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Qihoo 360 Technology (NYSE:QIHU)

Q4 2013 Earnings Call

March 06, 2014 7:30 pm ET

Executives

Helen Wu

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

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

Analysts

Timothy Chan - Morgan Stanley, Research Division

Alex Yao - JP Morgan Chase & Co, Research Division

Bin Liu - Citigroup Inc, Research Division

Erica Poon Werkun - UBS Investment Bank, Research Division

Jiong Shao - Macquarie Research

Eddie Leung - BofA Merrill Lynch, Research Division

Fei Fang - Goldman Sachs Group Inc., Research Division

Dick Wei - Crédit Suisse AG, Research Division

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

Alicia Yap - Barclays Capital, Research Division

Cynthia Jinhong Meng - Jefferies LLC, Research Division

Chun Ming Zhao - 86Research Limited

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Qihoo 360 Technology Company Limited Q4 and Full Year 2013 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, the 7th of March 2014. I would now like to hand the conference over to your host today, Ms. Helen Wu, Director of Investor Relations. Thank you. Please go ahead.

Helen Wu

Thank you, operator. Welcome everyone to our Fourth Quarter and Full Year 2013 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 fourth quarter and the full year 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 discussion 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. 2013 was an outstanding year for Qihoo. We made great progress toward [indiscernible] and achieved recorded revenue under profitability. We ended the year on a high note as well with solid revenue growth across all of our business lines. We are adequately pleased with the 2 [ph] of them, and increased distribution from search and the mobile monetization.

As a reminder, these businesses are relatively early stage, and we are really pleased with our progress so far. At end of 2013, search and mobile monetization accounted for over 30% of our total business. During the year, we continues to strengthen our position in mobile security and the mobile app store. We are maintaining our leadership in PC security and the browser.

According to a third-party study, the number of active users of our PC-based products and their services reached 475 million at the end of 2013, covering over 94% of the China active PC Internet users. Monthly active users of our PC browser reached 354 million, covering more than 70% of the China active PC Internet users. Mobile security continued to be an important component of our brand. According to third-party data, we are the indisputable leader in smartphone security market in China with 70% marketing share. During the fourth quarter, we continued to grow our user base and build our leadership position in China's dynamic mobile market with transition to 40 [indiscernible] smartphone music [ph] and are supporting our growth.

As at the end of 2013, total smartphone user of 360 Mobile Safe, our flagship mobile security product, reached 467 million. This is more than double the 207 million users at the end of 2012. The user base for our Android-based app store, 360 Mobile Assistant continue to grow at a rapid pace in 2013 despite the dynamic change in the industry landscape and the tough competition from our peers.

We are a clear leader in Android-based app distribution in China. According to third-party studies, Qihoo 360 has a nearly 40% market share. It has now been 18 months since we launched our own search engine, and we continue to gain meaningful traffic share that has transformed the competitive landscape. By the end of 2013, we surpassed our Internet search traffic goal and reached about 23%, according to [indiscernible]. Our game and search traffic was mainly driven by continued improvement in search quality and user experience as well as substantial leverage in the distribution core of our platform.

Our goal is to achieve 30% search traffic at the end of this 2014. As we depend our reach -- within the PC search market, we are also making a significant approach in mobile search where we are also capturing additional share. We have already launched a few new mobile search-related products and there's more to come. To strengthen our marketing position in this area and continue our current momentum, we are taking a market-pronged approach through our mobile app store, mobile browser, mobile desktop and what you call mobile apps.

We made significant progress in achieving our goal of becoming a major player in China's massive research market. Our monetization system showed significant improvements throughout 2013, and we will continue to make upgrades in 2014. At the same time, we will continue to build our search advertising sales network, including direct sales force and agency networks. We certainly are very pleased with our results in search traffic and the monetization thus far. And we're seeing even greater potential ahead of us.

Our game platform continues to attract game developers and the user activities under one scheme. We are pleased with the overall market and achieved robust growth in this segment despite the cooling off in PC games and increased competition in mobile games. In 2013, we made important progress in monetizing our mobile app store with a rapid ramp in mobile games. Mobile monetization remains an important part of our overall business strategy in that we expect that we'll continue to see a development of growth in this area in line with our -- with user trends well into the next few years.

