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

Q2 2014 Results Earnings Conference Call

August 25, 2014, 07:30 AM ET


Helen Wu - Director of Investor Relations

Hongyi Zhou - Chairman, CEO and Co-Founder

Alex Zuoli Xu - Co-CFO


Jialong Shi - Credit Suisse

Thomas Chong - Citigroup

Tian Hou - T.H. Capital

Tianli Wen - China Renaissance Securities (NYSE:HK) Ltd.

Fei Fang - Goldman Sachs

George Askew - Stifel Nicolaus & Co.

Jiong Shao - Macquarie


Ladies and gentlemen, thank you for standing by, and welcome to the Q2, 2014 Qihoo 360 Technology Company Limited earnings conference call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Monday 25, August, 2014.

I would now like to hand the call over to Helen Wu. Thank you. Please go ahead.

Helen Wu

Thank you, operator. Welcome everyone to our second quarter 2014 earnings conference call. I am Helen Wu, Director of Investor Relations in Qihoo 360. Joining me on the call today are Mr. Hongyi Zhou, Chairman and CEO of the company, Ms. Jue Yao and Mr. Alex Xu, Co-CFOs of the company.

For today's call management will first discuss operational and financial highlights for the second quarter 2014 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 the 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. We are very pleased to deliver another quarter of solid growth and operational metrics. We’re particularly pleased with the strong momentum in search. Since its launch two years ago our search engine has gradually gained notable traffic share. In the last few days our search traffic share reached over 30% and achieved our year-end target a few months ahead of schedule.

Our notable gain in search traffic was mainly driven by continued improvements in search quality and user experience as well as further leverage of the distribution power of our platform. While we continue to target higher market share in PC search we are making strategic shift in focus on resources to mobile search. We have launched a few mobile search related products and service during the second quarter and we'll continue to improve user experience of those products to gradually increase traction in mobile search market. In the long run we are aiming similar market share in mobile search as we are in PC search.

We made significant progress in search monetization as we continue to upgrade our backend system, both in terms of efficiency and coverage. At the same time we continue to build out our search advertisement sales network including direct sales force and agency networks. Overall, we are very pleased with the results in search traffic and monetization. We feel incrementally better than three months ago in search monetization.

During the quarter we've completed our majority investments in MediaV. With integration of MediaV later in the third quarter we should be able to further improve the efficiency of our online advertising business for both PC and mobile platform and enable us to expand our business offerings to advertisers. MediaV should start to make a notable contribution to our business after the integration.

In the second quarter we continued to strengthen our industry leading position in mobile security and mobile app install. As of the end of June total smartphone users that use 360 Mobile Safe, our main mobile security product reached 641 million, up from 338 million a year ago. Our Android based app store, 360 Mobile Assistant attract users at a rapid pace and continued to be a clear leader in this market despite the rapidly changing competitive landscape. 360 Mobile Assistant already become the go-to-platform for the third-party mobile game distribution in China.

In the second quarter we continue to make progress in monetizing our mobile app store through both advertising and mobile games. Despite a seasonally slower game market mobile already accounted for over 20% of our business in the second quarter. Search and mobile monetization are two most important drivers of our overall growth over the next few years. Since 2013 we start to allocate some resource to establish our enterprise security operations. With the notable policy and regulation change recently we see significant opportunity in enterprise security market. We intend to leverage our strong brand recognitions in security through internal development and external investments to quickly introduce next generation enterprise security solution to the market and make us the leader in a potentially multi-billion dollar market in the next few years.

China's Internet market is changing rapidly and our peers are moving fast. Looking ahead we'll continue to make significant investment to strengthen our brands in security and mobile to expand our monetization network to support product and technology innovation. Meanwhile we'll pay particular attention to manage our rapid growth and to maintain operational efficiency and innovative corporate culture.

On the other hand we will also keep our minds and eyes open to expand and strengthen our ecosystems through potential strategic partnership, investments and M&A. We expect this strategy and the measures to further support our efforts in building our tier one PC and the mobile Internet platform in China.

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

Alex Zuoli Xu

Thank you, Hongyi Zhou. In the second quarter we once again exceeded our internal targets and market expectations and delivered solid financial and operational results. Total monthly active users of 360 PC-based products and services reached a record 496 million compared to 461 million a year ago. User penetration of our PC-based products were 93.9% compared to 96% a year ago.

