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NQ Mobile Inc. (NYSE:NQ)

Q3 2012 Earnings Call

November 12, 2012, 08:00 pm ET

Executives

Michele Merrell - Senior Director, Global Marketing & Communications, Brightstar Corporation

Henry Lin - Co-Founder, Chairman & Co-CEO

Omar Khan - Co-CEO

Suhai Ji - CFO

Will Jiang - VP, Strategy

Gavin Kim - Chief Product Officer

Analysts

Mark Murphy - Piper Jaffray

Andy Yeung - Oppenheimer

Operator

Ladies and gentlemen, thank you for standing by and welcome to the NQ Mobile Q3 2012 Earnings Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, November 13, 2012.

I would now like to hand the conference over to your first speaker today, Ms. Michele Merrell. Thank you. Please go ahead.

Michele Merrell

Hello everyone and welcome to NQ Mobile’s third quarter 2012 earnings conference call. The company’s earning results were released earlier today and available on company's IR website at, ir.nq.com as well as on Newswire Services.

Today, you will hear opening remarks from NQ Mobile’s Co-CEOs, Henry Lin and Omar Khan followed by our Chief Financial Officer, Suhai Ji, who will take you through the company's operational and financial results for the third quarter 2012 and give guidance for the fourth quarter 2012 and full year of 2013. After their prepared remarks, Dr. Lin, Mr. Khan, Mr. Ji and our Chief Strategy Officer, Will Jiang and our Chief Product Officer, Gavin Kim will be available to answer your questions.

Before we continue, please note that discussion today will contain certain forward-looking statements made under the Safe Harbor provision of the US Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectation. NQ Mobile does not assume any obligation to update any forward-looking statements except as required under applicable law.

Also please note that some of the information to be discussed include non-GAAP financial measures as defined in Regulation G. The most directly comparable US GAAP financial measures and the information reconciling those non-GAAP financial measures to NQ Mobile’s financial results prepared in accordance with US GAAP are included in NQ Mobile’s earning release which has been posted on the company's IR website at, ir.nq.com.

Finally, as a reminder this conference is being recorded. In addition, a webcast of this conference call will be available on NQ Mobile’s Investor Relations website.

I will now turn the call over to NQ Mobile’s Founder, Chairman and Co-CEO, Dr. Lin.

Henry Lin

Thank you, Michele and welcome to everyone on the call. I am pleased to report that we achieved a strong third quarter with record revenues. Our revenues of $25.8 million again exhibit the high end of previously issued guidance. We continue to benefit from record increase in global smartphone shipments and consumer awareness and demand for mobile security and privacy solutions. Both our registered and active user base recorded the highest sequential growth for 2012, and reaching $242 million and $85 million, respectively. Some growth in our user base is also clear presentation of our business strategy and execution capabilities.

Additionally, we are starting to see significant revenue contribution from the NationSky acquisition for our enterprise business, which accounted for more than 70% of the total revenue in the third quarter. We are confident about our enterprise business and expect continuous strong growth in the foreseeable future.

Today, we also announced our intention to acquire 20% of Feiliu, which is a very important strategic step that we undertake to well broaden our mobile internet service offerings and to transfer NQ Mobile to become a leading mobile internet service platform company.

With that, I like to hand the call over to my partner and NQ Mobile’s Co-CEO Omar Khan, who will give you more details on some of the key departments in our business.

Omar Khan

Thank you, Henry and hello to everyone on the call. It’s been almost a year since I came on board as NQ Mobile’s Co-CEO and I must say I can’t be more pleased with the growth of our company year-to-date. Currently, already at an annualized run rate of $100 million in revenue. Furthermore, we have continued to globalize our business, we have built the best team in the industry, 54% of our consumer revenues now come from outside of Greater China, up from 51% last quarter.

In the third quarter, we continued our product expansion strategy that I shared with you earlier. We are excited to bring more innovative products to the global markets such as NQ Family Guardian. We are going to be launching this in our US channels. It’s a comprehensive suite-of-services targeted at parents and their smartphone enabled teens-and-tweens and even sometimes younger. 58% of teens now own smartphones in the US; the fastest growing segment of the smartphone industry. Our product allows parents to stay as responsible cyber citizens. Parents can monitor, manage and secure their kids by monitoring their contacts, text messages and photos. Additionally, you can manage their mobile internet usage on an age appropriate basis as well as their mobile application permission.

Finally, we are able to time fence their phone usage meaning, when they can be texting, when they can use their phones etcetera, when they can be browsing. And finally, you can track their geo-location for the fence in terms of an area that’s safe for them and you would be alerted when they were outside of that zone. In fact, I use this product for my 10 year old son, who is a smartphone owner today.

In the latest release for Vault for iOS and Android, we recently added private messaging with Facebook content, so we are with continued commitment to expanding our priority product lines. Together with NQ Mobile security and NQ Mobile Vault, we have built trust product suite that’s second to none; we will be sharing more about this strategy later on.

With the enterprise solutions we launched were Enterprise Shield and MMS or Mobile Managed Services through NationSky, we have moved from a single trusted security provider to a trust services provider encompassing both consumer and enterprise segments.