Looking ahead, continued investments in technology and development of our product is critical to our success and ability to maintain our leadership as an [indiscernible] China dynamic Internet market. In 2014, we will look to build on our success and extend our coverage of PC and the mobile Internet as well as cloud-based service. To support further search monetization and mobile penetration, we also plan to proactively expand our sales and marketing network to support our growth. At the same time, we will maintain our focus on user experience that compels our loyalty in the growing user base to choose Qihoo 360. We have achieved a significant progress in 2013, but our job is not done yet. In this fast-growing market and the ever-changing landscape, it is critical that we stay on the cutting edge of innovation and creativity. These are the values that have led [ph] Qihoo 360.

Last but not least, on behalf of the board and the shareholders, I would like to thank our employees for their hard work and contribution in 2013. 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. In the first quarter, we exceeded our internal target and market expectations and delivered strong financial and operational results. We finished 2013 with a big bang. Total monthly active users of Qihoo 360's PC-based products services reached a record 475 million compared to 456 million a year ago. User penetration of our PC-based products were 94.6% compared to 96.5% a year ago. Total smartphone users of our key mobile security products, 360 Mobile Safe, reached a record 467 million in December compared to 207 million a year ago and 408 million in the prior quarter.

According to multiple third-party studies, we continue to maintain a strong leadership position in Chinese smartphone security market, a segment that is growing rapidly along with smartphone penetration rates in China. Monthly active users of our 360 PC browsers was 354 million in December compared to 310 million a year ago and 342 million in the prior quarter. User penetration rate of 360's PC browsers was approximately 70% in December compared to 66% a year ago and 69% in the prior quarter. Average daily unique visitors to our 360 Personal Start-up Page and its sub-pages were 119 million in Q4 2013 compared to 91 million a year ago. Average daily clicks on 360 Personal Start-up Page and its sub-pages were 681 million in Q4 2013 compared to 450 million a year ago.

As of the end of December 2013, we had over 800 games commercially running on our game platform. And the total number of paying [ph] gaming accounts grew to approximately 700,000 compared to 560,000 in the prior quarter.

Now let's review our financial performance for the fourth quarter. Revenues were $221.6 million, up 111 -- 115% from Q4 2012 and up 18% from the prior quarter. The strong year-over-year and sequential growth was driven by solid performance from both online advertising and Internet value-added service, with IVAS continued to outperform and additionally, both search and mobile monetization ramped nicely during the quarter.

No single customer contributed 10% or more to total revenue during the quarter. Online advertising revenue were 142.4% -- $142.4 million, up 113% from Q4 2012 and 18% from the prior quarter. The solid year-over-year and sequential growth was mainly driven by strong search monetization and further penetration of performance-based advertising of Personal Start-up Page. We're very pleased with the progress we have made in search monetization, and the trend looks very encouraging. We continue to receive broad-based positive response from our users and business partners. By the end of 2013, we had significantly expanded our agency networks and advertising customer base. We expect our search business to continue to ramp smoothly 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 industry leader in terms of commercial coverage and efficiency. There is 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 $78.9 million, up $124 million -- up 124% from Q4 2012 and up 18% from the prior quarter. The strong year-over-year and sequential growth was driven by solid growth in paying [ph] gaming accounts, expansion of our game portfolio and a healthy ramp in mobile games. Within IVAS, game revenue were approximately $63 million, up 131% from Q4 2012 and up 16% from prior quarter. Cost of revenues were $30.2 million compared to $10.6 million in Q4 2012 and $25.9 million in the prior quarter. Gross margin was 86.4% compared to 89.7% in Q4 2012 and 86.2% in the prior quarter. The year-over-year decline in gross margin was mainly due to a cost reallocation related to the continued search monetization, which we had noted in the previous calls.