Total smartphone users of our key mobile security product, 360 Mobile Safe reached a record 641 million compared to 338 million a year ago. We continue to maintain a strong leadership position in the fast growing Chinese smartphone security market. Monthly active users of our 360 PC browser was 345 million compared to 330 million a year ago. User penetration rates of 360 PC Browsers was approximately 65.2% compared to 69% a year ago.

Average daily unique visitors to our 360 Personal Start-up Page and its sub-pages were 128 million in Q1 2014, compared to 114 million a year ago. Average daily clicks on 360 Personal Start-up Page and its sub-pages were 749 million in Q1 2014, compared to 590 million a year ago. As of the end of June we had approximately 1,200 games commercially running on our game platform. The total number of paying games accounts was approximately 1 million.

Now let's review our financial performance for the first quarter. Revenues were $317.9 million, up 109.6% from Q2 2013 and up 19.9% 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 growing at a faster pace. We are particularly pleased with the search monetization ramp. No single customer contributed 10% or more to total revenue during the quarter.

Online advertising revenue were $171.3 million, up 89% from Q2 2013 and 22.3% from the prior quarter. The strong year-over-year growth was mainly driven by strong search monetization and further monetization of our user traffic. We are very pleased with the progress we have made in search monetization and the trend looks very encouraging. We further expanded our agency network and advertising customer base during the quarter.

We expect our search business to continue to ramp strongly going forward. We continue to upgrade our search monetization system during the quarter and we have seen notable improvement in monetization efficiency through these upgrades. Later in the third quarter we will integrate our search monetization system with the MediaV system to enable us to offer a more comprehensive Online Advertising Solution to our customers.

Internet value-added service revenue, which are mainly derived from our game platform, were $146.2 million, up 140 % from Q2, 2013 and 17% from the prior quarter. The robust year-over-year increase was driven by strong growth in both PC and mobile games. Sequential growth was driven by other IVAS and continued improvement of game operations. Within IVAS, game revenue were $121.3 million, up 149% from Q2, 2013 and up 14% from the prior quarter.

Cost of revenue was $66.6 million compared to $17.8 million in Q2 2013 and $50.4 million in the prior quarter. Gross margin was 79% compared to 88% in Q2, 2013 and 81% in the prior year quarter. The year-over-year and the sequential decline in gross margin was mainly due to a cost reallocation related to the search monetization as well as the revenue mix change.

GAAP operating expenses were $208.3 million compared to $97.2 million in Q2, 2013 and $175.1 million in the prior quarter. Share-based compensation was $25.8 million compared to $18 million in the Q2 2013 and $20 million in the prior quarter. The increase was mainly driven by the acquisitions we made in the recent quarters. For Q2 2014 share-based compensation in sales and marketing, product development and G&A were approximately $4.4 million, $[70] million and $4.4 million respectively.

Non-GAAP operating expenses, which exclude share-based compensation were $182.6 million compared to $79.3 million in Q2, 2013 and $155.2 million in the prior quarter. The year-over-year and sequential increase were mainly driven by increased marketing expenses, bandwidth costs, depreciation and the personnel-related costs, as we expand our sales and marketing efforts to support our search monetization and mobile penetration, while further stressing our technology and product development capabilities.

Non-GAAP operating income, which excludes share-based compensation was $69.7 million compared to $54.5 million in Q2, 2013 and $59.5 million in the prior quarter. Non-GAAP operating margin was 21.9 million compared to -- sorry 21.9% compared to 36% in Q2, 2013 and the 22.5% in the prior quarter. The year-over-year sequential decline in non-GAAP operating margin was primarily due to increased marketing and promotional expense, personnel-related costs and bandwidth and equipment depreciation expenses.

GAAP net income was $39.1 million compared to $33 million in Q2, 2013 and $49.1 million in the prior quarter. Non-GAAP net income was $69.2 million compared to $51 million in Q2, 2013 and $73.3 million in the prior quarter. Non-GAAP net margin was 28.8% compared to 33.6% in Q2 2013 and 27.7% in the prior quarter. GAAP fully diluted EPADS for Q2 2014 was $0.30. Non-GAAP fully diluted EPADS was $0.50. For EPADS calculation purpose the GAAP weighted average ADS using a computing diluted EPADS was $131.5 million.

As of June 30, 2014 our cash and cash equivalent balance was approximately $786.8 million. Net cash generated by operations in Q2, 2014 was $57.7 million and cash expenditure, capital expenditure were $41.4 million. Adjusted EBITDA, which excludes share-based compensation, was $95.4 million in Q1, 2014.