To capitalize on the mobile security market opportunity, we also increased our international expansion effort with the formal opening of our International Headquarters in Dallas last quarter. We have continued to strengthen our international team as well. Recently, we have hired and outstanding lead mobile architect with cross platform expertise across iOS, Android etcetera reporting directly to Gavin Kim, our Chief Product Officer.

We remain committed to our global expansion efforts and continue to see strong momentum in international business development; we newly announced agreements with Go Wireless, Wireless and Cat Phones in United States, Celcom in Malaysia, epay in Australia and Phones4you in the United Kingdom. As an example, Phones4you brings a 600 plus retail locations in United Kingdom where we’ll be launching mobile security and epay in Australia has access to thousands of locations, we are going to launching with Harvey Norman and one additional retailer initially.

As mentioned earlier, revenue from our international markets today already accounts for more than 54% of our consumer business and we believe that the continued build out and investment in our international business will further drive and sustain a long-term growth. These investments have had a short term impact on our margins. We believe that it’s necessary and critical for us to undertake in order to position ourselves for future growth. We remain confident that 2013 will be another inflection point in revenue contribution from these markets. In fact, we are starting to see great traction in the retail markets. It’s a very important channel for us. For example, with one of our large independent dealers, A Wireless, we are already seeing tax rates north of 20% with better performance source seeing 50% and even higher tax rates.

Lastly, as Henry mentioned earlier today, we also announced our Feiliu acquisition, our intent to acquire Feiliu which marks an important strategic step in our effort to move beyond security and establish a mobile internet service platform, while security and trust services remained the hallmark of our core business with the expectation of continued growth globally, we believe that NQ Mobile has a significant opportunity to combine our prudent capabilities and acquire an engaging consumers and monetizing mobile services which they lose capabilities that they bring to us.

Feiliu is a leading mobile internet and interest based community platform that has 57 million registered users and 12 million monthly active users. They engage users in vertical communities focused on mobile technology, healthcare, automotive and gaming. They are able to convert those users for third-party developers including gaming, advertising and merchandise.

They are able to monetize these conversions using virtual currencies and goods as well as mobile advertising and referral fees. This is an extremely important initiative for NQ Mobile. We already have an outstanding user acquisition engagement and conversion engine. Feiliu’s platform adds unique interest based community engagement capabilities and new monetization capabilities such as virtual currency and advertising.

As we broadened the services, we offered to our consumers and also joining the MediaTek consumers through our investment in Hesine Technologies through their premium messaging platform. We remain excited about the growth prospects that these investments bring to our company.

We are excited at the prospect to continue our evolution as a leading mobile internet platform and services company and look forward to showing more details on our strategy at our Analyst and Investor Day that we are hosting tomorrow in New York.

With that, I will now turn the call over to our CFO, Suhai Ji to speak to the third quarter financials and operational results.

Suhai Ji

Thank you, Omar and hello to everyone on the call. At outset please note that unless stated otherwise order numbers I will discuss today in US dollars. So we are happy to report another strong set of results for the third quarter of 2012 and this mark the sixth consecutive quarters since IPO that we delivered on above promise to our shareholders.

In the third quarter, we again saw a strong user growth and reached to new heights in all three sets of operating metrics that we disclose. Our accumulative registered user accounts reached almost 242 million at the end of third quarter up 97% year-over-year and 19% sequentially.

Overseas users now account for 41% of total registered user accounts up from 36% at the end of the third quarter of 2011 and 40% at the end of the previous quarter. Our average monthly active user accounts were about $85 million for the third quarter of this year, up 98% year-over-year and 22% sequentially.

Active user accounts continue to make up about 35% of the registered user base and the breakdown between China and overseas are similar to that of registered user accounts. So those ratios have been quite constant for the past two years.

Our average monthly paying user accounts were about $8.2 million for the third quarter this year, up 65% year-over-year and $0.11 sequentially. Overseas paying users now account for 32% of the total paying users compared with 30% for the third quarter of last year and 30% for the previous quarter. The conversion ratio from active to paying users was 9.7% compared with 10.7% from the previous quarter and we had yet to turn the payment option in certain markets while experiencing strong active user growth across all markets.

Also in the third quarter, we increased our pre-load or pre-installation effort for the China open market channel with a free version of NQ Mobile products which result in a rapid increase in active users who have not yet been converted to paying users.

As I discussed in the previous earnings calls, we would continue to experience fluctuations in both directions as we expand globally and adopt different market strategies. The overall increase in our user base was driven by both external factors such as the growth in the Smartphone industry, the continued proliferation of mobile internet applications and increased awareness of mobile security among consumers worldwide. It also reflects our execution ability to establish effective user acquisition and payment channels and to continuously improve existing products and launch new products to build user attraction.

Now on to the financials. Total net revenues were about $26 million in the third quarter, up about 127% year-over-year and 29% sequentially. The increases were mainly due to the strong growth in revenues from premium mobile international services, revenues from other services and also revenue contribution from NationSky, which amounted to $4.5 million in the third quarter.

