because we are essentially booked net. So no matter what the sharing structure is between these 2 structures, we only book the net revenue. So the flow-through at the end of the day, both business generate. At this point, it's already at, I will say, at the normalized corporate margin which, we said, is about in the close to 40% non-GAAP operating level. I think that the -- that those for PC and the mobile game. I don't think there's too much a difference there.

Operator

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

Cynthia Jinhong Meng - Jefferies LLC, Research Division

I have 2 questions. Number one is for the mobile game and web game. Can you give us more color on the paying member ratio as well, or number of paying members as well as ARPU profile for the 2 types of games? And number two is on the search business. Now that you already have a sizable traffic market share, already achieved that, is there a revenue market share target that management has in mind?

Zuoli Xu

[Chinese] So Cynthia, I will take the question. First of all, regarding the game, we said we have a combined 560,000 playing gaming accounts for the quarter. This is blended between -- including both the PC and the mobile. But if you recall, last quarter, we had 440,000 on the same measure. And essentially, all the incrementals from the last quarter to this quarter are in mobile. And the PC side essentially flattish in terms of paying-user accounts. And the paying ratio relative compared to, say, the active, the MAU, the monthly active user perspective, mobile side is actually slightly less than the PC side I was saying. It's in part probably because of the rapid growth of the overall user base may drag down the number initially. We'll probably need to wait a few quarters to see when this thing settle down will be. And in terms of ARPU, we don't separately disclose ARPU anymore. But if you do the math, basically, the blended ARPU is about 30-ish. I did the math, it's about USD 32 a month. And naturally speaking, the PC side of ARPU is certainly higher than the mobile side of ARPU, maybe by a 2:1, roughly 2:1 kind of a level. So that's the ARPU side I'm saying. In terms of search, yes, we do have a 30% traffic share for search traffic goal next year. The only thing we can say about the revenue share is that right now, it's not the right ratio. Because right now, we only have 1% revenue share in terms of search market, and we anticipate to gradually close or narrowing that gap between the traffic share and the revenue share, and gradually to move up. I don't have a specific, really, target. The reason is just because we really didn't provide any clear guidance in any line items for the next year. But the rationale that you should anticipate is that number to change pretty dramatically.

Operator

Your next question comes from the line of Wendy Huang of Standard Chartered Bank.

Wendy Huang - Standard Chartered PLC, Research Division

Hongyi Zhou, I think you just touched upon the competition from Tencent in the mobile space. So how do you think this threat from Tencent to your core -- to core mobile products, mobile sales and also mobile assistant? I think Tencent has 2 products, namely eLong and QQ Show [Chinese]? And how was your product differed from their products in terms attracting the new user and return your existing users?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese] So if you look at Tencent, you have a very broad business lines and basically competing every single areas of the Chinese Internet industry. Where for us, we have been a little in last few years, has been very focused on security and focused on the key gateways to Internet. That really give us the advantage that in terms of creating a better, more innovative products in both mobile security and the app store. There's not -- no kind of other way, it's just keep innovation that to keep us -- keep our advantage. So if you look at -- and also, obviously, we are the early mover, at least on the security side, even though Tencent have been very aggressive in the last couple of years, trying to push into security. But so far, we hold back them pretty well and keep our leadership. And the other advantage we have is really the interconnection between our user base on mobile and user base on PC. One perfect example is really the app store. The reason we can come from behind in just 1 year to surpass industry leader is really just because we leverage our PC side of user base and quickly gain the traction among the mobile users. So that's a few factors that we believe we can keep and maintain our leadership in those areas.

Operator

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

Thomas Chong - BOCI Research Limited

I have a couple questions. The first question is about the headcount. Can management provide some color about the headcount in the third quarter? How many are coming from PC and how many are coming from mobile? And how should we think about the trend for next year? And my second question is about the union that management has mentioned. So should we expect there will be something called Qihoo union to be launched in the -- over the long run, say, in 3 years time? And my third question is about advertising outlook in 2014 after CCTV prime time auction. Yes, can management give us some color would be great.

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese] So first of all, in terms of headcount, we already said in the past that we want, by the end of the year, get to somewhere in the 4,000 to 4,300 people. And most of incremental, other than the search sales team that we're building as we're speaking, headcount R&D side are mobile-related. Because that's really -- we have a very strong foundation on the PC side, and the mobile side is more about extension and addition. So that's probably will continue to be the strategy going forward in terms of that, the headcount. Regarding the traffic union, we are not in a rush to do that. The main reason is because, organically, we still have a very significant resources that haven't really been tapped yet in terms of gaining additional traffic share. So we will use our own resource first. And secondly, union traffic, as we mentioned early in the discussion, really it's the low quality and the less valuable traffic. And so we, from a monetization perspective, we certainly want to tap our own traffic first. So eventually, we will do the union, but -- and maybe eventually we will have a similar kind of a traffic configuration compared to others. But at least, right now, we're not rushing to it, because our internal research have not been fully utilized yet. Sorry, I missed your third question. Maybe you want to dial back again to ask that.

Operator

Your next question comes from the line of Kevin Kopelman of Cowen and Company.

Kevin Kopelman - Cowen and Company, LLC, Research Division

With your search query share up, can you just talk about your brand related to search? Are your users coming to think of you as a search company at all? And do you still have plans to promote so.com?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese] It's a very good question. And if you look at the -- in the first year, we launched -- up until probably the middle of this year to August. Almost 100% of our search traffic, or a very significant majority of our search traffic, is actually coming from our browser and the navigation page search box. But since the middle of this year, we have been more vocal in letting the people know about so.com, mainly through our own assets. Example, our browser, our home page and everything let people know that 360 search and so.com. And by now, the so.com contribution, in terms of our overall search traffic, is already close to 30%. So it's very significant progress. So far, we haven't. Which means that people start to recognize 360 and so.com as a search alternative in the market as opposed to just kind of happen to use that box. And we haven't been really aggressively doing any marketing-related stuff with it on search. It's really because the historical lesson we have learned from the past is that a lot of times, if your products haven't reached the perfection and then you do it, a lot of the marketing campaign to make the users more, I guess, come to your products, eventually they will go. And so for us, we are basically in that perfection process. And maybe at some point next year, we'll become more proactive in terms of using other channels to let more people outside our own products portfolio to know us, the product and know the search. So it's a step-by-step function, and we are getting closer to that stage.

Operator

Due to time limitations, I would now like to hand the conference back to today's presenters. Mr. Alex Xu, please continue.

Zuoli Xu

Thank you, everyone, to participate in the conference call. I think that if you have any additional questions, feel free to send email to us or give us a call. Thank you. Bye-bye.

Operator

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

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