Now I would like to provide a brief business outlook. For the third quarter of 2014 we expect the revenue to be between $306 million and $365 million, representing a year-over-year increase of 92% to 94% and a sequential increase of 13% to 15%. Again as a reminder these estimates reflect our current and preliminary view which is subject to possible material changes.

Thank you. I think that concludes our prepared remarks. We are happy to take your questions. In the interest of time we ask each participant to please limit your enquiries to one question only. For any follow-up questions please go back to the queue. With that, we would like to now open the lines for questions. Operator?

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Jialong Shi from Credit Suisse. Please go ahead.

Jialong Shi - Credit Suisse

Hi, good evening Hongyi Zhou and Alex, thanks for taking my question. I remember Hongyi Zhou mentioned in the last quarterly call that Qihoo was ready to enter the enterprise security software market. Now one quarter has passed. I just wonder if management can provide an update on this business.

Hongyi Zhou

So basically we're actually prepared for the enterprise market or enterprise-related products almost a year ago and -- including hiring the right person and doing the product development. And recent, the Chinese government policy shift in this area is actually a trigger for us to sort of accelerate this kind of an effort basically given what happened in last couple of years in terms of the information, kind of monitoring or spying kind of activity globally. Now most of the Chinese enterprise and institutions should realize that security is a very important aspect of their daily operation and also using domestic products is also a very top priority among those kind of institutions.

So we believe this is a very important and very good cutting point for us to get into this market and we -- like I said we already have a team in place and the product is under development. As a matter of fact you probably will see a couple of new products launched in this area from us later this quarter or some part of the next quarter to address this market. These kind of products are really the next generation of this enterprise security products. It's different from the traditional sort of anti-virus, anti-malware kind of solution.

To some degree it may be similar to what’s the U.S. offering by the FireEye and Palo Alto in that regard. At the same time we are also looking at -- because this is a highly fragmented market, we're also looking at good teams and good small operations outside us we wants through the M&A and investment to quickly consolidate this market and gaining a meaningful and leading position in this market.

Again we think it's a very good opportunity in the long-run and for the company. Thank you.

Jialong Shi - Credit Suisse

Thank you.


Thank you. Our next question comes from the line of Thomas Chong from Citigroup. Please go ahead.

Thomas Chong - Citigroup

Hi, good evening. Thanks for taking my question. I've a question regarding the mobile search, can management talk about the strategy how Qihoo can reach a similar level hopefully to PC search and when should we expect monetization to happen? Thanks.

Hongyi Zhou

So basically I think given that we already reached 30% of the PC search traffic recently so we are making a strategic shift, as I mentioned in the press release, we actually shift a significant portion of our PC search team to mobile search from a product development perspective. At the same time we are also hiring outside new teams or new talents to specifically targeting the mobile search related products. So that’s from a resource preparation perspective.

And from our perspective the mobile search, there are two type of need. One is more like a traditional way of mobile search, essentially based on that box, the search box and enter the key words and do the search. So today the majority of people are still using that way, essentially they use cellphone almost like as if they use a PC. So that’s a one area of demand we need to address.

And the other areas of the demand we believe actually is based on, question and answer, based on kind of a dialog related mobile search. So that’s another area from product development perspective we are looking at as well. And then in terms of how do we move forward to gain further market share there I think the few things there.

First and foremost, you need to have good products. Secondly, you need to have a relatively good channel to kind of let your [new] [ph] search whether it’s a search app or mobile browser to let people know, let people use. For that we have our app store and have our security products as a base to push out those kind of related products. And the third, we believe is also very, very important is really the brand of their search in mobile because mobile search tend to be diversified entry points. So branding becomes very important. So we may allocate some resources to do mobile search related branding to help us gaining search traffic share.

As we mentioned longer-term we are looking at a similar target for mobile search as we do on the PC side, that’s we are gradually allocating proper resource to do that basically. Thank you.

So in terms of -- your question in terms of the monetization of the mobile search, I think first of all we have been following very conservative and very careful route in terms of monetizing our PC search so far. And the reason behind that is really we don't want -- we learned a lesson from our competitors, we don’t want to really hurting user's experience. But as the technology, moving forward, as well as the overall kind of a user behavior and the user habits change, we actually see the opportunity that we can increase the intensity of monetization of our search engine without really hurting user experience.

And for example one of the ways is to probably to deliver the advertising as a more accurate and more related or relevant way to users even though the intensity is increased. So these are basically the things we're going to start to deploy as we're speaking right now. So you will see starting from now to through the next few quarters you will see our search monetization, actually part of the driver is really the picking up the speed and picking up the intensity of the monetization. Of course first and foremost we always put the user experience as the top consideration.