Net revenues from premium mobile internet services increased 77% year-over-year and 14% sequentially to about $18 million in the third quarter of this year. The increases were primarily due to the strong and steady growth in the number of paying user accounts which reflected growth in the number of registered and active user accounts as well as increased use of NQ Mobile’s premium services, particularly among overseas paying user accounts, which generally pay a higher subscription fees.

Revenue contribution from overseas users accounted for 54% of total net revenue from premium mobile internet services in the third quarter this year compared with 50% in the same period a year ago and 51% in the previous quarter.

In terms of average revenue per user or ARPU is measured on a quarterly basis, our blended quarterly ARPU were $2.24 for third quarter of this year compared with $2.08 for the same period a year ago and $2.18 for the previous quarter. ARPU for domestic China users were $1.52 for the third quarter up this year compared with $1.5 for the same period a year ago and $1.51 for the previous quarter. So it has been quite stable.

ARPU for overseas users was $3.75 for the third quarter of this year compared with $3.01 for the same period a year ago and $3.73 for the previous quarter. Just like the conversion ratios from active to paying for overseas users, overseas ARPU also tend to fluctuate because it depends on the pricing strategy we set in each country and the timing return to billing switch. But as the overseas pricing is generally higher than China and overseas revenue carries more and more weight, we expect the blended ARPU to trend up over time.

Net revenues from other services in third quarter which include revenues from NationSky increased 643% year-over-year and 91% sequentially to $7.4 million. So, excluding the net revenues of $4.5 million from NationSky, net revenues from other services were $2.9 million representing an increase of 197% year-over-year and 20% sequentially.

The increases were mainly due to the growth in revenues from secured download and delivery services for mobile applications produced by third-parties. The revenues from NationSky increased 218.0% sequentially to $4.5 million in the third quarter due to the strong growth in its enterprise business and new customer gains. Also the last quarter revenue for NationSky only includes a month of June post to the completion of the acquisitions.

So excluding the revenue from NationSky, net revenues from other services as a percentage of total net revenue was 14% in the third quarter of 2012, compared with 9% in same period a year ago and 13% in the previous quarter. So before moving onto the cost of revenues and operating expenses, I want to refer you to our disclosure, our non-GAAP financial measure which was included in our official press release, so only difference between our GAAP and non-GAAP numbers our share based compensation or SBC expenses.

So SBC expenses included across cost of revenues and operating expenses on a GAAP basis but excluded to derive our non-GAAP numbers. Most of the SBC expenses are incurred in operating expense line items and we have included a reconciliation table in our earnings release showing the detailed calculation.

Cost of revenues in the third quarter was $8 million, representing an increase of 264% increase year-over-year and 70% sequentially. Excluding $3.4 million of NationSky's contribution, cost of revenues increased 110% year-over-year and 28% sequentially to $4.6 million.

The year-over-year and sequential increases were primarily due to increased customer acquisition cost as a result of more users acquired in the third quarter and higher revenue sharing with mobile internet service providers consistent with the increase of revenue from them. Gross profit in the third quarter was $17.8 million, representing an increase of 95% year-over-year and 17% sequentially. Gross margin or gross profit as a percentage of net revenues was about 70% in third quarter of this year, compared with 81% for same period a year ago and 77% in the previous quarter. Excluding the impact of NationSky, gross margin was about 79% and 81% in the third and second quarter of 2012 respectively.

So given NationSky’s lower margin business nature, gross margin is expected to decline further in the fourth quarter of 2012 as NationSky’s revenues contribution becomes greater. NationSky’s gross margin in the third quarter and second quarter of 2012 were about 25% and 20% on a standalone basis respectively. And the cost of revenues for NationSky primarily consists of the hardware device procurement cost.

Now on to the operating expenses; for the third quarter of 2012, third quarter of 2011 and second quarter of 2012; we recorded total SBC expenses of $7.8 million, $2.7 million and $5 million respectively; of course the three operating expenses line. A significantly higher SBC in the third quarter of this year was primarily due to the SBC impact of newly hired executives and employees and acquisition of NationSky, which are also the main reasoning contributing to the GAAP operating loss we had this quarter.

So to make the quarterly comparison more consistent, I would like to address the following line items on a non-GAAP basis which excludes SBC expenses. The non-GAAP selling and marketing expenses were about $5 million in the third quarter, representing an increase of 252% year-over-year and 40% sequentially. The year-over-year and sequential increases were primarily due to higher marketing and advertising spending and higher staff costs as a result of increase in salary and headcount.

Non-GAAP general and administrative expenses were $4 million in the third quarter, representing an increase of 92% year-over-year and 10% sequentially. The year-over-year increase was primarily due to higher staff costs from salary and headcount increases, higher legal and professional fees and higher consulting fees resulting from acquisitions and investment activities made from the second quarter of 2012; while the 10% sequential increase was primarily due to the higher staff costs, higher traveling and the entertainment cost, partially offset by lower office related expenses.

