NQ on the road and trading color

[doublebagger448]

NQ has been meeting with investors over the past 5 days.  Here is the color....  many investors asked about the decline in the stock price post-earnings call.  Given the increased 2013 guidance, the America Movil deal and the insanely cheap valuation, investors were asking why the stock dropped from $10.50 to $8 over 7 days.  My non-PC explanation.  There is an uncredible "market research firm" called iimedia in China.  In China, if you are a paying customer with certain (crooked) market research firms, these firms drastically skew their market share analysis and give the paying customers larger market share than they actuall have and the non-paying customers smaller market share.  Qihoo (sleazy company and direct competitor to NQ) is the largest paying customer of iimedia.  iimedia said that Qihoo was gaining market share with domesitc Chinese (what a shock).  iimedia has approximately 10 "researchers" and the firm generates approximately 20 reports per month.  I am suuurreeee the quality of each report is quite high and rigorous (sarcasm intended).  Nevetheless, the shorts jumped all over this report, wrote some BS blog postings, created some panic and took the stock down temporarily.

NQ's investor meetings over the last 5 days have been going very well.  NQ met with several of its large holders over the past 2 days.  Many have said they love the story and now that liquidity is increasing, they plan to grow their NQ holdings.  This is one of the reasons you continue to see NQ trading 1M - 2M shares/day.  There are several new buyers (both mutual funds and hedge funds) coming into the stock.  The weak sellers are rapidly being cleaned up and the stock should move back to the $10-$12 level.  Many buyers believe NQ will be at $30 within 12 months.

NQ's deal pipeline remains full.  StarPulse (telco channel checking firm) said they expect NQ to sign additional carriers and possibly OEMs in the coming months.  Here is the text of StarPulse's commentary from March 18, 2013.  It is the FIRST time StarPulse has written about NQ.

NQ:  Mobile Device and BYOD Security Creates Global Secular Tailwinds with Domestic and International OEM's and Tier1 an Tier2 Mobile Network Operators.

-  We are uncovering increasing visibility and demand from global carriers for mobile device security solution offerings.  A name we continue to follow is NQ Mobile which provides a broad and comprehensive product portfolio and security offering for mobile devices.  Although NQ has been primarily an emerging markets play where they have shown the most growth, there is increasing evidence of new partner wins and progress with Tier1 domestic operators and OEM's.  The company's growing partner ecosystem offers the broadest cross platform support of any other company in the fast growing mobile security industry.

- With the increased frequency of mobile device application malware, identity thefts, smart phone/tablet breaches we believe NQ offers a compelling value proposition for both consumers, enterprises and channel partners.  Our research suggests there are at least one pending domestic carrier and possibly a new global OEM are working with NQ for a 2013 launch.

- The company's software client, annual subscription model and cloud based/hosted security offering is considered a compelling value proposition for global MNO network monetization strategies.  Although NQ is competing in an increasingly crowded market segment, their addressable opportunity and global mobile device growth rates leave room for multiple solution offerings of which NQ is considered a leader.

M&A - speculation is increasing that Baidu approached NQ for a buyout.  Robin Li is on record 2 weeks ago saying Baidu is looking to acquire well positioned companies in the smartphone ecosystem.  One of NQ's Board members (he owns 15% of NQ) also sits on Baidu's Board.  Baidu recently raised $1.5 billion for acquisitions.  Chatter is NQ will not consider selling under $20.  It has to be a friendly deal, given the need to retain the technical team.  Therefore, the thinking is NQ's stock will naturally climb to $12-$14 as more funds get up to speed on the story and insanely cheap valuation and then Baidu can offer $20-$22 to get the deal done.

[admin]

That old reptile, information asymmetries and people opportunistically trying to exploit them for private gain once again raises its ugly head. No surprise there, but in this particular case, many will not even have been aware of this. Luckily, things are rather straightforward here:
- The America Movil deal should extinguish most, if not all doubt
- Valuation is compelling, as is the balance sheet, zero debt, cash flow positive, lots of cash and 50%+ growth

It's really difficult to imagine, bar a complete market melt down or a paradigm shift in mobile security, how you can lose money with this one in 6-12 months.

[tradestar2012]

A deal at $20-22 would imply a valuation of $1.3Bn for NQ. You think BIDU would want to blow their entire warchest on 1 company? Another thing to remember is that at $20-22/sh, it would imply a forward multiple of ~18x assuming a $22sh price at end of year. That would be a dilutive deal for BIDU to swallow. Its possible i suppose and can be done with a mix of stock and cash, but it certainly wont be easy. The other interesting thing is BIDU recently launched their desktop anti virus platform. Coupling it with mobile support would allow them to complete a security suite.

[doublebagger448]

A deal at $20-22 would imply a valuation of $1.3Bn for NQ. You think BIDU would want to blow their entire warchest on 1 company? Another thing to remember is that at $20-22/sh, it would imply a forward multiple of ~18x assuming a $22sh price at end of year. That would be a dilutive deal for BIDU to swallow. Its possible i suppose and can be done with a mix of stock and cash, but it certainly wont be easy. The other interesting thing is BIDU recently launched their desktop anti virus platform. Coupling it with mobile support would allow them to complete a security suite.

Yes.  Baidu will likely want to do the deal.  There are numerous strategic synergies for Baidu to exploit.  On the math....NQ will have close to $175M of net cash at the end of 2013.  NQ will likely generate a minimum of $70M of FCF in 2014 (based on $265M in revenue in my model).  At $22, that is $1B in enterprise value using 53.5M fully diluted ADRs.  Hence, Baidu is buying NQ at a 7% 2014 FCF yield and NQ is growing much faster than Baidu (50% for NQ in 2014 vs. 27% for Baidu).  Given that Baidu raised debt for the acquisitions, as long as the return on investment exceeds the interest rate, the deal is not dilutive at all.  Quite accretive to Baidu.  Good chance this deal happens in 2013.

[tradestar2012]

I'm using PJC's sharecount of 58M ADRs. 58x$22=$1,276. Even then, that share count might be light given how many shares are convertible due to the acquisition earn-outs and Omar's earnout. Omar's I'm not sure if his earnout is options or out right shares. Anyhow, I was thinking an all stock (brain fart) deal but I think you are right and that they would use all cash. However, I'm still not sure they would unload their entire warchest on 1 deal. Also, my calcs show this being only mildly accretive given BIDU's much larger EPS. Around 2-3% accretive in 2014. Not a bad deal for them if they were to go down that path.