And secondly, this on the PC side by the way, but the experience we get from the PC side of the monetization will eventually use all applied it to the mobile side of search monetization and will help us on that end as well. In terms of timing I would say mobile side monetization you're probably looking at early 2015 as a starting point. Right now we didn't have any, as you know. Thank you.

Thomas Chong - Citigroup



Thank you. Our next question comes from the line of Tian Hou from T.H. Capital.

Tian Hou - T.H. Capital

Hongyi Zhou, Alex Zuoli Xu, I have a question related to your sales and marketing. If I look at the sales and marketing spending, feel like it's a big jump Q2 over Q1 and following a big jump in the Q1 over Q4. So I wonder where have you spent this money and what spending is going to benefit your growth, top line growth in the long-run? What spending is going to benefit your operating efficiency improvement? And what's going to look like in Q3, Q4 and also for next year is that going to be another high spending year or the sales and marketing can be controlled under the certain level as a percentage of revenue?

Hongyi Zhou

So I think the overall as you guys know the Chinese Internet industry has been in the very intense competition over the course of last year or two. And given the success we achieved in the past, many of the Internet giants, start to mimic, at least from a product level, mimic our offerings. For example they are getting into the security market, particularly on the mobile side and also the handset manufacturers as well as other Internet companies also look at the App Store as a very important kind of gateway as well as the distribution power, so they enter into this market, created their own market place. So all these things basically increased the competition in those area and increased the difficulty for us to, basically to maintain and gaining market share. So that's why from a kind of a channel spending perspective on a year-over-year basis, you will actually see pretty significant increase on the year-over-year basis there.

So that's the -- I guess for one part is to continue to strengthen our products penetration and strengthen our product market position there. That’s something we need to do and in particularly given this year the general view is that this year is the last year where you still see a meaningful number of Greenfield smartphone users coming to the Chinese market. So that's the way we look at it.

And the second part we are doing in terms of costs or personnel and we are trying a lot of a different things in the last few quarters, including in the hardware and the gadget side and other kind of the new areas of testing some of them doesn't really contribute on top-line or any -- in any meaningful way, but there are certainly a cost burden in there. I think those are necessary tests and necessary innovations for the company to get the next growth driver in that process. So that's the second element in there.

But really if you look at reality, to your question, the first to second quarter increase in the cost side of the thing was in many cases is driven by the one-off items, particularly the two acquisitions we made, as you know in the first and second quarter, and then also second quarter you have the World Cup related spending there in terms of TV advertising. So that's the -- in many cases, it’s a one-off thing.

And on a going forward basis, I will say for one, the company is already in the process of the streamlining, basically the segment of those spending make sure there is some no kind of a waste of the resource and over spend in certain areas. So you will see a kind of pretty meaningful control or cutting back in some way particular in the fourth quarter of this year. And from our side environment perspective those factors that impact the part of the spending by first quarter, many of those will be gone there.

So overall we are still looking at the second half as a margin improvement compared to the first half and I don’t think the spending will expand -- this kind of spending will expand into kind of 2015 for a couple of reasons. One is that from industry perspective by the end of the year the penetration is done in terms of smartphones. You are getting into the replacement cycle. I don’t think it’s a wise way to spend money, to -- or huge money in pre installation or channel in the replacement cycle. And two, we already achieved position, for the most part that we want to be. So next year I think for the most part of your business is almost like collecting of results kind of a year. That’s why we still think next year you will see a very meaningful margin expansion for us and for next year compared to this year’s level.

So many of those spendings we did this year in the later part of year was really from product and the channel and the marketing perspective prepared for us for the future growth and we certainly see that kind of growth coming, as you can see evidenced in the search which is, we are very pleased with that results on search and we think that’s a very, very significant driver for the next couple of years there.

Tian Hou - T.H. Capital

Thank you, Hongyi Zhou, Alex.

Hongyi Zhou

Thank you.


Our next question comes from the line of [inaudible] from JPMorgan. Please go ahead.

Unidentified Analyst

Good evening, Hongyi Zhou, Alex and Helen. Thank you for taking my question. My question is on your overall gaming strategy. As we can see Qihoo has already been a leading player in both web game and mobile games market and I know that you have reason, you have formed JV with the gaming company The9 to jointly operate a game called Firefall, which is actually a MMO game on PC. So just want to understand more about this co-operation. What could be initiatives behind such a JV and are you planning to more proactively expanding to the PC-based game market. Thank you.

