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Welcome to Part 2 of the SludgeReport (SR) interview with NQ Mobile Co-CEO Omar Khan and Vice President of Capital Markets Matt Mathison. Part 2 focuses on NQ’s business strategy. Part 1 focused on the broader company, including the targeting by short sellers, the late filing of the 2013 20f, and the resulting nosedive in share price over the past eight months. It may be found here.
Globally speaking, Khan indicated the pace of channel partnership and deployment of new technologies was accelerating quarter over quarter in both the enterprise and consumer business segments. He attributed this sustained expansion to the team’s ability to stay focused on the business, while ignoring distractions, including the noise of the capital markets.
When asked for a broad thesis for investment in NQ Mobile, Khan said, “Both on an enterprise and consumer side we have been able to prove that we can execute the strategy laid out two years ago. The growth prospects of that strategy are still well ahead of us”.
Enterprise business growth strategy
On July 15, 2013, NQ Mobile acquired the remaining 45% equity of NationSky.
What makes NQ Mobile the go-to enterprise solution in China? Khan elaborated on the last year and a half of strategic changes, “propelling” NQ from a mobile security app provider to an enterprise platform provider that is now the “go-to company for enterprise mobile in China”.
NationSky first entered the mobile enterprise space by deploying Blackberry enterprise servers. NationSky CEO Charlie Hou then cultivated this expertise by scaling their deployment capabilities with newer technologies for the National Bureau of Statistics of China contract earlier this year. This “seminal win,” according to Khan, resulted in 800,000 seats successfully deployed, with manpower, systems, and tools for additional growth.
Hou isn’t sitting still though. The NationSky team continues to build the backbone of their systems and mobile enterprise application platform (MEAP) offerings. “The credibility established with the expansion into hosted enterprise solutions, and the broader set of productivity applications, makes us a natural go-to company when Apple, China Mobile, Unicom, Lenovo, Samsung, and others have partners looking for solutions,” said Khan.
NationSky isn’t overlooking the smaller customer either; they offer on-premise installations as well.
This growth resulted in a need to build their consulting arm for implementations and ongoing site analysis for new customers. The consulting arm has become integral in the RFP, RFQ processes, and in designing strategic roadmaps for new projects.
These early wins, and investment in the business, position NQ well to fend off emerging competitors “who have not been able to gain traction in the China market to date,” Khan stated. Continuing on prospects for growth, Khan offered that State owned enterprises and China based multi-nationals have skipped large scale deployments of PCs and gone straight to tablets and smart-phones, providing additional tailwinds for NQ’s enterprise business, which currently serves about 80 Fortune 500 companies and 1,250 total customers.
Consumer Business Growth Strategy
NQ started out as a mobile security app provider and then quickly migrated to a broader set of productivity applications and other assets. Security applications provided a primary monetization through premium subscriptions, establishing an initial user base as a foundation for growth with Edison Award winning applications like NQ Family Guardian and others.
Over the last two to three years, that user base has expanded exponentially, with a thriving gaming operations business and more recently NQLive and Music Radar are emerging and promising products.
NQLive replaces the wallpaper on your device with a more interactive, informative, and immersive experience. This engagement mechanism is tailored to your interests without replacing the traditional function or experience of the native Android launcher. NQ’s VLife product shares the same technology and has been used frequently by film studios in support of major motion picture releases. Recent partnerships include China Telecom and Sprint.
Music Radar recognizes song artifacts, whether you hum a tune or hear it playing. It allows you to instantly identify the song, download lyrics, share with friends with similar tastes, buy the song, or whatever the developers on a partner platform decide. Recent partnerships include Huawei, Sprint, and China Unicom.
The monetization models have also evolved as consumer offerings have grown and the user base expanded. While premium subscriptions are still a core, the main underlying model for all consumer assets is now application referrals and traditional brand advertising. “That transition of the businesses… has gone extremely well” as evidenced by “the growth of the advertising businesses we have deployed,” said Khan.
NQ currently has over 1000 premium advertisers appearing in video, banner, application wall, and audio ads, as well as in-app alerts and other notification types. Breaking down a few of advertising types into daily download results, one quickly gets a sense of volume.
|Banner Ads||150+ million||800,000|
|Ad Walls||10+ million||1+ million|
|Interstitials/overlays||20+ million||1+ million|
Other changes to NQ’s monetization model are focused on NQLive, Music Radar, and image search, which allows a smart-phone camera to find related information and items. (Note: NQ is currently hiring for their image search subsidiary, please check their Careers site if you have experience).