GAAP operating expenses were $184.9 million compared to $82.6 million in Q4 2012 and $111.2 million in the prior quarter. Share-based compensation was $75.3 million compared to $14 million in Q4 2012 and $15.9 million in the prior quarter. For Q4 2013, share-based compensation in sales and marketing, product development and G&A were $2.5 million, $11.6 million and $61.2 million, respectively.

During the quarter, we recognized a one-off $57 million share-based compensation expense in relation to share incentive granted to senior management at the end of 2013. The Board of Directors of Qihoo 360 approved the grant to reward outstanding performance of the company in the past few years. Non-GAAP operating expense, which excludes share-based compensation, were $109.6 million compared to $68.6 million in Q4 2012 and $95.3 million in the prior quarter. The year-over-year increase was mainly driven by increased marketing expenses, bandwidth cost, depreciation and personnel-related costs as we expand our sales and 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, excluding share-based compensation, was $84.2 million compared to $26.1 million in Q4 2012 and $66.7 million in the prior quarter. Non-GAAP operating margin was 38% compared to 25.4% in Q4 2012 and at 35.5% in the prior quarter. The year-over-year non-GAAP operating margin expansion was mainly due to the operating leverage from the robust revenue growth. GAAP net income was $16.7 million compared to $12.8 million in Q4 2012 and $44.5 million in the prior quarter. Non-GAAP net income was $96.3 million compared to $26.7 million in Q4 2012 and $61.5 million in the prior quarter.

Non-GAAP net margin was 43.5% compared to 26% in Q4 2012 and 32.7% in this prior quarter. GAAP fully diluted EPADS for Q4 2013 was $0.13. Non-GAAP fully diluted EPADS for Q4 2013 was $0.70. For non-GAAP EPADS calculation purpose, weighted average fully diluted ADS for the quarter were $136.6 million.

As of December 31, 2013, our cash and cash equivalent balance was approximately $1 billion. Net cash generated by operations in Q4 2014 was 6 -- was $76.8 million. And cash capital expenditures were $18.8 million. Adjusted EBITDA, which excludes share-based compensation, was $114.5 million in Q4 2013.

Now for the full year of 2013, revenue was $671.1 million, up 104% from $329.0 million in 2012 with strong growth across our online advertising and Internet value-added service. Online advertising revenues were $417.1 million, up 88.3% from $221.5 million in 2012. The solid growth was primarily driven by increased monetization of user activities on 360 Personal Start-up Page and incremental contributions from search and mobile advertising. Internet value-added service revenue were $252.7 million, up 145% from $103.3 million in 2012. The robust growth was mainly driven by strong ramp in mobile games and continued strength in PC game operation.

Cost of the revenue was $87.8 million compared to $32.8 million in 2012. Gross margin was 86.9% in 2013 compared to 90% in 2012. GAAP operating expense was $482.5 million compared to $250 million in 2012. Non-GAAP operating expenses, which excludes share-based compensation, was $361.4 million compared to $199.5 million in 2012. Non-GAAP operating income, which excludes share-based compensation, was $224.2 million compared to $99.3 million in 2012.

Non-GAAP operating margin was 33.4% compared to 30.2% in 2012. While we continue to make necessary investments to support our long-term growth, we managed to exceed our internal margin target in 2013, mainly due to better-than-expected top line growth.

GAAP net income attributable to Qihoo 360 was $99.7 million compared to $46.8 million in 2012. Non-GAAP net income attributable to Qihoo 360 was $226.3 million, up 132% from $97.4 million in 2012. Non-GAAP net margin was 33.7% compared to 90 -- 29.6% in 2012. GAAP diluted EPADS was $0.77.

Non-GAAP diluted EPADS was $1.74 compared to $0.80 in 2012. Weighted average ADS is used to compute non-GAAP diluted EPADS in 2013 was $130.4 million. Net cash generated from operations in 2013 was $210 million compared to $117.8 million in 2012. Cash capital expenditures were 2 -- $121.4 million in 2013.

Now I would like to provide a brief business outlook. For the first quarter of 2014, we expect the revenue to be between $226 million and $228 million, representing a year-over-year increase of 106% to 107% and sequential increase of 2% to 3%. Again, as a reminder, these estimates 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 now like to open the call for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Timothy Chan from Morgan Stanley.

