Management responds to SA article

[admin]

NQ Mobile Rejects as False Allegations in Seeking Alpha Article

Press Release: NQ Mobile Inc. – 44 minutes ago

RELATED QUOTES

BEIJING and DALLAS, Dec. 11, 2012 /PRNewswire/ -- NQ Mobile Inc. ("NQ Mobile" or the "Company" (NQ), a leading global provider of mobile Internet services, today rejected as false allegations made in an article ("Seeking Alpha Article" published on seekingalpha.com on December 10, 2012, written by an author named "FJE Research" who has admitted to holding a short position in the Company.

NQ Mobile strongly rejects these allegations and notes that FJE Research's commentary contains numerous inaccuracies and misleading speculations based on flawed arguments and illustrates a lack of understanding of the Company's business model.  The Company also stands firm and ready to protect its reputation and reserves legal rights against any deliberately false accusation. The following statements clarify the key misleading areas contained in the Seeking Alpha Article:

NQ Mobile market share data in China

Contrary to allegations regarding NQ Mobile's market share in the Seeking Alpha Article, the third quarter 2012 Sino MR research report indicates that NQ Mobile has 63% of registered mobile security users in China. Sino MR is wholly owned by renowned market research firm, GfK Group, and has reported NQ Mobile's market share in China as greater than 60% in every quarter since May 2011. The Company also notes that the Sino MR research report is among the very few that are publicly released each quarter.

Because the third quarter 2012 Sino MR report was issued after NQ Mobile released its third quarter earnings on November 12, 2012, data from the report did not appear in the Company's third quarter 2012 earnings release.

The third quarter 2012 Sino MR report on mobile security market in China (in Chinese only) is publicly available at the following link: http://www.sino-mr.com/cn/uploadfile/20121120095205728.pdf

NQ Mobile user acquisition channels in China

NQ Mobile mainly acquires users through three major channels. For the third quarter of 2012, roughly 20% of NQ Mobile's newly acquired user accounts were acquired from pre-installation with handset manufacturers, which are mostly in China; approximately 40% were acquired through various online downloading channels; and approximately 40% were accrued through viral marketing.

The third-party app stores listed in the Seeking Alpha Article are only a small part of the Company's online downloading channels, and the Company does not invest heavily in these stores because it finds that the returns on them do not justify the investment due to their low conversion rates. In the third quarter of 2012, out of the online downloading channels that the Company employs to acquire users, less than 20% of the new user accounts the Company acquired in China are acquired through app stores. The rest are from working with a number of mobile ad networks to provide users with direct download from the Company's server. The Company is prudent on spending and constantly works to minimize its user acquisition cost. The Company finds the ad network channel to be the most effective and cost-efficient method to promote its apps and generate registered users.

Pre-installation is another important user acquisition channel for NQ Mobile in China. Almost 7.6 million, or 20%, of the Company's 38 million newly added registered user accounts in the third quarter of 2012 came from this channel, with most of the accounts being in China. The Company has extensive pre-installation relationships with major mobile device manufacturers. As of the end of October 2012, NQ Mobile has pre-installed its app in more than 55 million smart devices produced by a number of major manufacturers such as Huawei, ZTE, Coolpad, Hisense, Gionee, Motorola, Samsung and Nokia.

The Seeking Alpha Article ignored both pre-installation and the viral channels for NQ Mobile's user acquisition and, for the online downloading channels, it also ignored the important ad network channel and only focused on the least meaningful user acquisition channels for NQ Mobile.

Internet search engine indexes, web forums and microblogging websites

The Company does not consider internet search engine indexes, most of which are performed through Internet search rather than on mobile platforms, to have any meaningful indication of its user base; nor do internet search engines form a significant user acquisition channel for NQ Mobile.  NQ Mobile has long stopped promoting web forums as a way of engaging users and rather has email-based customer care and a call center that takes live customer inquiries around the clock.  Likewise, the Company does not believe its popularity on microblogging websites has any correlation to its product quality and popularity. And the nearly two-year-old CCTV event cited in the Seeking Alpha Article has been addressed by NQ Mobile in May 2011.

Additional relevant management action

Management and employees own nearly 40% of the Company's total current outstanding shares.  Share incentive awards granted to NQ Mobile employees typically vest over four-year periods.   NQ Mobile's founders have recently announced a two-year lock-up which means they will not sell for at least three years post-IPO and for nine years following the establishment of the Company. In addition, the senior management team of the Company has completed a $2 million management purchase plan this year, and NQ Mobile announced a share repurchase program where it may repurchase up to $20 million worth of its outstanding ADSs over the next 12 months.

NQ Mobile remains committed to open and transparent communication with its investors.

[tradestar2012]

The company has been under a short attack for some time now. Current shorts outstanding as of 11/30/12 was 2.0M out of total float of 16M. 12.5% of the float is shorted. This is a steep climb from 400k shares short back in May/June of this year. The big spike in shorts was due to a botched secondary offering for initial investors to exit (secondary was minimally dilutive as the selling shareholders were predominantly the original funds that invested in NQ. this was poorly communicated to shareholders btw). Compounding that problem was the size of the offering. I think it was around 40% of the float. Shorts basically piled on to the stock as the botched secondary puts a cap on future upside in the near/intermediate time frame (shareholders know the company wants to do an offering that would increase the float significantly and that insiders want to monetize). The company has however recently put in place a share repurchase of $20M (on top of the $2M purchased by senior management). Thats equivalent to 3.5M shares purchased at today's price of $5.71. I believe there will be a short squeeze as the company continues to purchase stock.

