Key Points
• Broadening Their Mobile Platform Reach: 2012 was a year in which NQ Mobile changed
its corporate profile, via the acquisitions of NationSky and Feiliu, from a consumercentric
mobile security/privacy provider to a mobile platform services provider with
three legs to the growth stool; consumer security/privacy applications; enterprise mobile
device management applications and services; and, consumer interest-based community
applications and services. We believe there is the potential for significant synergy between
the two consumer-facing offerings that could result in much higher monetization rates.
Feiliu is the #1 mobile online game distribution platform in China on iOS and could provide
significant cross-sell opportunities for NQ's mobile security and privacy applications.
• A Very Long Growth Runway: According to IDC, smartphone unit shipment growth will
average 20% 2011-2016 reaching 1.26B units in the out-year. At 9/30/12, NQ had a active
user base of 84mm, suggesting there is a large greenfield opportunity and that just refers
essentially to the consumer security/privacy products. Now consider that according to
Newzoo, 13% of all the time spent playing games is spent on mobile devices while 9% of
the $6B spent on games is spent on mobile games. Another statistic, especially relevant
to NQ, is the estimate that 47% of mobile gamers in Asia are paying users, the highest
percentage of any geographic territory.
• Margins Should Expand In 2013: Geographic and addressable market expansion does
come with a price. NQ geographic expansion (a.k.a. higher sales/marketing expenses) and
inherently lower profitability at NationSky given the hardware element in their revenue
model has pressured operating margins to "only" 26.4% in 3Q12. As the pace of expansion
projects (personnel, customer acquisition) ameliorates, margins will begin to recover to
the mid-30s in 2H13.
• All Of This..And More.. For 6x Earnings: NQ Mobile's challenge is not the size of their
addressable market. The challenge will be in delivering the products and programs that
will drive geographic expansion, higher monetization (conversion) rates and an enterprise
presence. We believe NQ can deliver 40-50% growth for which investors are only paying
6x EPS.
