Article / 04 September 2015 at 4:15 GMT

Earnings Review: Qihoo results raise more questions than answers

China Watcher / Shanghai
China
  • Qihoo's revenues of $438.3 million were in-line with expectations
  • However, it did not provide third-quarter guidance
  • Management also failed to give any new commentary on the privatisation bid

By Neil Flynn

As it has done almost consistently since its 2011 IPO, Chinese tech firm Qihoo beat analysts' consensus for revenues and earnings. However, the firm declined to give guidance for the coming quarter, and did not hold an earnings conference call, at a time when major questions are being asked by investors about the state of the current privatisation bid. 

This means that the earnings release hasn’t really answered any lingering questions. Below are the two key points from the announcement.

Headline results

It should come as no surprise that Qihoo failed to disappoint with its revenues and earnings for the second quarter. Revenues of $438.3 million were in-line with expectations and fell within the range that management guided in the first-quarter earnings release, while non-GAAP earnings per share (ADS) of $0.82 beat the consensus of $0.72. 

The first quarter was disappointing for all Chinese firms, but this was due to the late timing of Chinese New Year, and hence the lost revenue from the first quarter would have been transferred to the second quarter. This is evident for Qihoo, which confined the first quarter as an anomaly.

Qihoo's Revenue
Source: Qihoo Investors Relations. Create your own charts with SaxoTrader; click here to learn 

Usage data remained strong on both PC and mobile formats, with the firm claiming a user base of 96.6% of all Chinese internet-connected PC users. Likewise, its industry-leading mobile security product 360 Mobile Safe has claimed 799 million users. 

This will likely enjoy further growth in the coming quarters as the smartphones that have been released through the firm’s joint venture with Coolpad will all be preloaded with Qihoo’s apps. Unfortunately, due to the lack of commentary in the earnings release, and the absence of an earnings conference call, the company has provided very little other information about the state of its business.

Offering the bare minimum to investors


In my earnings preview last week, I stated that Qihoo’s management should either inform investors that a new bid is coming at a lower price, or that the current bid would be scrapped, which are both logical and expected outcomes of the current privatisation bid fiasco, given that the buyout bid of $77 per share currently offers a 53.5% premium over last night’s share-price close.

I also added that the worst thing that management could do would be to say that the bid is an ongoing process and no decision has been made. This is because there are serious doubts about the ability to raise the required funds for the buyout, and even if they were available, the proposed bid is far too high, and management could easily reduce it by at least $10 per share. 

However, I have clearly overestimated management’s regard for shareholders, as they not only gave no further updates on the progress of the bid, but also gave no third-quarter guidance, and didn’t hold an earnings conference call.

This has left investors in limbo, because if the company can’t provide the most basic information to investors about the state of the company, then why should investors continue to have faith in it? It also brings up a wider issue of the differences between Chinese and US corporate governance. 

Chinese firms trading in the US are typically valued at a discount to their closest US equivalent, due to what I call the "China Discount". Aside from the fact that most Chinese firms focus almost entirely on their domestic market, and hence are difficult for Western investors to understand, the China Discount is where investors reduce their valuation of a Chinese firm because it’s Chinese, and they therefore carry the implied risk of financial irregularities and lower levels of corporate governance. 

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 Elephant in the room? Qihoo shone no new light on its privatisation bid. Photo: iStock

As a China-focused analyst, it’s frustrating that large firms such as Qihoo would offer such little information to their investors at such a critical time, and will likely only reinforce the belief among Western investors that greater care must be taken when investing in Chinese firms.

The confusion that Qihoo has brought upon its investors can be taken in two ways. First, Qihoo simply wants to avoid the elephant in the room – the privatisation bid – and has done the bare minimum in order to dodge the issue for the next three months. Second, perhaps the firm feels that it doesn’t need to issue guidance, and doesn’t need to talk about the future prospects for the company and the industry because the bid will be completed before the next earnings release, whether that is at the current or a lower price. 

While both are possible, and I’m leaning more towards to the former, investors are the real losers of this management’s intention to avoid keeping investors informed. 

– Edited by Gayle Bryant

Neil Flynn is a China watcher based in Shanghai. Follow Neil or post your comment below to engage with Saxo Bank's social trading platform.

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