Timothy Chan - Morgan Stanley, Research Division

My question is actually related to your M&A strategies. Could you maybe talk about what areas you are now focusing on, and how do you see the opportunities in China and overseas? And what are the criteria when it comes to making transactions?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

Okay. So obviously, we are -- we know that there's a lot of activities happening around the Chinese Internet. We keep an eye open on all the possibilities, but given this pretty intense competition for the different kind of assets, we don't want to get into this kind of bidding war against our peers. For the most part, our peers are much bigger than we are. So we're not in that kind of mood. We will look at deals or potential targets that's suitable for us both in terms of size. And more importantly, we're looking at technology, products and the team. We wanted it -- a target has innovative products and has a team can run these products and integrates products into our platform. So that's the overall kind of areas and the criteria we're looking at in terms of the M&A activity. Thank you.

Operator

The next question comes from the line of Alex Yao from JPMorgan.

Alex Yao - JP Morgan Chase & Co, Research Division

My question is on the mobile gaming distribution market share. We noticed that some of the competitors are far more aggressive in terms of the payout ratio recently. How do you guys think about your mobile gaming distribution market share? And also, how do you think about monetization [ph] in 2014?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

Okay. So yes, we did notice there are a lot of competitions, big and small, coming to the market. But -- and also there are other third-party numbers thrown around in the market. But really if you talk to the content provider at the game developers and a prudent due [ph] consensus, we are a clear leader in terms of game distribution in China. And the reason those -- because some of the competitors have tried to use the sharing percentage to pursue market because they feel a significant pressure from us. But really, some of those kind of so-called better deals from our competitors, you have to read the fine print. At the end of day, it may not necessarily -- a better deal compared -- consider all the promotional costs and then so on. And also very important I want to add is that from a game developer perspective, the incentive is really not to find the best deal. It's really to maximize my revenue. So based on that incentive, their approach is to put my game on every single possible platform out there, no matter how big and how small, no matter how much we get in terms of share. And so for us, if you notice, we announced our kind of a sharing structure or revised the sharing structure a few months ago to encourage smaller developers coming up with the better games and grow bigger. So for the first RMB 500,000 growth for the smaller games, we will totally 100% give to the developer. So these kind of things -- it's actually one part -- create a healthy ecosystem because the more game developers there are, the more games will be in the system, the more kind of business opportunities we have. So that's the overall kind of approach. And in terms of continuing monetization going forward, we continue to see very strong momentum in this area given the industries still in very early stage. Thank you.

Operator

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

Bin Liu - Citigroup Inc, Research Division

Just a quick question on your share-based compensation. Can you elaborate what's the one-off $57 million share-based compensation used for? What do we expect your ballot [ph] this year as trends for 2014?

Zuoli Xu

[Chinese] Sure. Thanks, Bin, for your question. I think the -- first of all, this $57 million is a one-off. It's not going to recurring on quarterly basis. It's not going to recurring on annual basis. And secondly, this is basically the board, based on the company's past performance -- and reward our 2 cofounders for their outstanding contribution to the company. And the total share comp, I believe it's already embedded in this quarter's fully diluted share count. Given the share price, it's not too many kind of a shares. It's just the value is that much, but I will say it's probably 1 million-ish on a fully diluted basis. So that's basically it.

Operator

The next question comes from the line of Erica Werkun from UBS.

Erica Poon Werkun - UBS Investment Bank, Research Division

Earlier, Chairman Zhou mentioned that the search and the mobile monetization combined contribute to over 30% of the company. Just wanted to get a little bit more detail. So can you share with us out of your online advertising revenue how much of that is from your search revenue? And if any of that is from your mobile search platform? And also, related to that is on your IVAS revenue, what is the contribution from mobile games?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

Erica, so for the -- for search and mobile, this quarter, I think each contributes approximately 17% of the total business. So basically, a similar size on the quarterly basis for now. In terms of a mobile search, no, I don't think at this point, we have any revenue from mobile search, so all the search is just related to the PC search. And the -- and then, as you know, for our mobile revenue, there are advertising and, at least, accounting speaking, there are advertising and IVAS. That's again, similar to previous quarter, is evenly split.

