05-02-2014, 03:55 PM
Fundy,
I'll defer to your analysis on NQ's products. Your commentary on the acquisitions and SBC is off. SBC is a non-cash expense. The company actually gets a tax benefit for the large stock based compensation. Its not to say that its a phantom expense. Stock as a form of compensation is a real expense to shareholders in the form of dilution. The SBC you see in the financials is an estimated value of the optionality of the underlying issued stock. Its not an actual expense where physical dollars are spent. That said, different people have different views on how to treat SBC. For a small, fast growing company like NQ, I would normally exclude SBC from an eps calculation as its not a fair estimate of long term earnings potential. Its like trying to value a company that just turned eps positive on a P/E basis (small eps, large PE multiple). You just dont do it because its not meaningful. Hence the add back of SBC to calculate EPS. For a large, mature company like GE, i would include SBC as an expense as the impact is not a material a % of total eps. The key question is when does that switch happen, from adj. eps to gaap eps. There are lots and lots of small companies valued on a adj. eps or Cash EPS or any multiple of a derivation of EPS. It comes down to what form of EPS is the most accurate view of what earnings will look like in the long run. So the question is, will NQ be adding an Omar Khan every year for 10-15% of the business, thus continuing the large SBC? Probably not. In fact, the SBC related to Omar will taper off in about 2-3 more years once all his shares completely vest. Will NQ be doing acquisitions with 100% equity or move more towards a cash/stock mix like nationsky and nq live? Probably the latter. As the acquisitions they do with stock vest, the sbc related to those deals will eventually drop. Will they do more deals? Probably, hence new SBC. But as a % of revenues, it will probably drop as acquisitions become a smaller part of the business.
W/re to your observations on acquisitions. If you read the fine print to the transactions (they're in the 20f from last year), you'll see that each deal they did included hefty earnout clauses in order for the stock portion of the deals to trigger. We wont know how Nq live was structured until the 20f comes out, but if it was anything like their prior deals, I would not be surprised if NQ live has to be a blockbuster in terms of revenues and profit in order for the full value to be achieved.
I cannot stress this enough, but reading what you read on SA from some of the short authors questioning the acquisitions made by NQ will be a fairly extensive waste of your time. A colossal waste of time. Yes, the company does use too much stock. Thats a given. But are they doing too many deals or paying too much for them? I do not agree. 2/3rds of the company is now made up of NS and FL. To me thats revenue diversification and growth, it 2 hot sectors in mobile internet and computing. 2 things you want to have in a company. Were they expensive? Yes. but they also had lofty earnout clauses to EARN their shares. Does NQ do a lot of tiny acquisitions, sorta. Most tech companies that are mid sized do tons of partnerships and equity investments all the time. NQ just discloses more information than most companies. In a given quarter, most companies will do tons of small investments and tuck-ins and just never mention them to any significant detail.
Anyhow, my point is, their acquisition history and sbc is probably one of the EASIEST things for most finance professionals to get comfort around. I would lump myself in that bucket. I rely on people like you to get comfort around the technology as thats where I'm not as well versed in.
I'll defer to your analysis on NQ's products. Your commentary on the acquisitions and SBC is off. SBC is a non-cash expense. The company actually gets a tax benefit for the large stock based compensation. Its not to say that its a phantom expense. Stock as a form of compensation is a real expense to shareholders in the form of dilution. The SBC you see in the financials is an estimated value of the optionality of the underlying issued stock. Its not an actual expense where physical dollars are spent. That said, different people have different views on how to treat SBC. For a small, fast growing company like NQ, I would normally exclude SBC from an eps calculation as its not a fair estimate of long term earnings potential. Its like trying to value a company that just turned eps positive on a P/E basis (small eps, large PE multiple). You just dont do it because its not meaningful. Hence the add back of SBC to calculate EPS. For a large, mature company like GE, i would include SBC as an expense as the impact is not a material a % of total eps. The key question is when does that switch happen, from adj. eps to gaap eps. There are lots and lots of small companies valued on a adj. eps or Cash EPS or any multiple of a derivation of EPS. It comes down to what form of EPS is the most accurate view of what earnings will look like in the long run. So the question is, will NQ be adding an Omar Khan every year for 10-15% of the business, thus continuing the large SBC? Probably not. In fact, the SBC related to Omar will taper off in about 2-3 more years once all his shares completely vest. Will NQ be doing acquisitions with 100% equity or move more towards a cash/stock mix like nationsky and nq live? Probably the latter. As the acquisitions they do with stock vest, the sbc related to those deals will eventually drop. Will they do more deals? Probably, hence new SBC. But as a % of revenues, it will probably drop as acquisitions become a smaller part of the business.
W/re to your observations on acquisitions. If you read the fine print to the transactions (they're in the 20f from last year), you'll see that each deal they did included hefty earnout clauses in order for the stock portion of the deals to trigger. We wont know how Nq live was structured until the 20f comes out, but if it was anything like their prior deals, I would not be surprised if NQ live has to be a blockbuster in terms of revenues and profit in order for the full value to be achieved.
I cannot stress this enough, but reading what you read on SA from some of the short authors questioning the acquisitions made by NQ will be a fairly extensive waste of your time. A colossal waste of time. Yes, the company does use too much stock. Thats a given. But are they doing too many deals or paying too much for them? I do not agree. 2/3rds of the company is now made up of NS and FL. To me thats revenue diversification and growth, it 2 hot sectors in mobile internet and computing. 2 things you want to have in a company. Were they expensive? Yes. but they also had lofty earnout clauses to EARN their shares. Does NQ do a lot of tiny acquisitions, sorta. Most tech companies that are mid sized do tons of partnerships and equity investments all the time. NQ just discloses more information than most companies. In a given quarter, most companies will do tons of small investments and tuck-ins and just never mention them to any significant detail.
Anyhow, my point is, their acquisition history and sbc is probably one of the EASIEST things for most finance professionals to get comfort around. I would lump myself in that bucket. I rely on people like you to get comfort around the technology as thats where I'm not as well versed in.