July 3, 2012 (Chinavestor) In order to understand Qihoo 360 Technology (NYSE:QIHU), investors have to drill down into the smart phone industry and search indusry in China, in addition to security software and related businesses, we wrote about: Business overview: QIHU.
Smart Phone Industry
There are two types of smart phone business models in China. The original one is the smart phone manufacturing companies which produce and deliver smart phones directly to telecommunication service companies, such as China Mobile (NYSE:CHL), China Unicom, (NYSE:CHU) and China Telecom (NYSE:CHA); the other way for those companies to do business in smart phone industry is to tailor mobile phones for Chinese internet companies that have large number of users. For example, those internet companies include Baidu (NASDAQ:BIDU), Netease (NASDAQ:NTES), and Qihoo 360 Technology (NYSE:QIHU), etc.
Not long ago, Qihoo 360 Technology (NYSE:QIHU) has named its first tailored mobile phone “Shining”, which is manufactured by Huawei Technologies Co., Ltd, and recently Qihoo 360 Technology (NYSE:QIHU) has announced another tailored smart phone by Alcatel-Lucent, “AK47”. These two mobile phones are being sold in the market. QIHU, as an internet company that steps into smart phone industry, will benefit from this strategy in the future. One of the most important advantages for Qihoo 360 Technology (NYSE:QIHU) is that it neither engages in manufacturing mobile phones, nor is responsible for the customer services after phones have been sold. This strategy not only avoids the question of severe cost and price competition that phone manufacturing companies are facing, but it also grants Qihoo 360 Technology (NYSE:QIHU) the opportunity to increase its user base in mobile internet industry; while this industry is considered as the future trend in the whole internet industry.
The question that investors would potentially ask is that how Qihoo 360 Technology (NYSE:QIHU) could make profit from this newly expanded business. As the QIHU-tailored smart phones, these mobile phones would be installed with QIHU’s featured software, such as 360 Safe Guard, 360 Browser, and etc. Whenever the mobile users click the link supported by 360 Browser, shop through the website or app installed in 360’s smart phones, or search in the browser, Qihoo 360 Technology (NYSE:QIHU) would receive revenue from partners that are cooperating with it. This strategy is one of the many ways that QIHU tries to leverage its large user base gained and fostered in the past. Compared the cost that QIHU is going to spend under this business, the potential revenue is very large, which means it can help increase QIHU’s profit margin in the future.
Although there are advantages for Qihoo 360 Technology (NYSE:QIHU) to conduct this business, it is possible that this business may not contribute to QIHU’s revenue and profit as expected. There are several factors that need caution and follow-up in the coming quarters. One is the total number of QIHU-tailored phones that are sold. The smart phone industry in China is very competitive. For example, there are iPhone, HTC, and Samsung, those of which are provided by multinational corporations and are very popular nowadays. However, these phones are relatively expensive for many customers in China, and the low price smart phones still constitute a substantial portion of the total smart phone market. This specific market might be the target of QIHU’s tailored smart phones. In addition, even in the low price smart phone market, QIHU still faces severe competition. Recently, as announced by its CEO, Jun Lei, one smart phone company (considered as QIHU’s major competitor in the smart phone industry) called “Xiaomi” has been successfully raised $216 million with a total valuation of $4 billion. This company has sold out more than 5 million smart phones named “Xiaomi”, and its CEO has been engaged the oral fight with QIHU’s CEO, Hongyi Zhou, about the cost and features of the “Xiaomi” and QIHU-tailored smart phones. Not to mention other internet companies, such as Baidu.com (NASDAQ:BIDU), are also competing in this market.
Another factor that is important is the real revenue and profit Qihoo 360 Technology (NYSE:QIHU) can actually make from this business. Because chances are even though Qihoo 360 Technology (NYSE:QIHU) has large number of tailored smart phone users, the revenue and profit would not be as good as expected. Thus in the future quarters, he financials regarding to this business, if any, would need much attention.
Recently there are rumors regarding to Qihoo 360 Technology (NYSE:QIHU) that it is preparing to step into general searching industry, directly competing with other search companies like Baidu.com (NASDAQ:BIDU) and Sogou in China. Right now, QIHU is providing vertical searching services for online videos. The revenue generated from this vertical searching service is not illustrated in QIHU’s financial report, probably because it’s still very small compared to other sources of revenue. However, the searching industry is far from mature in China, and IF Qihoo 360 Technology (NYSE:QIHU) could successfully gain part of market share both in the vertical and general searching market, then it would substantially benefit from this industry in the future.