Operator

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

Jiong Shao - Macquarie Research

My question is on Internet finance. It's a hot topic right now. Almost all your major competitors already got into the market. I was just curious on your thoughts to play at the rapid growth in this area, how Qihoo is going to be -- play a role?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

Thanks, Jiong, for your question. Obviously, Internet finance is very hot in recent months. But our view is slightly different. We look at this hot spot as not necessarily the area that we are expert on. And so we still believe for any given company should focus on what you're good at. For us, obviously, security is really the core value of the company. We will continue around that to build our business model. Secondly, even for the Internet finance itself, I think the current format in terms of helping the mutual fund company selling funds online or with the different kind of a name, it's not necessarily a very creative way to do Internet finance. So we're obviously -- we are talking and thinking with some of the people in that financial industry, seeing whether we can find any kind of a creative way to do this Internet finance. And this, so far, we haven't found that yet. And so it's probably more a gradual approach. We don't want to be a reseller of a mutual for online for that.

Hongyi Zhou

[Chinese]

Zuoli Xu

And also very important as more and more kind of assets been moving online both on mobile and PC Internet, security becomes even bigger issue. And given our core strengths in that area, we believe we can play a very, very important role even without directly doing the Internet finance. Thank you.

Operator

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

Eddie Leung - BofA Merrill Lynch, Research Division

I'm just wondering if you could give us more granularity on your first quarter guidance. Given historically negative seasonality for the quarter but your guidance are suggesting a sequential growth. So wondering if you could give more granularity?

Zuoli Xu

[Chinese] Eddie, so basically, you're right. Historically, if you look at our peers, as reported so far, almost every single one of them guided a decline in first quarter. We managed to grow our first quarter a little bit. I can't give you too much of a precise kind of area. But I would say, generally speaking, you should expect the traditional advertising, the navigation page declining on a sequential basis and search continue to ramp on a sequential basis. And the majority of the upside or growth will coming -- will be coming from Internet value-added service. In other words, the games because game in Q1 is a typically seasonal strong quarter. So that's basically from the quantitative kind of description, tell you where the strengths are, where the weakness is.

Operator

The next question comes from the line of Fei Fang from Goldman Sachs.

Fei Fang - Goldman Sachs Group Inc., Research Division

Alex, Hongyi Zhou, just a question on the competition. Baidu, your competitor has guided substantial SG&A increase for 2014. So how do you think about your marketing strategy for the year, and do you plan to ramp up, say, pre-installation or other marketing or branding efforts or bigger scale?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

Okay. So the -- yes, we noticed there are a lot of -- not just Baidu, but there are a lot of other companies as well trying to spend a lot of money in 2014 to, particularly on the mobile side of the business in terms of marketing and pre-installation, all these kind of things. Obviously, we need to, to a certain degree, do those things as well. But on the other hand, we really don't think pre-installation is the only way or even the most effective way to get users because the pre-installation will get your product in front of the users. But if the product itself is not good enough, user can choose to ignore you after the installation. So we believe the key thing, as we always believe, is really from -- in terms of products is really about innovation and user experience. So we -- this year, we'll continue to spend significant resource in product development to make our products better and for that to help us gaining more users across the products portfolio. And also, we noticed there are some competitors have a line of different kind of a mobile apps covering almost all areas. We tend to disagree with this kind of approach because when you do this kind of thing, you most likely diversify your firepower without enough intensity. So for us, what we're going to do, we probably will focus on a field that's -- mobile apps that we are good at and getting deeper and in getting broader in terms of user base. So overall, I will say the overall kind of a spending approach for this year in sales and marketing, in R&D and also in the M&A related -- I would say it's a balanced approach for us for 2014.

Operator

The next questions comes from the line of Dick Wei from Crédit Suisse.

Dick Wei - Crédit Suisse AG, Research Division

I guess a follow-up of the last question is that for the investment that other Internet companies do in the space in 2014, how much Qihoo benefits from those spending, particularly, what are the trends that we are seeing in terms of the mobile apps distribution fee that is changing?