So non-GAAP research and development expenses was $2.3 million in the third quarter, representing an increase of 123% year-over-year and 35% sequentially. The year-over-year and sequential increases were primarily due to higher staff costs from salary and headcount increases. So as a result, non-GAAP operating income was $6.8 million in the third quarter this year, representing an increase of 44% year-over-year and 4% sequentially. Non-GAAP operating income was 26.4% in the third quarter of this year, compared with 41.6% in the third quarter of 2011 and 32.8% in second quarter of 2012.

So excluding the impact from NationSky, non-GAAP operating margin was 29.8% and 34.5% in the third quarter and second quarter of this year respectively. NationSky’s operating margin was about 10.3% and 10.4% on standalone basis in the third and second quarter of 2012 respectively. We had a foreign exchange loss of 0.2 million in the third quarter, compared with a gain of 1.6 million in the same period a year ago and a loss of 0.3 million in the previous quarter. The foreign exchange loss was primary attributable to the depreciation of RMB against US dollars, as a significant portion of IPO proceeds were converted in to RMB and placed in bank deposits since the second quarter of 2012.

And we continue to record interest income in the third quarter, resulted from our strong cash and deposit position. Interest income was 0.8 million in the third quarter of this year, compared with 0.5 million in the same period a year ago and 0.8 million in the previous quarter. So the significant year-over-year increase was primarily due to the higher term deposit position.

Income tax expenses were 0.3 million compared with 0.08 million in the same period a year ago and 0.12 million in the previous quarter. So the sequential and year-over-year increase are mainly due to the more taxable profit generated; and we expect our effective income tax to remain relatively low for the remainder of 2012.

The net income attributable to NQ Mobile was 0.3 million in the third quarter, compared with 4.3 million in the same period a year ago and 2.1 million in the previous quarter. Again the decline in net income is mostly due to higher SBC expenses in the third quarter. Non-GAAP net income attributable to NQ Mobile was 8.1 million in the third quarter, compared with 7 million in the same period a year ago and 7.1 million in the previous quarter.

On EPS basis, our third quarter GAAP earnings per ADS is about $0.01 on a diluted basis and a non-GAAP earnings per ADS is about $0.16. In the third quarter of 2012, we continue to generate strong cash flows; our net cash flow generated from operations for third quarter was 6.9 million compared with 2.6 million for same period a year ago and 1.9 million for the previous quarter. As of September 30, 2012 the company had a total cash position of about 126 million; about 35 million cash and cash equivalents and a 91 million term deposits and differed revenue of 10.9 million.

So looking forward to the fourth quarter of 2012 and beyond, we expect net revenues to be in the range of 28.5 million and 29.5 million for the fourth quarter of 2012; thereby raising our net revenue guidance for the full year 2012 from the previous issued range of 86 million to 89 million to the new range of 90 million to 91 million. And the company also initiates its revenue guidance for 2013 to be in a range of 150 million and 155 million. So please note the above guidance for 2013 does not include the impact from the just announced Feiliu acquisition.

So this concludes my remarks, and lastly as a reminder I will encourage to attend in person or watch through the webcast of our analyst investor day tomorrow starting at 1 PM New York Time. So I will now hand the call over to the operator and open the line for questions. Operator?

Question-and-Answer Session

Operator

Your first question comes from the line of Mark Murphy from Piper Jaffray. Please ask your question.

Mark Murphy - Piper Jaffray

I wanted to begin by asking you about the conversions rates at TCC and A Wireless, you had mentioned a number of 20%, I wanted to, and I think you said in some cases, 50% conversion rates that is just a lot higher than I would have expected. I think we were seeking 10% to 20%, I want to make sure that we heard you correctly, and is the 20% number a blended average of stores that are online thus far and maybe how do those conversion rates compared to what you had hope when you entered into those arrangements?

Omar Khan

Yeah, I am going to start, hey Mark answer for your question, and I am going to start little of bit get and also provide some additional inside. Yeah, so what I share on the call from a comment perspective is absolutely for me it’s a blended average of the stores that they have launched. And when I said the statement that I did which is higher performance stores are 50% and above, it all has to do with performance of individual stores, where we have where the training have taken hold, where store manager is personally are engaged and even using the product it all has to do with training.

So what we are trying to do is to get as many of the stores replicated at the higher performing rates as possible and that has do with the engagement with the store manager, with the amount of point-of-sale show that we put out there, as well as the training that we provide the store managers and their sales forces. And so that's probably what you and I, we chatted about on the last conference call, we are making a pretty large investment in throughout the quarters at the end of Q2 to make sure the training was profitable for stores.

And I promised that during the Q3 conference call to share some insights or some data around what we are seeing. So absolutely, the blended average is above 20% already. Our internal estimates and that's just for A Wireless for now and we will share additional data overtime, but as you just mentioned, we’ve internal, we have a range of forecast we are very pleased with where the numbers are coming in right now and we continue to think there's opportunity to continue to improve that tax rate as well. So, Gavin any……..?

