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Must-know NQ Mobile equity research

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Must-know NQ Mobile equity research PART 1 OF 5

Must-know: Has Muddy Waters sold NQ Mobile short?

NQ Mobile’s (NQ) impressive past

Up until the recent release by Muddy Waters, NQ Mobile (NQ” has impressed analysts with significant registered user growth and revenue growth since inception. The company, as it states in its own words, has been “firing on all cylinders” and the stock responded positively to the impressive growth and business success before fear struck with fraud accusations. Up until this news, the most recent news had been around a new product offering called NQ Live, which will be put into 470 million Android smart phones integrated with the operating system. In a sense, it will provide the Android user with a new tailored “home page” and provide the user with always-on content. With the significant revenue growth, ability to navigate NQ into a truly mobile platform company, and exciting product roll-outs, the management team has proven itself capable of continuing to fuel significant growth. Despite all of this, the stock has been given little credit in the face of short seller Muddy Waters. We discuss the associated mitigants to the Muddy Waters claim later in this report.

Must-know: Has Muddy Waters sold NQ Mobile short?

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Company overview

NQ Mobile Inc. provides mobile Internet services in the areas of mobile security, privacy, productivity, personalized cloud, and family protection. It operates through two segments, Consumer and Enterprise. The company offers NQ Mobile Security, a mobile security product that protects users’ mobile voice and data from malicious software, data theft, and privacy intrusion; and mobile security services, such as mobile malware scanning, Internet firewall, account and communication safety, anti-theft, performance optimization, hostile software rating, and reporting. It also provides NQ Mobile Vault, a mobile privacy product that ensures users’ digital privacy through active control and on-device encryption of content and communication, including contacts, SMS, pictures, videos, and call logs; and Android Booster, Mobile Manager, and NQ Mobile Call Blocker mobile productivity products, which enhance users’ time and relationship management. In addition, the company offers NQ Family Guardian, which allows parents to protect their children on smartphones; NQ Space, which provides personalized cloud services and synchronizes user information; and a cloud security and vault/storage software development kit. Further, it provides mobile games, Interest-based community applications, and advertising services; and enterprise mobility solutions, such as mobile device management solutions, bring-your-own-device platform, cross platform middleware/center enterprise server solutions, enterprise mobile security platform, industry mobility solutions, and architecting mobility strategies, as well as device sourcing, devices and application deployment and optimization, and training and support services.

The company was formerly known as NetQin Mobile Inc. and changed its name to NQ Mobile Inc. in April 2012. NQ Mobile Inc. was founded in 2005 and is headquartered in Beijing, the People’s Republic of China.

The Market Realist Take

For the second quarter ended June 30, 2013, NQ Mobile said net revenues increased 107.4% year-over-year to $41.4 million—exceeding the high end of its previous guidance of $38.5 million to $38.8 million. Net income attributable to NQ Mobile decreased 8.3% year-over-year to $1.9 million. Net income would have been $8.7 million, up 319.7% year-over-year, without the additional share-based compensation of $6.8 million incurred as a result of FL Mobile exceeding its operating and performance-based targets during the period. Net cash flow generated from operations was $11.1 million in the second quarter of 2013, compared with $1.9 million in the corresponding period of 2012. Cash and cash equivalents and term deposits together amounted to $128.4 million as of June 30, 2013.

NQ vies with companies like Qihoo360 (QHOO), Tencent (TCEHY), Baidu (BIDU), and Kingsoft (KSFTF) in the China mobile security space. Qihoo360 leads the Chinese Internet security market and faces competition from Tencent and search engine Baidu, which officially launched its anti-virus products in June. A report from Macquarie Research, which cited research from Sino MR, said that NQ has managed to grab 37.9% market share of mobile security users who installed mobile security software in 2Q13, and follows Qihoo, which had a 38.8% share. The report said that NQ has been trailing behind its competitors in user count mainly because of the freemium model it offers and has less organic traffic compared to its peers, which have high PC traffic.

In May 2013, there was speculation that Baidu and Tencent were in the running to acquire NQ. NQ had previously spoken about receiving interest from strategic and financial investors during its 1Q 2013 conference call but said “it remains focussed on delivering shareholder value by executing on its strategic plan and initiatives.”

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