Editor’s Note: This past week, SludgeReports (SR) attended an hour-long conference call with NQ Mobile Co-CEO Omar Khan and Vice President of Capital Markets Matt Mathison. SR was also asked to collaborate, with select NQ individual and institutional shareholders known to us, on a list of questions for the NQ executives. As you might expect, the questions were no-holds-barred, and we got answers to most, thanks to the engaging and cooperative Khan and Mathison.
Early on, we turned off the interrogation lamps and settled in for a pleasant fireside chat. What may be surprising to some was the eagerness and zeal with which Mathison and Khan spoke about the business. Considering the relentless and repetitive outpouring of short seller allegations—fraud of the highest order, perjury, deception, books-cooking, misrepresentation–you might expect the NQ guys to be guarded. You might expect a blizzard of well-prepared, legally-vetted responses.
But nope. Nothing was further from the truth. The bulk of our questions got answered, with the underlying thesis that NQ Mobile is running on all cylinders, executing its vision successfully, and unafraid to tell it like it is, in a realistic manner, with timelines.
The first of a new NQ article series is below.
Getting Back to “Go”
Few long term shareholders of NQ would argue that the past 10 months have been discouraging to say the least. This former market darling, with its fast top line growth, novel packaging of mobile platform products, and even more novel path to monetization of those products, lost some 87% of share value in a year, measured by its low of $3.45 this past July.
Vicious short attacks (now mostly disproven). Untimely resignations. Change of auditor. And worst of all, a 20f filing extension granted by the NYSE, which brought the short “hounds-of-hell” bearing down on NQ with intent on tearing the company to pieces. It’s been a tough 10 months, a period which will be largely brought to an end by the filing of a 20f in October or early November.
The company has stated repeatedly and emphatically that not only the 20f will be filed, it will be filed without qualification or restatement. These statements were repeated multiple times during our conference call, but the focus of the call was the potential of the company ongoing, after the 20f, after the company gets back to go.
“The filing of the 20f is the beginning, not the panacea,” said Mathison. “Most important is our positioning of the company for rapid future growth.”
Mathison and Khan believe there is a “great discount” currently placed on shares that will be resolved with the 20 filing. The filing immediately returns the company to a state of compliance (quarterly filings are not required from Chinese-domiciled companies). The new Audit Committee and MBP have made encouraging progress, said Mathison, but MBP has begun the process from near scratch, which takes time.
MBP was on-boarded efficiently, with more than double the resources brought by dismissed auditor PWC, and they are working diligently to complete the job. Filing the 20f is a “primary focus” and NQ looks forward to “returning to normal operations … as a compliant public company.” But, stressed Khan, the 20f delay doesn’t mean they are letting the business side rest on its laurels. In fact, they are driving harder than ever, notching significant “quarter over quarter growth.” (The growth story will be a focus of Part 2 in our series.)
After completion of the 20f, these same MBP audit resources will immediately re-engage to complete the first three quarters of 2014 filings. NQ views these three quarters as “just as important as the 20f to shareholders,” because they will provide further and more timely evidence of the revenue growth rate NQ has been guiding. NQ projects 5 to 7 weeks after the 20f filing for the completion of all three follow-on quarters.
Once the financials,—20f and follow-on quarters, are completed, the “great discount” will be seen by the market and then further resolved in a number of ways, said Mathison. Current restrictions on company share repurchase and executive purchases will be removed. Ongoing discussions with Bison, and “other numerous interested parties,” will proceed. The board of directors will be free to make shareholder-friendly decisions on further equity and asset interests.
So, a best-estimate timeline of near-term events:
November 15: the latest date for filing the 20f (with Mathison stating repeatedly the filing could easily come “sooner”)
December 15-January 5: completion of the three delayed quarterlies
December-January: Company and executive share purchases begin
The company and its executives have committed to $30 million worth of share purchases. On April 10, 2014, NQ Mobile reported $27 million from the company and $3 million of executive purchases remain available. Depending on share price at the time, these purchases may represent near 20% of the current float.
- $7 – 4.3 million shares purchased
- $8 – 3.75 million shares purchased
- $9 – 3.3 million shares purchased
Now, let’s be realistic. The NQ story changes quickly with the 20f filing and we can already see shorts attempting to cover and/or prepare.
When NQ Mobile is freed to buy shares, it will signal the complete dissolve of the short story. Any short unprepared will face diminishing returns or possible losses.
Open short positions for 9/15/2014 totaled 15.8 million, down from the peak 17.8 million of two months prior. Everyone has watched the 44k January call option placement and roll down every few weeks, and additional call options placed elsewhere. Its obvious shorts are preparing themselves. They’ve had a good run at NQ’s expense (join me in closing your eyes to the ethics and tactics they utilized, that is water over the dam). Now that run is coming to an end and they know it.
Bison’s $9.80 per share buyout offer
Bison made an offer of $9.80 for all outstanding common and American Depository Shares (ADS). Shorts and some analysts went a bit loco on the topic—defining the offer as less than legitimate. But the offer was completely legit and something of a surprise to NQ, said Mathison and Khan, in a simple answer. The complete answer, however, is somewhat more complicated.
