Qihoo 360 Technology Co Ltd (NYSE:QIHU) released its latest quarterly results on Sunday, posting non-GAAP earnings of 50 cents on revenue of $318 million. Earnings per average diluted share were 30 cents.  Analysts had been expecting earnings per diluted share of 26.6 cents on $309 million in revenue.

Qihoo 360

In spite of the earnings and revenue beats, however, investors started selling off shares of Qihoo on concerns about the company’s margins.

Qihoo 360 beats guidance

The Chinese company had previously guided for second quarter revenue of between $300 million and $305 million. The main driver was good mobile monetization and search numbers. Non-GAAP operating profits were $69.7 million, a 28% year over year increase. Non-GAAP operating margin was 21.9%, compared to 36% last year.

In a research note dated Aug. 25, 2014, analysts Philip Wan, George Meng and their team said Qihoo’s results demonstrate strong momentum in revenue. The company reported $171 million in online ad revenue, which made up about 54% of its total sales. That’s compared to $140 million in the previous quarter and $91 million in the same quarter a year ago.

Internet value-added services grew 140% year over year to $146 million.

Analysts react to Qihoo’s earnings results

The Morgan Stanley team notes that the main reason Qihoo’s margins declined was because of heavy investments, as the company sacrificed margins for growth. The Chinese company’s gross profit margin fell to 79% for the quarter. Qihoo invested heavily in marketing and personnel costs, as it kept strengthening its brand and position in what is an increasingly competitive industry.

The analysts say the company provided solid guidance for the third quarter. Qihoo projects sales to be between $360 million and $365 million for the quarter. That’s compared to the consensus estimate of around $360 million and represents a quarter over quarter growth rate of between 13% and 15% and a year over year growth rate of between 92% and 94%.

Qihoo reports solid user growth

Qihoo reported 496 million in monthly average users of its PC products. That’s a 4% quarter over quarter increase and 8% year over year increase. Its browser hit 339 million monthly active users, a 2% increase quarter over quarter and 5% increase year over year. Qihoo saw the total number of mobile security product users on smartphones rose 19% quarter over quarter and 90% year over year to 641 million.

The company’s daily clicks per startup page visitor were 5.9, slightly lower than last quarter’s 6.3 but a bit higher than last year’s 5.2. Qihoo’s internet search traffic share surpassed 30% just a few days ago.