These emerging technologies are already embedded in some of the largest carriers and in leading OEM phones and tablets. Partnership deals with Sprint, China Mobile, Huawei and others have increased NQ’s distribution power exponentially. Carriers are benefitting from this return to product offerings versus supplying only a communications channel for data. Similar concerns were previously seen in the cable internet industry, with Comcast, Time Warner, and others returning to product-driven offerings including Tivo software in their DVRs and more recently working with Apple to provide Xfinity on-demand services for Apple TV. Consumers are benefitting from instant access to these useful applications.
The strategy of generating additional user growth with the intention of additional user traffic for advertising has been tremendous, Khan stated. NQ’s R&D is working to add even more to this emerging technology pipeline.
Khan believes this increased distribution method uniquely positions NQ from a channel access perspective. These leveraged partnerships are allowing quick entry into new markets where competitors are relying on word-of-mouth, or investing resources into slower-growth social media campaigns and traditional advertising to introduce products and drive market share.
Infrastructure and Manpower
NQ Mobile has increased capacity to keep up with growing demand for their products. One project was profiled in this Dell case study. NQ’s Systems Operations Manager Pengyu Yue explains the enhancements and 75% cost savings garnered from the thin-provisioning functionality. The new architecture allows over 500 million users to access NQ’s cloud 40% faster despite the rapid increase in the number of concurrent input/output (I/O) requests. Overall I/O performance increased 10 fold.
Khan went on to say, “We can’t hire fast enough”. Keeping an eye on the NQ Careers site can provide insight into the growth story. Since July 1, there are 68 job listings for animators, product managers, developers, network engineers, game designers, and more.
Company and executive share purchases
SR provided a projected timeline of events in part 1 of this article series. Share purchases are governed not only under corporate bylaws but also by SEC rules. Shareholders may find this FAQ helpful in understanding Safe Harbor restrictions. In summary, it is best for all material information to be publicly available before the company or insiders buy or sell stock. This would include quarterly statements for 20f filers.
What kind of growth can shareholders expect?
Reminding readers that Mathison stated NQ has not updated guidance for the full year, there are some public data points of interest.
The Company stated that first quarter 2014 net revenue would exceed the previously announced range of $75-$76 million, with second quarter revenue guidance near $84 million.
NQ’s official 2014 guidance is $320-$325 million, representing 65% year-over-year revenue growth.
Co-CEO Henry Lin recently stated 2014 annual revenue may exceed $350 million and remains confident of rapid growth for the next 3 to 5 years. While this isn’t official guidance, Lin gave us a glimpse into the potential of what NQ is building.
Lin also predicted that over the next 5 to 10 years, China’s enterprise software and services market is likely to surpass the US as the world’s largest.
There were many one-time expenses in 2013, necessary to establish a foundation for rapid growth; equity purchases of NationSky, Best Partner Ltd, Tianya, Fanyue, and Tianjin HuaYong Wireless to name a few. These one-time expenses dwindled but continued through the first half of 2014.
“Accelerating into year-end 2014, and beginning 2015, NQ expects a return to margins in the 25% range,” said Mathison, and perhaps a few percentage points higher. That would be welcome news to shareholders.
Summary and SR take-aways
- NQ Mobile was recently ranked #22 by the Ministry of Industry and Information Technology, in a list of the Top 100 Chinese Internet companies.
- There appears to be strong growth built on the recent spurt of hardware and software offerings and it’s always a good sign when a company is hiring. Ad revenue is expected to grow to 50% of the consumer side with the enterprise tailwinds continuing to build.
- Khan and Mathison expect a major analyst and investor meeting after the 20f is filed and resumption of an aggressive investor outreach program after the 2014 quarterlies are filed. Until then, shareholders are encouraged to keep their eye on developments as they occur.
Considering the current share price, SR’s interest was elevated at this point in the conversation.
With the hurdles, and missteps, and stumbles of the past eight months nearly overcome, the future appears bright for this innovative mobile platform and product developer.