Qihoos games are the same; the revenue is out of line a presentation

Regarding Qihoo 360 Technology Co. Ltd Matt Berry

7/18/2012

See the Video presentation http://tinyurl.com/arpuvideo

Disclosure: I am short QIHU. I am not infallible. Every investor must do their own due diligence. Every investor must make an individual decision based on his/her judgment of the company and the market. This is not a recommendation to buy or sell a security. I may not (and usually do not) post changes I make to my positions.

7/18/2012

Qihoo claims that web game revenue grew 248% from the same period last year.
Web games, according to Qihoo, made up about 25% of total revenues for the 1 st quarter of 2012.

Within IVAS web game revenue was 17.3 million, up 248% from the same period last year and up 28% from the prior quarter. ~Q1 2012 conference Call 12:20

7/18/2012

100 90 80 70 60 50 40 30 20 10 0

Average 64.5 RMB

ARPU average of 64.5

Typical online game companies in China and their monthly Average Revenue Per Paying User (ARPU).
2
All numbers are as of March 31, 2012, except for Renren, which is a 2011 average . Quarterly amounts were divided by 3 for monthly comparison.

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ARPU source material

Source material: Data as of March 31, 2012, except for RenRen, which represents an average for 2011. Quarterly ARPU was divided by 3. Monthly Average Revenue per Paying User (ARPU) for games operated in China was RMB99.9, compared with RMB92.8 in Q4 2011. ~ Shanda Games Reports First Quarter 2012 Unaudited Results Online games revenues increased by 22.9% from US$34.4 million in 2010 to US$42.3 million in 2011 due to the increases in revenues from purchases by end users of in-game virtual merchandise or premium features and an increase in the number of licensed and internally developed games offered through our online games center. . We had approximately 243,000 active paying users on a quarterly average basis in 2011, compared to 225,000 active paying users on a quarterly average basis in 2010. ~ Renren Inc 2011 20-F Annual revenue divided by 12 months then divided by quarterly average paying users = $14.51 average monthly ARPU in USD

= 2011 average Monthly ARPU of 92.34 RMB]

First Quarter 2012 . Average Revenue Per User ("ARPU") for online games was RMB228, up 3.1% QoQ and up 5.6% YoY Giant Interactive Announces First Quarter 2012 Results (Divided by 3 for monthly comparison.) ARPU 76 RMB.
average revenue per active paying accounts or ARPU for the quarter was RMB225, a slight increase of 2% quarterover-quarter and 7% year-over-year from RMB221. ~ Changyou Q1 2012 Earnings Call Transcript (divided by 3 for monthly comparison) ARPU 75 RMB. For the 1Q12 3-month period, domestic mainland China online game operations achieved average concurrent users ("ACUs") of 228k and aggregate paying accounts ("APAs") of 744k with quarterly average revenue per user ("ARPU") of RMB153. ~KongZhong Corporation Reports Unaudited First Quarter 2012 Financial Results (Divided by 3 for monthly comparison.) ARPU 51 RMB. Monthly Average Revenue per Paying User (RMB) 47 ~ Kingsoft Announces 2012 First Quarter Results Shek Hon Lo - SVP and Deputy CFO: In terms of the ARPU range for MMOG is 90 to 130 per quarter and advanced casual game is between 50 to 95. Tencent Holdings Ltd Q1 2012 Earnings Call Transcript (I took the top numbers, then divided by 3 for monthly comparison.) Monthly ARPUs of MMOG 43 RMB and Casual Games 32 RMB

http://tinyurl.com/qihuarpu

7/18/2012

Qihoo is different.
Qihoo 360 is running a very unique business model that is hard to find a close comp in China or globally.
~ SEC 6-K exhibit 99.2 filed 12-16-2011

7/18/2012

Got that right. Qihoo sticks out like a CEO in an orange jumpsuit.
Alex Xu, CFO
Q1 2012 conference Call Jan basically, as I mentioned the game business at the end of the 3rd quarter Im sorry, March, we have 87 games up and running on the platform, 139,000 paid customers uh, paid players and the ARPU for the month was about 440 RMB per month. [47:18 Listen: ]

440 is so painfully off the chart that Im going to help out. Lets say that the CFO means Average Revenue per Paying User before splitting revenue with developers 70:30 so I trimmed 30% off the top. (He didnt say that, but Im trying to be generous. Doesnt help much.)

and which is it? For

the month or per month ?