Hongyi Zhou

I think overall, I think from a game industry perspective we think they are maybe moving towards two different directions. One is towards the mobile game which is basically a broad coverage kind of a user base. In other words for those non-PC game players or even non-game players in the past maybe just because of the convenience with the handset they started playing mobile game. So that's from bringing up the user base perspective, that's a one direction we want to go. That's why we are focused on mobile game very much making progress there.

And the second direction actually is on the other extreme side which is the heavy hardcore games. PC web game, as you know, we are one of the leading distribution platforms out there. I think sooner or later that market will reach its maturity and getting -- as an industry getting into a sort of a declining phase. Even though we are still growing at a very healthy pace but sooner or later that may happen.

But the PC hardcore game, the traditional MMORPG for example are -- attract a very loyal and steady user base, those -- player base, and those players tend to be more heavy spenders in that process. So this business will probably continue to exist in ways to grow particularly with new set of the hardware or gears coming into this market.

If you recall recently Facebook acquired a kind of the virtual reality kind of a gear company. And I think that represents one of the directions for those hardcore games essentially making it more attractive for those players. So these are the two directions we are looking at in the long run and this JV you mentioned is just one of the testing effort we are doing.

And also the other thing keeping in mind in China, on PC side essentially there are only two large user base. One use is the Tencent the other one is user base. Given Tencent itself is doing games themselves, So it's very difficult for other those hardcore game developers to kind of survive without finding another source of heavy or large user base and we happen to be that alternative source. So that's why this relationship makes sense from the developer perspective as well. Thank you.

Unidentified Analyst

Okay. Thank you.


Thank you. Our next question comes from the line of Eric Wen from China Renaissance. Please go head.

Tianli Wen - China Renaissance Securities (HK) Ltd.

Thanks very much for taking my questions, Hongyi Zhou, Alex and Helen. I've a question regarding your balance sheet. I noticed that you have a large increase in long-term investment and goodwill by almost $250 million and you also now have $900 million from the just completed convertible bond. I just wonder besides MediaV and enterprise security where are you investing your money this quarter and also going forward what is direction that you are putting your money on? Thanks.

Hongyi Zhou

So as you know at least in the last year or so the Chinese industry went through a very intense kind of M&A, kind of cycle where -- which represent by Tencent and Alibaba, both spend tens of billions of dollars to in all different areas to make investment and doing acquisitions. Relatively speaking, we are -- of course, we don't have that much resource, so we are very much careful, carefully moving in that direction. I think overall our thinking process is that we're probably going to two different end of this M&A activity or investment activity.

On the one hand, if we can find a kind of strategic piece of asset that can help us further move forward in a big way in certain strategy. So those kind of assets we may be interested and although given the resources we have I seriously doubt that we will do any kind of billion dollar deal. Most of these assets we look at is probably at the most is probably in a couple hundred million or several hundred million kind of a range.

Where, on the other hand, the other extreme is that we will continue to follow our past route to basically taking on the companies with innovative products or innovative team. Those small start-ups in mobile internet and on your smart hardware like that or -- the IOT related kind of areas. So that's the two kind of the extreme end of where we're looking at. But overall given the resource limitation we have, even after this new fund raising, it will be still pretty controlled measures to, in terms of approaching this kind of investment opportunity. Thank you.


Thank you. Our next question comes from the line of Fei Fang from Goldman Sachs. Please go ahead.

Fei Fang - Goldman Sachs

Hi. Thanks for taking my question. My question is regarding the growth of your mobile paying account, which have appeared to have slowed down in the past quarter. So can management discussion the trend and also if you expect the paying account number to re-accelerate at some point later this year. Also in the past quarter was the paying account slowdown a result of a lower overall MAU in your app store or is it because of a lower paying ratio.

Alex Zuoli Xu

Fei, I think the paying account growth definitely slowed down a little bit from the Q1 to Q2. I think the main reason is actually reflecting two things, one is again seasonality in mobile game. Two is reflecting the nature or the difference between our mobile game operations versus Tencent’s game operation for example. Normally, probably the industry knows that first quarter is a strong game quarter. Second quarter is relatively slow game quarter. So that certainly reflects in our mobile game revenue growth as well as a user account growth.

And secondly, also very important which you probably noticed that since the end of the first quarter, the entire mobile game industry doesn't, in terms of developers hasn't really launched kind of a very good or more kind of blockbuster games unlike during the first quarter and the end of last year, you almost on daily basis hearing those kind of new titles come into this market. But because the game operation for us [running] is a platform. So it's very much content driven. If there is a new game coming into this market user tend to be very active playing it and paying for it. And if there is not a good game out there user base could take a rest, wait for the next title there. But that release cycle is not really controlled by us at all, is actually controlled by the developers based on their developing cycle.