Zuoli Xu

[Chinese] Yes, I guess, generally speaking, Dick, that is certainly we're looking at it, given that there's a huge marketing budget flooding into the market. It's actually, what we're taking in terms of app store business, both in terms of advertising and also in terms of revenue sharing is we are taking the marketing dollar of the app developers and the game developers. So if those guys trying to spend more to distribute their apps and games, we certainly will benefit from that kind of activity. Thank you.

Dick Wei - Crédit Suisse AG, Research Division

Any trends of the -- maybe to download some changes, maybe per apps advertising fee changes?

Zuoli Xu

No. I would say, we -- at least so far and probably going forward as well, we take an industry average approach. Obviously, in some special cases there is a case of case-to-case negotiation but, generally speaking, we take an industry average.

Operator

The next questions comes from the line of Tian Hou from T.H. Capital.

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

I have a question regarding your overseas expansion strategy, and I wonder how are you going to pursue overseas market with your security and other mobile product [ph]? So that's the question.

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

So first of all, in terms of global expansion or international expansion, we are really -- tried to be focused. In other words, we don't want to do get everything, anything on to the global market. Security is still our key area of focus. We certainly want to get our security brand expanded beyond China. And secondly, we're not necessarily just use the sort of pre-installation or use other channels to distribute the product as the main approach. We would rather do some kind of a partnership with local players because those guys understand the local market better than like what we did in Brazil. We had to see pretty good results there. So 2014 is a very important year or the beginning -- or very important year for us in terms of global international expansion. You probably will see some kind of results by the end of this year.

Operator

The next questions comes from the line of Alicia Yap from Barclays.

Alicia Yap - Barclays Capital, Research Division

My question is if you wanted to address the overall M&A activities move very fast in China last few months. So what is management view of the overall China Internet industry landscape in the next 2 to 3 years? And why will Qihoo's position on that, and what is our vision for the Qihoo growth prospect? And will we also get into or have any interest of getting into the O2O business?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

So first of all, yes, we do see that the intensity of the competition in terms of -- in terms of Internet has been super hot in the recent period. It's even more intense than the U.S. market. Secondly, the M&A activity happening in Chinese market is kind of different from the U.S. market where -- in the U.S., this kind of M&A activity happening most likely the focus area will be the future technology and the future trend, where the Chinese M&A, what people focus on, it's really how do we split the existing hot market and existing knowing [ph] opportunity. So within the next 2, 3 years, this kind of existing kind of a knowing [ph] opportunity will probably be split among the major players in the market. We're looking at it. Our approach in terms of -- or the opportunity we see on an M&A or self-developer. It should really -- the area today maybe not on people's radar screen but really represents somewhere in the future opportunity. So that's probably one approach we want to look at it. Because by doing that, we can avoid the money burning kind of operation or money burning kind of a game against those deep-pocket guys.

Hongyi Zhou

[Chinese]

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

So in terms of O2O strategy, as you know, a lot of O2O -- so-called O2O companies today are close business relationship customers. And we certainly, currently don't have the O2O kind of expertise or kind of a know-how. But going forward, we may look at it from 2 different angles. One is through some kind of partnership. Secondly, is through some kind of investment through others to get in touch into this O2O market. So that's basically our view on there.

Operator

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

Cynthia Jinhong Meng - Jefferies LLC, Research Division

My question is on the games section. Can you give us some breakdown of web games, mobile games and Tianjin [ph] for revenue contribution? And the amount of new paying gaming accounts for the quarter, how much of this was contributed by -- for the mobile paying users? Also on the platform side, how do you view Alibaba's entry into mobile game distribution? And in the future, how do you cope with the possible impact from increasing competition?

Hongyi Zhou

[Chinese]

Zuoli Xu

[Chinese] So first, I will answer the number questions, and I think we -- I already mentioned the early -- the mobile profit revenue is about 17% of the total business and evenly split between the game and the mobile advertising. So that's probably -- if you do the math, you will get the numbers you want. And secondly, in terms of total paying accounts, you basically can assume on the PC side no growth or very minor growth. All the incremental growth are coming from in terms of paying account are coming from mobile game. That has been the case last quarter in Q3 and Q4 as well. So that's the number questions.