Gavin Kim

I mean not just to belabor the point but yeah the deals that we have already launched in market obviously as A Wireless, we are in that TCC and Moorehead relationship as well. Those channels are, they are performing well, like Omar had mentioned we are seeing tax rates at north of 20%. We think there's clearly a lot more headroom in the business, a lot of this for us is, I mean frankly we are still learning how to execute within that channel. Omar mentioned a lot of the kind of the key success factors for us. A lot of it goes back to training, a lot of it does go back to just understanding how to work through the sales process. This is still in the US market. We are calling it an assisted sale and so that process of working through the retail channel to educate the retail sales professionals on how to actually position security is something that we are learning, our channels are learning and we are taking clearly some best practices and trying to roll them across the channels that we have in that market today.

Omar Khan

And then one additional point Mark is that again that's just mobile security. We see the opportunity as we are heading forward to launch, we are going to be launching into Family Guardian in that same channel as well. So I mean our team right now, Conrad Edwards and his team, our Chief Experience Officer is actually and we are going to, he is going to be sharing some more details tomorrow at the Investor and Analyst Day, but we are developing point of sale materials to make sure that as a parent is walking into a store that there's point of sale material that’s engaging the parent at the store that says, if you are here to buy your kid a smartphone, don't walk out of here without buying NQ Family Guardian. And we are making sure, that we are putting the right investments in place to convert other products at retail as well. So I think we've talked about the strategy. We've put retail in place and one of the benefits of it is the low incremental or marginal costs of adding new products into that channel and that's something that we are going to fully take advantage of with the launch of our additional products.

Mark Murphy - Piper Jaffray

Okay, great and Omar just, I just want to see if I'm digesting this correctly, I mean from our side of the sense here, can we extrapolate that 20% out across all these stores. I know it say the ones that haven't rolled out yet and as we think through there's A Wireless you have a whole slew of new agreements I think in the UK and Australia; I mean are you throwing this number out so that we can start thinking about that as a broader kind of global average across these types of retail stores or would you, you think we should maybe remain more conservative than that until we learn more about some of these other stores and geographies?

Gavin Kim

Yeah Mark, so this is Gavin again, so our experience, I think what we are relaying to has really been our experience in the US market, I mean clearly the channels that are now under full execution are very specific to A Wireless and TCC. As you know we've announced our additional relationships including Wireless and Go Wireless, epay in Australia, Phones4you in the UK. A lot of these other channels, a lot of these other markets are certainly markets that we've got to go through that same learning process. I think if you were to ask people here in the room, that question I think we will say we are very optimistic that those channels are going to execute really well for us.

But especially as we move overseas, specifically in UK and into Australia with Harvey Norman, we are going to experiment; we are going have to figure what the right model is, what the right experience is at retail in order to convert. But to put into perspective, in the United States 20% number that we shared, that has been the number that has grown overtime. If you ask the same question, a month ago, it would have been a different number. So we're continuing to see a lot of headroom in the channel. We want to keep growing and keep blowing it out.

Omar Khan

So Mark, as we launch, obviously it starts at a lower number and has ramped to this perspective. So as I bring additional stores online, they come online, so there is two factors. One is, stores coming online themselves and then working up to this type of attach rate and then beyond there as well. So there is obviously phasing purely from this point of perspective and then there is also a phasing in terms of growth rates around the tax rates that you have to model.

Mark Murphy - Piper Jaffray

I wanted to ask you as well about the longer-term, I guess I call the strategic role of some of the more traditional security products to your business model. What I mean by that is, products like the core antivirus, you are rolling out some of these very exciting new products like Vault and Family Guardian, which are, I guess, you could argue they are security oriented types of applications I suppose, but they have a very innovative, modern and kind of different feel to them and flavor to them. And so I wanted to understand, how are you looking at this and do you think that few years down the road that the traditional security products are going to be kind of a more of a minority role in the business?

Gavin Kim

Yeah Mark, this is Gavin again. So I guess, if you think about mobile security by itself, I think we share a business that’s still being very regionalized, meaning the industry is to sell to people that we compete with; they are very regional competitors and I think continue to win business or we are winding the gap on the merits of really our core technology platform, the ability of our model to basically engage and convert customers and then clearly just a proven capability or the credibility of the business that we have earned overtime.

You are right, I think we have recognized that there is just an explosive opportunity and need to try to drive broader security capabilities and I think the way that we think about it is not security as a kind of an endpoint security pure play but it’s really more about this migration to a trust services opportunity and hence the reason why we have tucked in products like Vault and Family Guardian.

We have seen a lot of strong interest from our partners. They are looking for companies who can deliver end to end solutions to them and it’s not purely just only about security; it is really about this idea by trust service platform, our trust service suite and really on that basis and frankly the reason why if you look at some of the retail relationships that we have announced even with Go Wireless and Wireless, they are running they are going to roll out all three of them, as an example in the U.S. market and that’s just obviously an example only.

But I guess for us we see the opportunity for us to see these other products as really as engagement points. The more people engage with our product, the more opportunity we then have to drive further conversion opportunity and that happens either in the form of cross-sell, but also product bundling; product bundling as an example I mentioned before where and retail somebody might choose to buy a whole trust package which would include Vault and Family Guardian as well as security.

But also even just experiencing the app itself, we are already doing things like cross-selling of Vault duty application itself. So for us it is about using security as a foundational layer in the company, but then driving additional incremental trust services on top of that.