So that's why you actually will see a relatively slow new game title cycle in the second quarter and third quarter to some degree and to our knowledge most of the new title launch will be in the fourth quarter of the year. Where if you look at the Tencent’s model for example on the mobile game side, they basically the vast, vast majority of their revenue is coming from the in-house games where they control the entire pace of releasing of those games. So they can very much manage that seasonality much better than we do, just because of that fact of the different type of games. So I think from that perspective the second quarter slowdown is as expected and once the industry move into a strong season you will actually see another wave picking up in terms of paying and playing users in our in our platform basically.

By the way I don’t think this has anything to do with the app store MAU. First of all I don’t agree with that absolute MAU is declining, is actually increased from quarter-to-quarter perspective by a pretty meaningful percentage. So I don’t think these two things are related. Thank you.

Fei Fang - Goldman Sachs

That’s very helpful, thank you.


Thank you. Our next question comes from the line of George Askew from Stifel Nicolaus. Please go ahead.

George Askew - Stifel Nicolaus & Co.

Yes, thank you. Good evening and thanks for taking my question. Would you please remind us what benefits the MediaV investments bring to your search business as you near the competition of the integration and will Qihoo will become the principal or only search engine on the MediaV demand side platform. Thank you?

Hongyi Zhou

George, overall as we mentioned in the past the MediaV basically is helping us in three different areas, overall advertising. One is that they will help us doing a better job in terms of user -- kind of matching the user need on the display ad side. That display ads including the stuff happening on our business start-up page, including stuff being happening within our app store and other kind of PC or mobile kind of products or platforms. So, that’s one area.

The second area that MediaV is helping is really on the search side. As I mentioned in the prepared remarks we will basically hook-up MediaV platform with our, what you call the search monetization system after the integration later this quarter. And by hooking these two things together MediaV will enable us to offer kind of a not just fewer speeding advertising, which we are already doing ourselves, but enable us to offer the contextual ads there. So that’s the second way of the help.

And the third way is probably refer to your second part of your question MediaV will enable us to offer an ad exchange kind of platform there. And so these are the three areas. I think the first two things will probably happening sooner than the last one because the first two things essentially helping us to improve our advertising efficiency. Well third thing is basically using MediaV to helping others to improve their advertising efficiency. Although you know we certainly benefit from that. So that’s from a timeline perspective the first two things is the current priority, the third one is a little bit later than that.

Once we start to hook up the search engine with a DSP platform I think we certainly want to make that as an exclusive offering there. I don’t think that will have any questions there. Thank you.

George Askew - Stifel Nicolaus & Co.

Okay, great, thank you very much.


Our next question comes from the line of Jiong Shao from Macquarie. Please go ahead.

Jiong Shao - Macquarie

Yeah, hi, thank you for taking my question. I am just asking about the market share currently from mobile search for Qihoo and the traffic share within Qihoo's search traffic and the target for mobile search traffic share by end of the year and by end of next year? Thank you.

Alex Zuoli Xu

John, this is Alex. I'll take the question. I think as you know we -- most of our mobile search related products we launched in this year. And so at the beginning of this year the mobile search traffic as part of our own traffic search traffic was about 5%. That's the beginning of this year or end of last year. Right now I think the number is probably sitting somewhere in the low teen to mid-teen kind of level as a percentage of our sales. And we are aiming to get 25% of our own traffic by the end of this year.

So in other words a quarter of our search traffic by the end of the year will be hopefully coming from our mobile search there. I can't give you a specific target for the end of next year configuration but directionally it will be significantly higher than that 25% for sure. And longer term when we said we wanted to get a similar market share in mobile search as we do in the PC search that's more like a longer term kind of picture.

And today I don't think there is a good [search part] of statistics to calculate the overall market share for mobile search. That's why we only refer to our own overall search traffic share as benchmark to move that forward. But I think that longer term it shouldn't be too long to get there. Thank you.

Jiong Shao - Macquarie

Okay, great. Thanks Alex for the color.


Thank you. That brings us the end of the call. I'll hand it back over to Mr. Alex Xu for closing remarks.

Alex Zuoli Xu

I don’t have any closing remarks other than just say thank you for everyone who participated in the call. If you have additional questions please send me email or give me a call. Thank you.


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

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