Hongyi Zhou

[Chinese]

Zuoli Xu

So in terms of Alibaba getting to this mobile game business, we don't necessarily think it's a bad thing just because this probably encourage more of the people getting to the game developing area. As you -- as we mentioned earlier, mobile game, at least for us, for the industry, is a content-driven business. The more games into the market, the more prosperous the whole industry is. And right now, you're probably talking about tens of thousands of games in the mobile games out there. And -- but even though there's probably hundreds of so-called platforms out there, from a game developer perspective, we will always pick the better and stronger ones, and given our leadership position there, we are a place to go in terms of for those guys to develop another game. That's a pretty healthy kind of circle there.

Operator

The next questions comes from the line of Eric Wen from China Renaissance.

Unknown Analyst

This is Stephen [ph], asking question on behalf of Eric Wen. Our first question is because there are many IPOs this year and many new IPOs at the companies that will be spending on Internet marketing, has Qihoo experienced any change in demand and its PSP and search business? And also what's the strategy on mobile search?

Zuoli Xu

[Chinese]

Hongyi Zhou

[Chinese]

Zuoli Xu

So I will take the first part of the question. I think it's a little bit too early. We're only in early March. Certainly, those budgeting in terms of marketing dollar getting from the IPOs or fundraisings, will eventually flush into this system. By that, again, it's a little bit too early to say anything, but kind of conceptually, that's the direction, I think, where the money goes. And in terms of mobile search, first thing, we believe that mobile search you share as a basic technology structure with the PC search. So as we continue to improve our PC search products, that certainly will benefit, product-wise, to our mobile search. And secondly, I think there are 2 things probably different from the PC search, Internet mobile search. One is the format of the products. It's no longer just a box in the middle kind of format. It will be multiple kind of entry points as we mentioned earlier. And secondly, it's what the people are searching for. On the mobile, the content become a very, very important kind of area for people to search. So that's why we take a multiple kind of approach, both in terms of using our mobile app store, mobile browser and mobile desktop and some of the vertical mobile apps as they're getting points to different kind of mobile search. So that's our general approach in there. Of course, for us, it's still early days. We intend to gradually ramp that mobile search traffic. Thank you.

Operator

In the interest of time, the last questions now come from the line of Ming Zhao from 86Research.

Chun Ming Zhao - 86Research Limited

[Chinese] So my question is, does company have any plan in e-commerce area, and is there any comment on the potential investment from Alibaba?

Hongyi Zhou

[Chinese]

Zuoli Xu

So Ming, thanks for your question. Obviously, e-commerce is a very, very important part of the Chinese Internet ecosystem. But we are -- traditionally, we are not in that area, and we consider ourself -- do not have the e-commerce DNA. And for that, we don't have the intention to kind of getting there because we want to focus on where we're good at in terms of the other 2 areas, the advertising and in particular search advertising, the game, particularly the mobile game. If we can get these 2 areas fully developed, for us is a potentially significant, significant kind of a business opportunity in front of us. Right now, from a per active user monetization intensity perspective, we are way behind the industry leaders. By doing -- focus on doing the search advertising and mobile game, we intend to gradually close that gap and that certainly will help us drive a pretty sustainable growth over the course of the next few years at least. And then, today, we have a basic relationship or partnership with pretty much every single major e-commerce company in China. We intend to keep that kind of relationship growing. And obviously, there's a lot of market rumors talk about this and that. Just treat it as rumors. And we want to have more -- as many of our partners or in terms of business as possible in this kind of environment.

Operator

Ladies and gentlemen, I would now pass the call back to the management for any closing remarks.

Zuoli Xu

Thank you -- thanks for everyone to participate. And if you have any additional questions, please feel free to send us an email and give us a call. Thank you.

Hongyi Zhou

Thank you.

Operator

Thank you, ladies and gentlemen. That does conclude the conference for today. You may now disconnect the lines.

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