7/18/2012

See. If he didnt mean ARPU before revenue share, the number is worse, as pointed out by this interviewer in China.
(From the i Wall Street snowball column: Professionally translated)

Question: If your game revenue is all shared income, then according to your published figures, on average every paying game player, every month, will spend around 550 RMB on games. Is this a normal (level) of expense? [Qihoo CFO Alex] Xu Zuoli: Our ARPU is 400 RMB, which is identical to the average value of the overwhelming majority of domestic web-based game companies and platforms, and is nothing special. ~
Qihoo Zuo Li, Xu, CFO: navigation page income 70% of the total advertising (A Google Translation)

Don't think so Alex

400 350 300

250
200 150 100 50

Original Chinese Text: 550RMB

ARPU400RMB
Original article: CFO70%

7/18/2012

For those who were hoping that QIHU would please clarify
They did ... in an SEC filing in response to accusations that their ARPU was out of line, so youd have to think that they got it right this time right?

7/18/2012

Statement filed with the SEC, December 2011: (here) The monthly ARPU has been fairly stable at around RMB380.
monthly ARPU has been fairly stable at around RMB380.
400

350
300 250 200 150 100 50 This one was filed with the SEC

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Qihoo then says in May 2012 that they have 440 ARPU.
What were they thinking?

Alex Xu, CFO Q1 2012 conference Call Jan basically, as I mentioned the game business at the end of the 3rd quarter Im sorry, March, we have 87 games up and running on the platform, 139,000 paid customers uh, paid players and the ARPU for the month was about 440 RMB per month. [47:18 ]
9
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Casual games earn less than MMO games.

Shek Hon Lo - SVP and Deputy CFO: In terms of the ARPU range for MMOG is 90 to 130 per quarter and advanced casual game is between 50 to 95. Tencent Holdings
Ltd Q1 2012 Earnings Call Transcript (To help Qihoo out with the comparison, I took the top numbers, then divided by 3 for monthly comparison.) Month ARPUs of MMOG 43 RMB and Casual Games 32 RMB.

10

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Lowest average age and the lowest personal monthly income

And all the survey results indicated that

the users of large & medium sized casual games had the lowest average age and the lowest personal monthly income. ~
iResearch

11

7/18/2012

Qihoo doesnt do MMO games, which earn more. So why advertise that?
Theyre not MMO
Qihoo 360's gaming

Theyre not MMO

Qihoo 360s web game

ARPU is not comparable to that of other publicly listed Chinese gaming companies because almost all of them are focusing mainly on MMORPG games. ~ Qihoo 360
Responds to the Citron Report

ARPU is very much in line with other major Non-Social WEB game developers and platforms in China. Yet the short sellers tried to mislead the public by comparing our ARPU to that of MMORPG game developers or SOCIAL game platforms. Comparing

our Non-Social WEB games

with MMORPG games or SOCIAL games is like comparing apples to oranges. It is simply wrong, period. ~ Short-Sellers Are Wrong Because
Qihoo 360 Is Different

12

7/18/2012

Huh? There is nothing unique about Qihoos web games

They are the same games that other web

operators are hosting.

13

7/18/2012

Renren games that are identical to Qihoo games

Same Games
300 250 200 150 100
Qihoo is unreal, even at 300 ARPU. And 440!?

Click a logo to go to a Renren or Qihoo Game

Bouncing Church (DDTank)

Ghost Shrouded
Dream Feixianguan Golden Age Three Kingdoms

Generals
Naruto World

Knight World
50 0

Renren

Qihoo

Troubled world

14

To simplify communication in English and to help readers independently verify the facts, I have used Google translations of the Chinese games. Links are as of 7/15/12. Like pop songs, these games will eventually be replaced with newer games.

Long Will

7/18/2012

Renren & Qihoos Identical Games

Renren & Qihoos Identical Games

Era of the Ocean (The Power of Capital)

Prehistoric Myth Mortal Comprehension Dream Cultivation Wolong Yin

Battle of Wits
Datang Real Dragon II Happy Sword Blade of the Sky The Decade Sword The Martial Arts Situation

The Martial Arts Hero

Fantasy Basketball Disdain of the World Three Blood Rich Countries

King of the Sailing

Ming Dynasty Immortal

15

Wonderland Fantasy

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Renren & Qihoos Identical Games

Nine Days Cents a Dream

Battle of Wits Cultivation Pass Blood Journey

Dragon God Tomb Star World Heroes Expedition Heaven and Earth Football World (All Soccer)

Call them what you will, QIHUs games are the same as other operators games.

Business Tycoon
God of Cookery

16

Little Ninja

7/18/2012

Some other operators for the game, Immortal

Baidu game Click here 616wan Click here 65wan Click here 01yo Click here Three Realms game Click here 57k Click here

The preceding slides have

only been a comparison between Qihoo and Renren. Qihoos hosted Games are also hosted by many other web game operators. For example, here are other hosts for the game, Immortal ( )

Pipi game Click here

Daisy Game Click here Want to play Click here

To accompany tour Click here

Fun network Click here UFO game Click here E7uu Click here 49you Click here 9377 Click here 96PK Click here 56uu Click here

5Q play Click here

Heart game Click here UU178 Click here

17

655u Click here

91 Click here

7/18/2012

360, just one of many game operators

18

7/18/2012

Top 10 games represent 60 to 70% of game revenue.