Mark Murphy - Piper Jaffray

Okay, great, fantastic. I appreciate that very much. I wanted to move on in another one if I may, just in terms of the competitive dynamics say within China versus globally, I guess, as you are expanding here and kind of quickly becoming more of a global footprint. What do you see in terms of just the presence and the effectiveness of the various competitors in the different markets and maybe also the willingness to pay on the part of the consumers?

Omar Khan

Mark, this is Omar, so from a competitive dynamics perspective, as you look at the traditional core security business that we’ve built our business on top of, the dynamics remains quite stable in terms of what we’ve seen. The competitors that we’ve talked about for a past two quarters are the same ones we are running into both in China and outside of China. We do see opportunity to, now just to piggyback on what Gavin said, outside of China for instance, as we broaden that side of services that we offer to drive chat trust in the mobile ecosystem in terms of different constituencies, constituencies looking for let’s say a encryption solution, or contingencies looking to protect their kids from a smartphone perspective or the enterprise constituency looking for a BYOD solution. We see a broadening, maybe the competitive set that we may have otherwise gone up again, so there is point.

So we have end to end solutions that individually there are quite competitors in regions that we run up against, but from an end to end perspective there is much fewer competitors that offer the entire suite; everything from consumer endpoint security to consumer privacy and encryption solutions as well as the family services or family protection services as well.

So as we engage with channels, then customers are looking for more of an end-to-end solution that competitive set around the world continuously diminishes but we do have competitors as I mentioned earlier that are in the point solution. So we have competitors that are providing family solutions as an example, those competitors and enterprise competitors and the consumer end point securities based and those dynamics haven't changed.

I think what has changed for us is that we are able to engage our customers more broadly at an end-to-end solution where we give them an opportunity with one engagement with one support structure, with one marketing support engine, with one point of sale system in terms of channel marketing etcetera to be able to sell a broad set of solutions so its not just about having to partner with three different partners or two different partners to sell value solutions. So they often itself I think gives us a competitive advantage.

Inside China, traditional competitors that we talked about, we continue to see tremendous growth in our China business from user acquisition perspective as well as from monetization perspective. It’s the same folks although I will say that if you look at the strategy that we’ve started to unveil both with the investment in Hesine Technologies in terms of joint venture with MediaTek as well as the investment and acquisition that we announced today related to Feiliu, we see an opportunity Mark that we've got an engaged customer set in the China market as an example.

We believe there's an opportunity to broaden the set of applications and services we can provide to them and monetize in a broader variety of ways. It’s an element we’ve talked about in the past but now we are giving obviously a broader lens to it. So as we think about for example the investment in Hesine Technologies is an investment that brings to us the ability to develop and co-develop and integrate a trust services suite into our product platform that is a premium messaging or premium messaging platform and that's a daily active engagement user product, that’s somebody engaging with the product or service through messaging, e-mail, IM, SMS on multiple times a day basis.

So we believe we have the opportunity to complement that service suite with security as well as open the door for other services whether its Feiliu acquisition or other third-party developers and then be able to monetize not just as a premium service offering through carrier given or subscription services but also start to monetize that traffic through other means, whether its referral fees, whether its advertising and beyond.

So I think that gives you an understanding of, hopefully if gives you an understanding and definitely asked a follow-up question that within the China market we are broadening beyond even though the secured businesses run stronger we see an opportunity to leverage the platform that we built complemented with pieces from the Feiliu acquisition as well as from the Hesine Technologies investment and had a broader offering with a broader monetization opportunity.

Mark Murphy - Piper Jaffray

And Omar finally for me I think my phone connection wasn't perfect and forgive me if I completely misheard this comment in your prepared remarks but I thought you said something about adding private messaging with Facebook content, I'm not sure if I got that right but any clarification there would be appreciated because I don’t think I've heard you articulate anything that way before?

Omar Khan

Yeah, so within the vault, I'm going to let Gavin talk about that.

Gavin Kim

It’s really within vault and this is our current release that's available on both iOS as well as on Android. We basically enabled encrypt and secure messages between Facebook contacts and that's part, again that is already commercially available on both iOS as well as Android.

Mark Murphy - Piper Jaffray

Okay, so that's something you are already monetizing that, that's already reflected in some of the vault business that you are doing?

Gavin Kim

We’ve already released it. It's actually a free feature.

Operator

Your next question comes from the line of Mike Walkley with Canaccord Genuity. Please ask your question.

Unidentified Analyst

Hi, this is (inaudible) for Mike Walkley actually. Mike’s on a delayed flight to your Analyst Day. Congratulations on the great quarter and I have a couple of questions if I may. First one is for Suhai, given the acquisition that you announced today for modeling purposes, what kind of a weighted average diluted share count should we be thinking about in the fourth quarter and 2013 perhaps?

Suhai Ji

Yeah, from the earnings call, we just released our weighted average share count increased from 50.1 million in the last quarter to about 51.2 million this quarter. We think we will see a gradual slight increase in the share counts because there are options exercised by the employee and also there are certain options or shares that we invested from the certain small scale acquisition investments that we made, acquisition basically (inaudible) here that will be investing but I do not have accurate set of estimates in terms of one number that will be but we think it's going to be more gradual in terms of share count increase.

