Qihoo 360 Profit Declines as Search Costs Erode Ad Sales

Qihoo 360 Technology Co. (QIHU), maker of China’s most-popular Web browser, said second-quarter profit fell 37 percent as the company boosted spending on new services such as a search engine, eroding higher advertising sales.

Net income declined to $7 million in the three months ended June 30, from $11.1 million a year earlier, Beijing-based Qihoo said in a statement today. Profit missed the $10.1 million average of seven analysts’ estimates compiled by Bloomberg. Revenue more than doubled to $72.8 million.

Qihoo is working to gain sufficient users for its search engine in China, challenging market leader Baidu Inc. (BIDU), to generate advertising revenue from sales of keywords. Qihoo will see “cost pressure” as the company increases spending on product development and networks, Co-Chief Financial Officer Alex Xu said.

“When you are ramping up your search service, and traffic volume is going up, you will see an increase in bandwidth costs,” Xu said on a conference call. Apart from the search engine, Qihoo is also focusing its spending on services for smartphones and cloud-computing technology, Xu said.

Qihoo rose 4.4 percent to $21.10 in New York trading before the earnings announcement. The stock has gained 34 percent this year, outperforming Chinese Internet companies including Baidu and Sina Corp. (SINA)

Third-quarter revenue may rise as much as 73 percent to $82 million, Qihoo said. The forecast compares with the $77.8 million average of eight analysts’ estimates compiled by Bloomberg.

‘Major Player’

Qihoo is adding users for its search-engine service, which started last week, by targeting customers of its Web browsers and hao.360.cn online directory, Chief Executive Officer Zhou Hongyi said on the call. Qihoo aims to be a “major player” in China’s search market in the long term, Zhou said.

Advertising sales rose 90 percent to $50.8 million, Qihoo said. Most of the ad sales are generated by hao.360.cn, Xu said.

Product development spending rose to $34.9 million from $12 million, Qihoo said.

Qihoo’s 360 Safe Browser accounted for 36.2 percent of Internet surfing time in China in March, more than the 33.2 percent for Microsoft Corp. (MSFT)’s Internet Explorer, Xu said last month, citing research company iResearch.

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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