Professionally translated:

[Qihoo CFO] Xu Zuoli: Go to our web-based games platform wan.360.cn and take a look; basically one can determine the ranking of games according to the sequence of pictures shown, we do not have any one game that is dominant. Question: What percentage of games revenue is contributed from those in ranking in the top five?
Xu Zuoli: Those ranking in the top ten represent 60-70%.
(Original / Google Translated)

19

7/18/2012

At first glance Qihoo appears to have an exclusive game. Taking a second look
Mortal Comprehension 2 Legend of Love Legend of Love (AKA Legend of the Situation) is the same game as Mortal Comprehension 2 both developed by The Guangzhou Philippine sound Information Technology Co., Ltd Google Translation of blog:The first thing to note is that the Legend of love and mortal comprehension is the same game different, but the agents, such as 4399, 91wan, etc., 360 The above is known as the Legend of the situation.( Here)

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7/18/2012

Mortal Comprehension 2 2 Legend of Love

Wan.360.cns is also known as 2, which has many game operators : Daisy Game, Brothers Play, Special Tour, Cocoa States, UFO Game, YA 247, e7wan, e7UU, SNSyx, 91yx, 65wan, Three Realms Game, Game Fun! EQ Platform, 92you, 37play, YOUC Network . And more

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7/18/2012

Click through to Kanke.coms Web Game Portal to see the many operators that carry the same games as Qihoo. (The English titles link to Google translated pages; the Chinese titles, to the original pages.)

The Divine Comedy (Shen Qu)

JX Romance

One Hundred Make Cents

Wan.360.cns Legend of Love played through other platforms as Mortal Comprehension 2 2 The Big Dipper break the sky II Dream Feixianguan Sea Laugh
The Magic of the Wizard (In Beta Testing (7/15/12), 17173 article: Not found in Kanke.com data base. Main operator: 5ay.com, developer is Kun Bo Chang-hong Technology Co., Ltd. )

Blood Piece Ghost Once upon a Time Long Will Naruto World

22

Immortal

Golden Age Three Kingdoms

Pa Knife

Bouncing Church (DDTank) 7/18/2012

Screen shot: 7/15/2012

Qihoo 360

Changyou.com Ltd. (CYOU) owns 68% of Shenzhen 7road Technology Co., Ltd the developer of the popular games, Shen Qu and DDTank. Google usually translates these games as Divine Comedy and Bouncing Church, respectively.

CYOU 2011 SEC 20-F

DDTank, which Google translates as bouncing church

23

7/18/2012

[Qihoo CFO] Xu Zuoli: Go to our web-based games platform wan.360.cn and take a look; basically one can determine the ranking of games according to the sequence of pictures shown, we do not have any one game that is dominant. (Here)

Average revenue recognized per active charging accounts for 7Roads games were RMB50, an increase of 32% quarter-over-quarter. The increase was mainly due to players average spending level for Shen Qu, which is a role-playing game, being higher than it is for DDTank, which is an action game. ~ 6-K as Filed with SEC & as reported on Changyou.com.

24

7/18/2012

ARPU isnt just revenue for Qihoo. It is also what gamers spend.

25

7/18/2012

Same games, same platforms, but different revenue? Same chunk of cheese to start with, same cheese grater, but .

26

7/18/2012

When you look at the pizza, you know whose 2 pound chunk of cheese actually passed through the cheese grater and whose didnt.

27

7/18/2012

Whose Cheese got Grated?

Again, Qihoos disclosures are vague. Out of kindness I fill-in the blank and record ARPU as 300 and not 440.

There is no difference between Qihoos games and other operators games.

The only distinction is the price that gamers pay.

300

250

200

150

Whose Cheese got Grated?

100

50

0 Tencent Casual Games Qihoo's Chunk

28

7/18/2012

Analysts have said that Qihoos ARPU is in-line with other web game operators in China.
How is that possible?

29

7/18/2012

If this is not a bluff, show your cards.

Analysts some examples please.

30

7/18/2012

Qihoos games are the same; the revenue is out of line a presentation
Regarding Qihoo 360 Technology Co. Ltd Matt Berry
7/18/2012

See the Video presentation http://tinyurl.com/arpuvideo

Disclosure: I am short QIHU. I am not infallible. Every investor must do their own due diligence. Every investor must make an individual decision based on his/her judgment of the company and the market. This is not a recommendation to buy or sell a security. I may not (and usually do not) post changes I make to my positions.

7/18/2012