China Internet Firm Qihoo Says Citron Allegations False

U.S.-listed Chinese online services provider, Qihoo 360, announced a 190 percent jump in revenues for 2011 in an unaudited financial statement released Thursday, but U.S.-based research firm Citron Research alleges in a report posted on its website that there are “gross inconsistencies” in Qihoo’s financials.

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[QIHU  Loading...      ()   ] Chief Financial Officer, Alex Xu, told CNBC that internal investigations conducted in recent weeks have found no wrongdoings and that the company will file its audited financials by the regulatory deadline of April 30.

“In terms of the allegations made by Citron, even though all of them are false and misleading, we take them very seriously. We conducted an internal review organized by (an) audit committee...we concluded that all the allegations are either misleading or totally false,” Xu told CNBC.

Citron, which has raised questions about the credibility of the Internet company’s financials in the past as well, reiterated on Thursday its concerns that Qihoo’s earnings’ report was “grossly misrepresented.”

Andrew Left, Manager at Citron Research, told CNBC the company had inflated revenue generated from advertising, particularly from the text links on its website.

A text link is text that is hyperlinked to a page on another website, in this case to the page of an advertiser.

Qihoo's claims that its annual revenue from text links in excess of $110 million is "impossible," as text links make up one percent or $80 million of all online advertising revenue in China, says Citron.

“I do not believe the growth in their current advertising revenue,” Left said adding that their business model of selling text links was “archaic”.

Citron also says in its report that the Internet company’s average revenue per user (ARPU) from its gaming products is “widely out of scale” with publicly listed competitors.

Qihoo claims ARPU of RMB380 ($60) per month, while similar online games from publicly traded competitors earn less than RMB100 per month, according to the research firm.

Citron, which says in its report that Qihoo has a slim chance of passing an audit or avoiding an investigation by the U.S. Securities and Exchange Commission, is taking a short position on the company.

However, other analysts including Wendy Huang, Senior Media & Internet Analyst at RBS, are upbeat on the prospects for the web firm.

“Few companies can deliver such stellar growth these days. Qihoo this quarter beat the street expectations, beat our estimate by 12 percent from the top line to bottom line, and also operating margins are improving every quarter,” she said.

Huang says Qihoo is an attractive investment because of its huge user base of more than 400 million a month, which is growing and can be monetized by the firm.

“While, Qihoo is not a popular company amongst their industry peers but it is becoming a necessity for most of the Internet users (in China),” she said.