Unidentified Analyst

Okay, great and perhaps Omar staying on the retail channels, obviously, significant deal momentum this quarter. I just wanted to talk about what kind of strategies are you using for install, promotion and product placement and pricing in these retail channels and how easy is it to replicate this, I would say another retailer or say in the international markets?

Omar Khan

So, yeah we had said a lot of time said I am getting it right the first, with these first couple of launches, we put a lot of attention and energy and we still are by the way and we don’t believe that Gavin mentioned and we don’t believe that we fully despite that fact that we are seeing good results, he still believes there is opportunity to improve our capability at the point of sale, so (inaudible) and his team runs basically marketing and consumer experience for us. We have got a handful of engagement techniques that we are using and we are going to share a little bit more actually a lot more detail tomorrow at Analyst Investor Day which I know Mike will be attending. Everything from point of sale materials that are physical materials whether its brochures, floor standing displays, a window, and then from a pricing strategy perspective Mobile Guard as an example is priced today at [19.99] at retail before consumers and there will be pricing strategies revealed shortly thereafter for additional product.

So it’s a very good offer that we got to retail with greater margin opportunity for the channels selling it which allows us to engage and get the incentive structure is aligned so that the channel is well incentive to sell the product as well. So from a scale extent and getting in terms of making sure that we are able to do this right, it is scalable.

So as we launched when we go from 300 stores to 500 stores to 1,000 stores to 1,500 stores to 2,000 stores specifically in the US market, we believe the strategy scales very, very well. If we don’t have to start from scratch or zero to be able to engage these channels and we are also when channel runs out of material we have created a process by which they can reorder those materials for each of those individual stores and we are continuously improving that process as well, and we have also brought on customer care capabilities here in the US as well.

Internationally, I think Gavin sort of alluded to this earlier. We are initially going to follow the best practices that we earned here in US but we will not necessarily, we are not going to have our blinders on. We do not believe that US model is a one size fits all, so we are going to be very careful in understanding the (inaudible) of channel with both Australia and UK as we launched Harvey Norman and Allphones for your to make sure that we understand how we will be able to engage through those channel, what the user feedback is, what’s the difference is in terms of consumer engagement and selling techniques.

Obviously, the best resource we have is the fact that we are getting retailers actually who know how to sell to their customers and that’s the best feedback that we can is listen to them, how they sell devices and software and services today and then give them the materials that they need rather than imposing unnecessarily our work, our strategy upon them. We have a very collaborative process with the retailer because it’s not a necessarily internationally maybe not be a one size fits all strategy. It’s working well today and our hope is that we continue to work very closely with the channel to help launch it and scale it.

Unidentified Analyst

And just one last from me; in terms of the customer acquisition costs, now that you have retail channels and you are having in-store promotions and the other customer acquisition cost association within, how should we view this customer acquisition cost trending essentially perhaps you can talk about this anecdotally, is it a higher or lower in certain geographies or certain product categories or in certain user acquisition channels perhaps?

Omar Khan

I mean, I think Suhai and I can really tag team this. Obviously, every channel has a different structure in terms of acquisition cost. The digital channels, or ASTRO channels, the [average] acquisition costs come primarily from advertising or other types of fees associated with the prime users in our channels. When we talk about acquiring users through the retail channels, there's channel marketing costs that we have in the sales and marketing line that go to supporting those channels but there's no specific user acquisition costs other than the channel margins that we have absorbed, but those are already netted out and it comes from net revenue basis.

So there is no sort of cost of sale associated with user acquisition, I mean the net margin already reflects channel margins, sorry the net revenue already reflects channel margin that we would have to pay to the retailer for their cut and their intent to be able to market and sell that product in retail as well. We do have channel marketing costs in terms of point of sale materials, etcetera that go into our sales and marketing line, but I'll let Suhai add a little bit more color on that.

Suhai Ji

Yeah, I think if you only talk about user acquisition costs mostly we pay, it’s really for online user acquisition and also for the installation. Those are on the CPI basis it is cost for action. We pay for the [Regis] user that generate us through those different channels, and those vary in terms of pricing operating from one market to another. For example China usually is much cheaper in overseas market and those huge acquisition costs are part of our cost of sales, and as we increase our effort on both on acquisition and consolidation and that cost will go up just like in this quarter and see the gross margin for the, and to move up excluding NationSky business dropped about 2% and that’s mostly due to the user acquisition efforts that we’ve put up. On a blended basis our average user acquisition costs is between $0.02 to $0.07 per new registered user. So that's where our cost is. Then for the other marketing or the channel marketing of the advertising that we do not on the CPI basis, those fall under the sales and marketing expenses.

Operator

Your next question comes from the line of Andy Yeung from Oppenheimer.

Andy Yeung - Oppenheimer

My first question is about your Feiliu acquisition, can you tell us how Feiliu is into your product offering and also what kind of snitch would you expect from Feiliu, and also what's the current revenue run rate for Feiliu and margins.

