New Bloomberg Article (11/3)

[Haggerston]

I don't have an accountancy background, but if PCW gives them a clean bill of health on their Q3 (rather than resigning, as MW suggested), would that not sufficiently settle all of this?

Just saw this SA article on NQ DSO from Sept - http://seekingalpha.com/instablog/899536-comf22/2234982-nq-mobile-has-a-dso-problem

[Haggerston]

In any case DSO is old news and have been explained by NQ:

'The company has repeatedly provided the following explanation for the lengthy time it takes to get paid in China. Unlike in the U.S., payments for smartphone applications are run through multiple companies before they reach NQ. First, the carrier is paid by the consumer. This can take 30-60 days. Then the carrier pays a 3rd party vendor, which can also take 30-60 days. Lastly the vendor pays NQ, which again can take 30-60 days. Simple math tells you that payment can therefore fall anywhere between 90-180 days'

So should be new news to market..

[quantumvibes]

http://www.bloomberg.com/news/2013-11-03...cmpid=yhoo

"NQ Mobile Sales Search Leads to Suburban Beijing Office"

Another article by Bloomberg.

Another piece of MW's "short" report debunked...

[ArtM72]

I’ve read the past couple of articles just updated by Bloomberg and it seems to me there are a couple of writers (or headline editors) doing a hit-job on NQ Mobile. The articles refute major Muddy Waters contentions but continue to headline and reiterate allegations.

The link below refutes the statement by MW that Yidatong is “incapable of processing meaningful amounts of payments on behalf of NQ because it does not have even one employee regularly present” to carry out such basic responsibilities as turning on the lights, answering phones or ordering office supplies, according to Muddy Waters. In fact there is a company that HAS been processing NQ payments for three years.

http://www.bloomberg.com/news/2013-11-03...ffice.html

I wonder why Bloomberg didn’t lead the story, say with the headline “Muddy Waters’ NQ Mobile Allegations Found False”.

I also wonder why as the following link shows, that NQ does get paid. OK, its DSO or accounts receivable are on the average 90 days or so, but the headline should have been “Cash Balance Confirms NQ Not Fraud” with a subtitle “Accounts payable in China typically slow”. Instead the article was titled “Muddy Waters Viewed Right on Mobile Payments, Wrong on Cash”

http://www.bloomberg.com/news/2013-11-03...-cash.html

The whole story SHOULD be Muddy Waters’ report and how it is being found riddled with errors, with MW itself the fraud. So just why does the accused and not the accuser suffer from the bad press unless there is something nefarious going on? After all, which is the barrel of rotten apples, the one with a couple of apples having bruises or the barrel smelling of alcohol covered in a cloud of flies?

[quantumvibes]

I've gotten the same impression. It's as if Bloomberg were carrying Muddy's water... sorry, couldn't resist.

[kshen]

Security Issues

Moving beyond accounting questions, the Muddy Waters report also attacks NQ’s products, calling its antivirus application “spyware” that’s “unsafe for sale to consumers,” based on analysis of the code and its functioning by software engineers that the report doesn’t name.

The application creates vulnerabilities in users’ phones that make them less secure, sends far more data than necessary to servers in China, doesn’t use basic industry standards to secure the data and creates fake alerts for viruses, according to the report.

An analysis obtained by Bloomberg news of NQ’s Mobile Security & Antivirus application by ViaForensics, a mobile security app and testing company, found that the application has poor security leading to leaked sensitive data. The app does appear to generate fake virus alerts, according to ViaForensics’ analysis, which also found indications that it sends contacts and contents of text messages back to the company, “a serious privacy concern.”
‘Very Poor’

“In terms of the data it collects and sends back to the vendor, that’s not atypical, because antivirus apps need to collect a lot of data to protect the phone,” said Thomas Cannon, director of research and development at Oak Park, Illinois-based ViaForensics. “The concern is the security is very poor. You wouldn’t expect that in a security application.”

NQ Chief Product Officer Gavin Kim denied that NQ sends sensitive private data to China in the Oct. 25 conference call with investors. He also said that the virus alerts mentioned by Muddy Waters are simply a notice to new users of the company’s virus database about the latest virus discoveries.

It doesn't say vault it says mobile security and antivirus application.

When I read this, I thought this was a huge issue. However after digesting it I realized the following things.
A. The 'fake virus generation' Covered by NQ, but i believe it probably really is designed to mislead people, or make it confusing. A little unethical but a minor issue.

B. What they're criticizing isn't how well the software performs but that its own security is poor. Which leads me to ask this question, are antivirus software generally secure?

http://www.klocwork.com/blog/software-se...hers-warn/

Apparently not it looks like.

[tradestar2012]

There's not necessarily an implication that NQ's accounting is less than conservative, but rather a question as to whether its high DSO is characteristic of the collection cycles it faces or if there's a collection problem, or revenue fabrication as MW asserts. In NQ's defense AsiaInfo was cited as another company whose DSO's were typically high due to long collection patterns with the carriers it does business. The mgt has previously stated that they've been working with the carriers, etc. through many cycles without any collection issues, but still they recognize a need to reduce the DSO, and are focusing on doing so. It's unlikely that PWC would have signed off on the financials if there were a material problem with collections. However, Deloitte is going to have a go at it also, and so there'll be a second independent opinion in due time. The fact that NQ is sitting on a pile of cash also speaks to their ability to collect on receivables.

I'd like to further that the article was identifying DSO's as a red flag out of context. DSO's that climb over time raise red flags as they inidicate channel stuffing or ficticious revenues. NQ's DSO's climbed in 1Q13 but fell in 2Q13 and based on what we know from the conference call on 10/25/13, likely fell in 3Q13. High DSO's by themselves is not that meaniningful without context, and obviously what the Bloomberg author failed to take into consideration.

[bosreeno]

"It takes larger customers longer to make payments, according to Drew Bernstein, co-managing partner of Marcum Bernstein & Pinchuk LLP, a New York-based accounting firm focused on Chinese companies, who said he’s seen companies with collection periods of as long as two years in China. AsiaInfo-Linkage Inc., a Beijing-based telecom software developer whose main customers are the biggest phone carriers in China, measured 189.5 days for sales outstanding in 2012."

They are playing both sides. Too early for anything to be definitive though the article suggests via headline that payments are more of an issue. 

Whatever, in the next round of media interviews I hope Carson gets grilled appropriately

[kshen]

I like the part of the title that says "Seems right"