Takeaways From A Day At NQ Mobile's U.S. Headquarters

| About: NQ Mobile (NQ)

I had the pleasure of spending the day at NQ Mobile (NYSE:NQ) with Omar Khan (co-CEO) and much of NQ's US-based team at their Dallas , Texas office on December 13th. NQ's Dallas team is an impressive group. Omar Khan was the CTO at Samsung Mobile. Since Mr, Khan joined NQ Mobile in January 2012, he has brought over 6 other senior Samsung Mobile executives to form much of the core senior team in Dallas. NQ Mobile is on a mission. They see mobile security as a massive rapidly growing opportunity and are attacking the global market from all channels.

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NQ is having tremendous success selling its mobile security software through retail wireless stores. The wireless salesperson explains the value of mobile security (malware protection, safe browsing, privacy protection, etc.) during the sales process around the same time insurance for the smart phone is discussed. The attach rate is running at 20%!! Hence, 1 in 5 smart phones bought in a retail wireless store that offers NQ's products results in the purchase of NQ's mobile security software. This is an extremely high number.

NQ Mobile just rolled out a new software product to its retail channel over the past 2 weeks; NQ Family Guardian. NQ Family Guardian is a parental control app that parents install on their kids' smartphones and tablets. This parental control application, used with an online web portal, allows parents to monitor their children's location (with geo-fencing) and smartphone usage (restricted web surfing, texting, etc.) and manage how kids use their mobile devices. Most parents monitor their kid's PC and Internet usage. NQ Family Guardian provides parents with an ability to ensure their kids are also using their mobile devices safely. Though NQ Family Guardian has only been in the retail channel for 2 weeks, early feedback from the channel has been tremendous.

NQ is rapidly rolling out in retail wireless stores in the US. In April 2012, NQ was sold in zero retail wireless stores in the US. In August 2012, NQ was sold in 300 retail wireless stores, up to 400 in September and NQ's products are sold in 900 retail wireless stores today. NQ will be in well over 2000 retail wireless stores in 2013 with just its currently signed relationships. Given the high attach rates and NQ's increasing product suite (NQ Security, NQ Vault, NQ Family Guardian), there is a massive revenue uptick coming over the next 12 months from just NQ's retail channel.

Starting in 2013, NQ Mobile's software will be integrated into Mediatek's smart phone chipsets. Mediatek produces chipsets for Tier 2 and 3 manufacturers and white label smart phones. These are typically less expensive smart phones and these manufacturers rarely alter the messaging software stack that Mediatek incorporates with its chips. In other words, NQ Mobile's software will be pre-loaded on smart phones powered by Mediatek's smartphone chips in 2013. Mediatek's smart phones chips were in 110M smart phones during 2012. MediaTek has prospered thanks to its partnerships with not only Chinese smartphone brands like Huawei, ZTE, and Lenovo but also the raft of smaller local players who have historically occupied the 2G feature-phone space and who are now moving into the smartphone market themselves. This new sales channel with Mediatek presents a huge opportunity for NQ in 2013.

We spent time discussing why NQ is technologically differentiated and superior to all other mobile security companies in the world. NQ detects more malware first globally than all other mobile security companies combined. This is a remarkable stat. Given NQ's global footprint (customers in over 150 countries) with 242M registered users and 85M active users, NQ's global reach is unmatched. NQ's highly differentiated effectiveness in malware detection was verified by the independent 3rd party testing firm Westcoast Labs. A copy of the report is here.

Risks - NQ is currently less desired by some investors given that the Company is Chinese, the market cap is small at just over $300M and the daily trading liquidity is approximately $2M/day. The SEC and China are in conflict about whether all US listed Chinese companies will have to turn over their audit working papers on demand by the SEC. In the worst case scenario, if this conflict is not resolved, it could result in the delisting of all Chinese companies from US trading exchanges. After speaking with a leading international securities law firm who is deeply involved in the matter, the law firm believes a compromise will be reached between the SEC and China. A recent blog post appeared questioning NQ's customer numbers and market share in mobile security. The blogger questioned why NQ did not include Sino MR's market share statistics in NQ's recent quarterly results. In reality, the recently released 3Q12 report from Sino MR was not yet released at the time of NQ's 3Q12 quarterly report and therefore the data from Sino MR market share report was not included. Since then, Sino MR's 3Q12 has been released and shows NQ with 63% of the Chinese mobile security market.

I came away from the day with high conviction that NQ should trade well over $20 within 12 months. At $6/share, NQ is trading at just 2.8x EV/EBITDA 2013, a 24% FCF 2013 yield (vs. EV), and 3x P/E 2013 (ex-cash). 2013 revenue will likely grow 90+% over 2012. At $6/share, NQ Mobile's ultra-low valuation is one of the largest disconnects I have come across in over 20 years of technology investing.

Disclosure: I am long NQ.

Disclosure: I am long NQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.