Omar Khan

Andy its Omar, I will take a shot at answering that question. We got to talk a lot about this in detail actually tomorrow. We are doing our analyst and investor meeting. I know we’ve given a bunch of plus for that, but we definitely want to leave some of that information for tomorrow, because it makes a lot more sense in pictures and on charts when we show it to you but I think Gavin and I both talked about how Feiliu fits in from a product platform side perspective. So if you think about the fact that we've got services that we then can augment in terms of customer engagement through the vertical communities and increase the engagement with our services using that strategy that's one aspect of it on the services and from the services perspective.

From a components perspective they have a lot of different components; everything from user profiling to interest based profiling in terms of how they think about users and how to engage those users and how to identify what the products and services to sell through to those users. That’s very valuable information that we can use to then complement the monetization opportunity.

So if you think about the monetization capabilities Andy that we had to date, that we've done really well. We've done digital sales very well where we've built through carrier build and other premium capabilities such as subscription services, in addition to our retail activation in retail sales. What Feiliu brings us is augment of [billing] capability, virtual goods, virtual currency, advertising monetization.

So you can see that it completes the picture when it comes to, we call it building of monetization. So every sort of stage or value, every stage of value chain of our business, we believe that the Feiliu acquisition is complementary in terms of how we look at it, in terms of how it fits in to our business model.

From a revenue perspective, obviously we’ve talked about the fact that we see Feiliu as earnings accretive in 2013. It's a high growth business. We're going to share additional details with you and with our investors as the acquisition closes. But currently from a revenue outlook perspective for 2013, our expectation ranges about 20 million to 25 million is what we're forecasting for the Feiliu business.

Andy Yeung - Oppenheimer

My next question is about both opportunities. You have recently launched a host of new products and expanded geographically. So in terms of your top monetization opportunity, geography of products, can you give us the top one or two that you think have the most incremental opportunity for monetization next year?

Suhai Ji

So, I think the way I think about it is our core security business continues to provide significant opportunities for growth globally, and what I mean by that is the fact that it's, it's still very early market when it comes to mobile security. In markets like North America, Latin America and Western Europe, we see continued upside in terms of penetration opportunities for mobile security in these markets and we still see continued growth in the emerging market whether it’s China, Middle East, Southeast Asia, India etcetera.

So there still remains a very, very important growth factor for our business. For us enterprise continues to be a big opportunity as well, so we have seen success with our mobile manage services product line that we’ve commercialized over that NationSky’s commercialized security system very, very nicely within that portfolio. So when you think about mobile application management, mobile content management, mobile device management security is a very poor component on what you need to offer a holistic solution or a complete solution to an enterprise, and so the enterprise opportunity that we see both in China and abroad is still significant. And then when we think about the trust services offerings whether it’s piracy products or family oriented products that derive trust within the mobile eco system among these other constituencies, those are again layered components of growth that we see globally

As an example Family Guardian you are touching a segment to a certain degrees it’s fairly priced insensitive. Parents will spend to a certain degree what they need to spend to protect their kids in that environment, and we have seen tremendous feedback on this product both from tech reviewers, from media as well as parent themselves on what this product does and how important it is for them to have it.

So we are targeting a very enthusiastic segment that has - obviously we are going to price it correctly, but there is a high degree of conversion opportunity for that segment. So we see growth opportunities coming from Family Guardian as well. And then I think tomorrow we will talk a little more detail about what monetization opportunities are created by Feiliu and the business integration when it comes to how that plugs into our platform because I could spend 10 or 15 minutes talking about it, but I think we will go into it more detail is very excited.

Andy Yeung - Oppenheimer

One more questions about your M&A strategy, obviously you too have a very strong balance sheet with more than $120 million in net cash and you made some acquisitions and investment this year is NationSky (inaudible) and Hesine. So can you give us some colors in terms of your overall M&A strategy; what other area you are looking into and what factor you use when you are making an investment?

Will Jiang

Yeah, hey, Andy this is Will. So for company we have a really good revenue and profit track records and are earnings accretive and really have clear and interesting product and business models such as Feiliu and NationSky. We would consider acquired majority stake or 100% of the company to maximize the synergy and collaboration potential.

Another half will be, we would also consider consolidate competitive offers to increase all our market share globally. And also we would like to share more insights on our investor day. In the strategy session; we would like to share with you some of the detail strategy going forward in terms of making early stage investment to [clamp] down cloud offering and platform offering in detail manners more.

Andy Yeung - Oppenheimer

Great, refer to the analyst day tomorrow and congratulation again on a great solid quarter.

Operator

There is no further questions at this time, please continue.

Michele Merrell

Thank you, operator. If there is no further questions at present, we would like to conclude by thanking everyone for joining us on the call. We welcome you to recharge to us directly by emailing investors at nq.com if you have any questions or request for additional information. We encourage you to visit our investor relations website at ir.nq.com, where you can find numerous resources and materials including the recording of the previous earnings webcast. This concludes NQ Mobile’s earning call.

Operator

Ladies and gentlemen that does conclude the conference for today. Thank you for participating. You may all disconnect.

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