Qihoo 360 (QIHU – Snapshot Report) reported second-quarter 2015 earnings per ADS of 66 cents, surpassing the Zacks Consensus Estimate of 50 cents on the back of higher revenues. Earnings per ADS exclude the interest expense of convertible senior notes but include share-based compensation expenses.

Revenues

Qihoo’s total revenue was $438.3 million, up 14% sequentially and 37.9% year over year, driven by continued momentum in online advertising. Reported revenues were within management’s expected range of $435 million to $445 million but missed the Zacks Consensus Estimate of $441 million.

Online advertising revenues were $293.9 million, up 19.8% sequentially and 71.6% year over year. The improvement was supported by increased monetization of user activities on Search Pages and strong contribution from mobile advertising.

Internet value-added service revenues were $122.2 million, down 8.6% sequentially and 16.4% year over year. The decline was mainly due to continued suspension of online lottery operations beginning March.

Margins

Reported gross margin was 76.2%, down 310 basis points (bps) sequentially and 280 bps year over year.

Qihoo reported operating expenses of $260.2 million, up 24.9% from $208.3 million reported in the year-ago quarter. As a percentage of sales, general & administrative expenses increased, while selling & marketing and product development expenses decreased year over year. The net result was an operating margin of 18.5%, up from 13.8% a year ago.

GAAP net income was $81.4 million or 42 cents, compared with $39.1 million or 20 cents in the prior quarter. Including share-based compensation expenses but excluding other one-time expenses, non-GAAP net income came in at $89.3 million, as against $43.4 million in the last quarter.

Balance Sheet

Qihoo exited the quarter with cash and cash equivalents, restricted cash and short-term investments of $1.28 billion versus $1.63 billion in the previous quarter. Accounts receivables were $220.4 million, down from $220.8 million in the earlier quarter.

Net cash generated from operations was $128.8 million, compared with $72.9 million in the last quarter. Cash capital expenditures were $31.6 million versus $35.7 million in the first quarter.

Recommendation

Qihoo continues to solidify its position as the undisputed leader in the Chinese Internet market on the back of its PC security products.

Qihoo plans to invest in product development and technology innovation as well as expansion of PC and mobile Internet coverage, going forward. Its consistent focus on Internet and product innovation has been the cornerstone of its success.

However, with intensifying competition, Qihoo’s prospects might be affected if it fails to expand and innovate products to cater to the changing tastes and preference of consumers.

Currently, Qihoo has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space are Globant S.A. (GLOB – Snapshot Report), ChannelAdvisor Corporation (ECOM – Snapshot Report) and Ellie Mae, Inc. (ELLI – Snapshot Report). While Ellie Mae sports a Zacks Rank #1 (Strong Buy), Globant S.A. and ChannelAdvisor carry a Zacks Rank #2 (Buy).