Putting the Boxing Gloves Back On, Citron Seeks Qihoo’s True Advertising Revenue [UPDATED]

[UPDATE on 12/06 at 11pm BJ time: Qihoo has responded in a press release saying that Citron’s latest report contains “numerous errors of fact” and has undercounted the paid-for ad links on its homepage by about a half. Read the Qihoo presser here].

Round 3! Fight! Here we go again, as the American short-sellers Citron Research unleashes its third attack on the Chinese anti-virus vendor Qihoo 360 (NYSE:QIHU). It’s part of an ongoing exposé by Citron into what it sees as a company that “has either not been forthright about its revenue model […] or there is a financial fraud unfolding.”

After criticisms of its previous two posts – including by PO – that Citron doesn’t understand China, Citron has this time focused solely on the math. It claims that Qihoo’s likely homepage advertising revenue – which is the greatest source of income, because the security software is largely free – is a mere US$5.5 to 8 million per quarter, which is far short of the $20.9 million that Citron has deduced it ought to be, on the basis of Qihoo’s own revenue analysis for Q3 2011 (pictured below):

Show Me the Ad Revenue!

Citron found this alleged major disparity by looking at the links on Qihoo’s directory homepage – hao.360.cn – and finding the ones that are tracked, and thereby likely paid-for. Of the hundreds of links on that much trafficked site, it reckons there are about “60 to 65 links with tracking IDs to the websites of third party entities,” which is about the right balance that can also apparently be found on Baidu’s (NASDAQ:BIDU) directory homepage, hao123.com.

From that tally of a supposed 65 paid-for links, and applying an average fee of 200,000 RMB ($31,000) per link per month, Qihoo’s homepage revenue comes out at just $6.1 million. Even allowing for some of those links being more valuable, Citron claims that the income from homepage ads could not possibly exceed $8 million.

Here’s a section of that homepage, photoshopped by Citron to illustrate that green links are probably paid-for, red ones are self-referring, and yellow ones are untracked and presumably free:

Follow the money: Citron presumes that only the links it has made green are paid-for. (Image source: Citron Research)

Remember AltaVista?

In addition to that, Citron claims that Qihoo is cheating on its online gaming revenue stats as well, which can be explored at the source link below.