What we learned from the conference call is that NQ has elaborate and current business dealings with Bison, although Khan and Mathison didn’t elaborate beyond the FL Mobile participation (FL Mobile is NQ’s game developer division). They did provide some clarity on Bison, and indicated the FL Mobile IPO is progressing nicely. Some further research by SR sheds additional light on Bison’s interest.
Bison is a $1 billion fund and has a large stake in AirMedia, a leading advertising provider in China. AirMedia sells air travel advertising on seven airlines, plus billboards, light boxes, and other digital media. Is there synergy with AirMedia and NQ Mobile subsidiaries? Count on it. vLife comes to mind rather quickly considering the recent movie advertising on it’s platform.
Now back to FL Mobile. Why would Bison be so interested in not only vLife but the gaming outfit FL Mobile as well? Recently NQ Co-CEO Henry Lin indicated that advertising revenue may reach 50% of total revenue in 2015 for the consumer side of NQ’s business. Imagine all those eyeballs playing games and looking at banner ads for the next big movie blockbusters of 2015! Blockbusters like Fury, Fast and Furious 7, Jurassic World, Terminator:Genesis, Star Wars: Episode VII.
Bison has definitely taken an interest in Hollywood recently, which isn’t surprising given Peixin Xu serves as an independent director of Bona Film Group Ltd., China’s largest privately owned film distributor.
Khan summed it up; Bison is not just a financial transaction. They are in a position to further strengthen content partnerships given their position in the entertainment business.
There’s no need to belabor the point further, Bison is interested in NQ Mobile for synergistic reasons. FL Mobile makes perfect sense as a Bison investment and a spin-off IPO.
Other Interested Parties
Unfortunately SR didn’t score a scoop on who these entities may be. The most we could get was what everyone knows, when the 20f is filed, other parties that have expressed interest will be looking for deals.
Additional Topics Discussed
Hint: SR will explore these additional topics further in upcoming parts of this article series.
The Citibank conference: “Great deal of interest in our stock,” said Mathison, but interest may not manifest in any appreciable way till after the 20f is filed.
The Citibank conference includes some interesting updates. Shareholders should note, user metrics do not include emerging products: Music Radar, NQ Live Platform, iSMS and the majority of Ad Network users.
Driving home this point, NQ Music Radar statistics have jumped from 3 million to 7 million daily searches and a recent banner ad campaign in Q3 resulted in over 200,000 new users for en.jd.com.
Pace of channel partnership and deployment of new technologies: “Accelerating quarter over quarter,” said Khan. NQ is now “a go-to company for enterprise mobile in China”. The company has 1 million seats under management, with a “green field of growth” among state-owned enterprises and multinationals in China. Khan also stated NQ will focus on China for the near term, seeing no reason to diversify geographically given the plethora of opportunity. “We can’t hire fast enough, can’t keep up with demand,” he concluded, reminding the conference call participants that China had basically skipped over the PC explosion of a generation ago, instead proceeding directly to mobile.
Khan summarized this departure from past statements of NQ not being a Chinese company (eg. 2012 presentation), there is enough growth in China now to view international growth on an opportunistic level like we have in Japan and other markets.
NQSky: NQSky has become a strategic core asset and there are many scenarios in additional to an IPO that are being considered. All things are possible with the two-year plan stated in the filing. Matt suggested investors, “stay tuned”. Omar indicated the cash infusion from the minority sale, was used to upgrade the hardware and software backbone of a rapidly growing enterprise business. Mathison and Omar had high praise for the NQSky team and their accomplishments.
Revenues Flattening in Second Half of 2014: It may appear that way because based on current guidance, but that’s because NQ “has not updated guidance”, said Mathison and then he went on to discuss positive trends in enterprise business in the first half of the year and the consumer advertising growth recently mentioned by Henry Lin.
Past year restatements: Expect no restatements. PWC legally had obligations at the time of dismissal, where if they had any reason to withdraw their opinion on the past years, they would have had to make their actions known at that time, Mathison stated. The SEC filing from July was a joint filing approved by PWC and NQ.
Margins: Will trend back to mid to high 20 per cent range by end of 2014, said Mathison.
Corporate Press Releases: NQ Mobile is doing numerous deals regularly, especially on the enterprise side, and isn’t releasing most. Some Chinese press releases are distributed at the subsidiary level. Given the corporate focus on building the business and completing the 20f, a release for every deal is a lower priority at present.
The NQ executives left me with the impression that filing the 20f is a done deal before the NYSE deadline. Several weeks later, Q1,Q2, and Q3 2014 revenue numbers will be completed and they will confirm consistent and rapid revenue growth.
The company is keeping a careful eye on 20f progress and has the resources in place to finish the job. Once the filings are up to date, all new deals and collaborations will come up in queue for the board of directors to consider, and NQ Mobile will initiate their share repurchase plans.
The platform strategy, laid out in recent conferences and presentations, is on track.
So far, NQ Mobile fits our bill as a solid investment opportunity at current share prices.