Matt Berry's  Instablog

From the 2012 first quarter announcement, Qihoo 360 Technology Co. Ltd.

We now have updated numbers for the "monthly active users" of all Qihoo's products.

"Total monthly active users of Qihoo 360's products and services reached a record 411 million in March 2012, compared to 345 million in March 2011."

When we put this quarter's numbers next to the preceding quarters, what kind of story do they tell?

The first thing we note is that sequential quarterly growth is actually slowing. For the last five quarters the numbers have trended downward.

Consider this quarter's growth over last quarter. We see that just three months ago the monthly active user base was supposed to be 402 million (Dec 2011 20-F). That is a difference of 9 million. Quarter over Quarter, Qihoo's monthly active user base grew only 2%.

Look at the preceding chart again. For March '11, one year ago, quarterly sequential growth was an eye-popping 19%, and last quarter's was only 2%? Is Qihoo's user growth slowing?

The answer is not that easy. At first glance, Qihoo's annual numbers look impressive.

From '09 to '10 we see that Qihoo's growth slows … then resurges in 2011.

Which is it? Are we slowing down or speeding up? … or just making things up as we go along?

When we plug in the 12 months ending March 2012 we get a very different picture:

What exactly happened in 2011?

Qihoo had a prospectus to file and a tour of US capital markets to make. January 2011 was highlighted. Look again at the 12 months ending December 2011 and then the 12 months ending three months later, March 2012.

"In January 2011, we had 339 million monthly active Internet users, representing a user penetration rate of 85.8% in China..." ~ Prospectus

"We have grown significantly since we commenced operations in 2005. Our monthly active Internet users increased from 122 million in December 2008 to 231 million in December 2009 and 339 million in January 2011." ~ Prospectus

Did the cavalry really come riding over the hill just in time?

In the following illustration, you can see that the single month of January 2011 (data highlighted in the prospectus) towers not only over the two succeeding months combined ‒ March and February 2011, but also over all other quarters.

Without a doubt, January was a month to be cherished by Qihoo lovers around the world. The user base grew by 17% in this single month ‒ January. The next two months combined only grew 2%.

Qihoo claims to have added 112 million users in 2011, 44% of that was added in the single month of January.

If Qihoo just wanted to make these numbers up, who could stop them?

(click to enlarge)

Disclosure: I am short QIHU.

QIHOO 360 Technology Co. Ltd.

There is a lot of confusion among investors about Qihoo's browser market share. Does Qihoo really have 60% market share in China? (EG, Here)

28% and 2nd place.

In reality, Qihoo's browser utilization rate is 28%, as of January 2012 -- and as one would expect it is Microsoft's Internet Explorer which is the market leader.

Citron Research already illustrated this by citing the source -- cnzz.com -- but the confusion remains.

• See Google translated page here.
• Original Chinese page here.
• See also Baidu.com statistics: here
• A Google Translated page illustrating Baidu's data here ‒
• and the same in original Chinese page here)

So why are so many investors confused?

Here is Qihoo's 2011 third quarter press release, …

"Our browsers' user penetration hit a record high of 57%, effectively becoming the market leader in September."

But in September 2011 Qihoo's browser was clearly not the leader.

Using the statistics page from Baidu, slide to the September 2011 time period and you will see Qihoo's 21% for 360 browser sandwiched between 59% worth of Microsoft browsers … (Confirm Qihoo 360's Chinese Characters in the Google translator here.)

(click to enlarge)

Citron Research called Qihoo out on this data mismatch, showing that it is impossible for Qihoo's browser to have 57% while MSFT has 55%. (here and below)

(click to enlarge)

Next Qihoo updates its SEC disclosure, this time using Internet Explorer as a reference point … in the lead ... but the damage has already been done.

Qihoo's 360 browsers have "... a user penetration rate of 59.5%"

and are "...second only to Microsoft Internet Explorer in China."

(SEC filing DEC 2011 20-F here)

All of this only makes sense if we are talking about what users have on their computers … not what they actually use. For example I have three different browsers installed on my computer, but I only use one of them ... 99% of the time. So when Qihoo refers to +50% it must be referring to the number of users who have the software on their computer. When Baidu refers to Qihoo's browser as 20-something percent it refers to actual usage relative to other browsers ... a number which is much more meaningful when making an investment decision regarding Qihoo.

In the 2011 third quarter announcement mentioned above, which does not use Internet Explorer as a reference point, Qihoo's readers are easily left with the impression that the 360 browser dominates the Chinese marketplace ... with 60% usage. Again,

"Our browsers' user penetration hit a record high of 57%, effectively becoming the market leader in September."

The second half of this sentence is simply untrue, and it renders the first half not merely incomplete, but clearly misleading.

And what kind of browser "war" is this anyway? ... to be the best imitator?

(click to enlarge)

Here is a juxtaposition of both MSFT's IE and Qihoo's 360 browser icons. How many novice users might there be who do not know the difference? (I took this snapshot from an online history of Qihoo's browser "war." It's an interesting read: Here. This history incidentally illustrates the scope of the confusion; even though he is a critic, he too believes that Qihoo has surpassed Microsoft for browser dominance in China.)

… As for Qihoo's technology ….

(SEC filing DEC 2011 20-F here )

Is it Qihoo who occupies second place in China's browser war ... or is it just Microsoft again?

Is Qihoo's 360 browser dominant in China? No.

1) Do many people think it is? 2) Is it growing?

For "Yes" as an example of the first question and "Yes" as an answer to the second, read this interesting history: How Qihoo 360 Won the Browser War in China

Disclosure: I am short QIHU.

Additional disclosure: and long MSFT (but not for reasons outlined here)

[under construction]

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Disclosure: I am short FMCN.