Controversial Internet software maker Qihoo 360 (NYSE: QIHU), accused by some of inflating its user data, has just announced some nice new figures that show a big jump in first-quarter sales tempered by a forecast for slowing growth in the current quarter. But what caught my attention in the report was the more unusual announcement that the company is appointing a new “co-CFO”, a title which I have never heard before and a move that, for me at least, increases my suspicions that perhaps there may be some truth to claims of exaggerated accounting. Let’s take a quick look at the actual results, as investors seem to be focused on that element of the report, with Qihoo saying its revenue tripled in the first quarter to $69.3 million, as it swung back to a profit after reporting a net loss a year earlier. (earnings announcement) But it also predicted a sharp slowdown in its top-line outlook, with revenue growth expected to slow to just 100 percent, not a bad figure on the surface but still about half the 200 percent rate it just recorded. Investors seem to be focused on the big revenue growth and return to profits, bidding up Qihoo shares nearly 5 percent during regular-hours trade on Tuesday in New York before the results announcement came out. Shares also rose another 4.5 percent in after-hours trade after the report came out. But below all the pretty numbers, the company near the bottom of its report also announced it is promoting its vice president of finance, Jue Yao, to the new position of co-CFO, sharing the role with the current CFO Alex Xu, citing its rapid business expansion for the move. I should at least credit Qihoo for being relatively transparent about this move, as the only reason I even noticed it was because they included it in the headline of their earnings report. At the same time, this kind of move involving a high-ranking financial official at a company is always a bit of a red flag that perhaps something is happening behind the scenes that the company would prefer investors didn’t know about. In Qihoo’s case, the company has already been living beneath a cloud for the last half year, following the release of a report by a short seller named Citron last fall claiming that many of the company’s figures were vastly overstated. (previous post) Qihoo’s shares largely survived that attack, even after Citron issued another report repeating its allegations. But then early last month Forbes magazine published its own article also questioning several of Qihoo’s numbers, again strongly implying that the company’s accounting might be exaggerated and that its accountant, Deloitte, would probably pay extra scrutiny to Qihoo’s records in upcoming audits. (previous post) Unlike the Citron report, the Forbes article seemed to carry a bit more credibility since the magazine wasn’t trading in Qihoo shares. But Qihoo strongly denied any wrongdoing, and its share are right now at around the same level where they were before the first Citron attack. This new co-CFO announcement looks to me like something is indeed happening behind the scenes, though I don’t want to speculate what. But I do feel fairly confident that the Qihoo accounting story isn’t over just yet, with 1 or 2 major new developments likely in the next 3-4 months.
Bottom line: Despite an upbeat earnings report, Qihoo 360’s naming of a new co-CFO could indicate an ongoing saga of allegations of exaggerated accounting isn’t over yet.
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