Fundamentally, the Company's response to the SA short article was fairly comprehensive. Marketshare is fairly amorphous in China. Everyone claims to be a market leader. Its not easy to determine when you are comparing free vs freemium and activation of a primary phone vs. one that has been replaced or seldom used. Dont forget, phone replacement cycles are fairly fast. So its very easy to double or even triple count activation. What really matters is paying customers, which NQ has always shown via its quarterly #s. Regarding user acquisition channels, NQ's response seemed fairly comprehensive. I'm not a fan of their explanation on viral marketing / eg direct marketing, but it does explain why the lack of dialogue on message boards. On the flip side, why do people even bother to twitter or talk about their virus scanners? I personally use McAfee and so long as it never makes a noise, I never think about it. I just rewnew my subscription when it ends. The rest of their explanation made complete sense.

Lastly, management is fairly invested in this company. Omar Khan has at least 3.8M shares vesting over 4 yrs + via employment agreement. A good chunk of the shares (1.9M shares) are based on hitting milestones. He is very incentivzed to stay and make it work.

[admin]

Thanks for that explanation, tradestar, and welcome aboard! Difficult to see too much merit in that SA article, but better safe than sorry, which is exactly what they're hoping to achieve, in all likelihood. They have considerable revenue outside of China as well, let's not forget that either.

[tradestar2012]

Thanks. Glad to have found this site. I'm pretty sure the SA article was a straight up bear raid, hit squad attack. No response from the author and zero history or credibility. Its a shame SA allows those sorts of articles to gain traction.

Anyhow, wanted to get peoples thoughts on the share buyback. On the one hand, I like it because I think it will help put a squeeze on the the shorts. On the other hand, I see it for what it is, a token buyback designed primarily to signal management belief that the stock is undervalued. $20M buyback is only a $0.50 bump to share price (theoretically, assuming constant fwd PE of 6x with stock purchased at $5.80). Thats not really going to swing the needle. If they really want to send a message and squeeze the shorts out, then they should have done a substantial buyback program (eg. $40-50M). The underlying problem with the company is the small float and how easily it can be manipulated. Doing a buyback only exacerbates the problem. Both good and bad (movements upwards and downwards are very rapid). The overhang from the botched offering back in May puts a cap on how far up the stock can move. Shorts are limited on downside given the cash value of the company plus theres only so many shares they can borrow short on (limited float). Anyhow, trying to think this dilemma through. From a capital markets perspective, I think the company should nix the buyback and instead use the cash on the balance sheet to finance their acquisitions and slowly issue new shares via follow-ons or from a convertible offering (once share price rises above IPO price). I think the company is doing a great job operationally, but from a capital markets perspective, they're doing a terrible job.

[admin]

Well, the reaction to the article and the buy-back stopped the rot, that's at least something. And it's quite difficult to deal with this stuff, really. You have:
- Chinese company
- Small float
- Enough wiggle room in some metrics, like Chinese market share, to create sufficient doubt.
- Not enough time for people to consider the relative merits, as the stock was tanking

Unfortunately, this is like a rather classic asymmetrical information problem that's been "opportunistically exploited." You probably noticed that the company on the most visited forum here, InterOil, has very similar problems (they even got their own multi-ID basher on Yahoo), so we're quite used to that.

It's also difficult for SA to weed these articles out, they can't have expertise on all listed companies and decide what's rubbish and what isn't. The only thing they can do is ban these people, but no doubt they can work around that. It's sad but true.

I'm not sure there is a solution to this, apart from the company delivering operationally, which is what, as far as I can make out, they have been doing. But I'm open to other suggestions.

Your suggestion to use the cash they spend on the buy-back and their other cash holdings for acquisitions and then expand the share base is sound, but on the other hand, they shouldn't do acquisitions just to get bigger. The literature on that is not terribly favourable, really.

Acquisitions should be done on their own merits, complementary capabilities, opportunities for cross-selling, geographical expansion, compatible cultures, stuff like that.

Anyway, you raise interesting points. The shares are rather cheap, this too will pass, although as we know from IOC, it can take a while..

[tradestar2012]

Excellent points. Its a shame how many Chinese companies are getting thrown out with the bathwater. This company went through a legitimate IPO and has PWC as its auditor. DB, PJC and Cannacord were its lead underwriters. They're pretty solid in terms of 2nd tier investment banks. They also have a dual management structure (china/US) with the US CEO a material stakeholder. I agree with you that it will take time for valuation to meet expectations. Its just unfortunate to see how little faith the street has in NQ. I've personally been buying a ton of shares at these prices. I can easily see a run up back to the low teens assuming they can shake off these shorts. My guess is we wont see it until 1q13-2q13. I think a floor however has been established at ~$5/sh.

Regarding acquisitions, the company has done 2 acquisitions this year, all stock with earn-out provisions. I understand wanting to incentivize the management teams of the acquired businesses with a large stock component, but paying 100% with stock is a very expensive form of capital, especially when the stock is trading at a 50% discount to IPO and you have $130M in cash on the balance sheet and you are a cash flow positive company. They really should have done 50/50 or 70/30 stock cash type deals. They really need to get rid of their CFO or find better bankers.

Solid call on IOC btw. I'm not familar with the oil industry but I can see its had a nice run-up.