NQ Mobile (NQ) is a global mobile security and privacy protection SaaS company for smartphones. NQ's mobile security services protect users from mobile malware, data theft, and privacy intrusion. NQ is the global leader with 242 million customers and is adding 400,000 new customers a day. The Company is a highly levered play on the strong global growth of smartphones and the rapid growth in malware targeting smartphones. Given NQ's massive growth and strong FCF (2012 revenue up 127% y/y, 2013E revenue up 90% y/y, 2013E FCF up over 100% y/y), the stock is silly cheap. Hence, the question is begged. Why is NQ silly cheap? One (unfounded) concern is that mobile security software could become a commodity or is not scalable. This article will explain why NQ produces differentiated technology that has a sustainable competitive advantage.
NQ's Global Customer Network Size = Network Effects
Why does the size of a mobile security company's network matter? Simply said, the effectiveness of a mobile security company's tools and methodologies are only as good as the size and coverage of its global network of users. Although mobile threats do not pay attention to borders, mobile malware is being developed most often in China, Russia and India. NQ Mobile has literally millions and tens of millions of users in EACH of these countries. As a result, NQ sees the threats before other mobile security companies and neutralizes the threats before they proliferate to other parts of the world. NQ's vast global network of 242 million customers is one of the key reasons why NQ Mobile is the most effective company in mobile malware identification and resolution. In fact, NQ identifies and neutralizes over 75% of all global malware threats before any other company in the world. Another way of saying this is… NQ Mobile identifies and neutralizes more mobile malware first than all other mobile security companies in the world combined.
NQ Mobile has the largest and most geographically diverse user base in the entire mobile security industry. NQ Mobile has over 242 million registered user accounts - 85 million of which are active users. An "active user" is defined as a customer that routinely interacts with the NQ software. This is an important distinction, as most other mobile security companies simply promote their total registered user numbers. Active users are the users that drive revenue, help to promote NQ's products to other users and are most often the first to try new software introductions.
Although many of NQ's competitors do not provide detailed breakdowns of their user bases, NQ's active user base is quite likely larger than all of NQ's global competitors combined. NQ's customer network lead over the industry continues to increase. NQ Mobile added 38M registered users in 3Q12 alone. Based on publicly available information, Qihoo is NQ's nearest competitor in China with a total of 37.6M registered users (Source: SinoMR/Gfk) and Lookout Mobile and AVG are NQ's nearest competitors outside of China with 30M and 20M registered users, respectively (sources: mylookout.com and AVG earnings call October 2012). In addition to leading in total users, NQ Mobile also enjoys a geographic advantage over its competitors with registered user accounts in more than 150 countries. This includes leading market share in some of the most infected markets in the world such as China - where the majority of mobile malware is developed.
NQ's China Market Share
Sino MR is the most reputable market research firm in China that tracks the Chinese mobile industry. According to Sino MR's recently released 3Q12 report…"At the end of 3Q 2012, the registered users of mobile security have reached 167 million in China. Among which, NQ Mobile's market share has remained at 63%, slightly higher than the previous quarter. "
NQ's Differentiated Technology
For many years, mobile security experts have been fighting an uphill battle against malware, which has been steadily and dramatically increasing in both volume and sophistication. Researchers face the daunting challenge of trying to catch malware before it makes its way on to users' smartphones. However, in many cases, they rely on known malware samples and their signatures. This means that malicious software can sit in app marketplaces for days, weeks, and even months being downloaded by users, before it's discovered. NQ Mobile analyzes mobile malware using RiskRanker, a first-of-its-kind probability assessment tool that can proactively monitor for risky behavior in apps. RiskRanker alleviates this problem by identifying apps with risky behavior while they are in the app market and before they make their way to a user's phone. It uses a unique two-step method of discovering malware, which is much more accurate in identifying patterns of seemingly innocent API uses that can actually be malware. RiskRanker analysis significantly reduces the need for slower manual analysis of Android apps, allowing NQ to proactively monitor thousands of apps for issues before they infect users. RiskRanker changes the paradigm from being faster at discovering malware that has already infected devices to discovering malware before it infects devices. It scalably analyzes whether a particular app exhibits dangerous behavior (e.g., launching a root exploit or sending background SMS messages). The output is then used to produce a prioritized list of reduced apps that merit further investigation.
Industry Accolades for NQ Mobile
NQ's software and management team received numerous accolades across the mobile industry in 2012…
- CES Mobile Apps Showdown: Top 25 (For NQ Mobile Security and Family Guardian) - 12/17/12
- "Top 100 app: Global Mobile Internet Conference Silicon Valley (GMIC SV) 2012 AppAttack" 10/22/12
- "Omar Khan -Bronze winner in the Technology Executive of the Year category, 2012" 11/12/12
- "Henry Lin and Omar Khan - Young Innovators Under 40: Mobilizers" - FORTUNE 10/11/12
- "It was only a matter of time before a technology came along that would help parents turn smartphones into a teen watchdog" -CNBC 9/27/12
- "NQ Mobile's Family Guardian will protect your kids" -CNET 10/15/12
- "NQ Mobile Family Guardian App is one of the best … apps thus favoring user friendly services throughout the Google play store" - Bestandroidblog.com 9/27/12
- "NQ Family Guardian ensures your child's safety and empowers them to enjoy a safe digital experience." -Androidpit.com 9/26/12
- "The comprehensive suite of tools protects children from harassing phone calls, allows parents to set up phone usage hours and more." -Nibletz 9/28/12
- "NQ Mobile Vault for iPhone solves the "all or nothing" problem of showing images on your smartphone" -iphoneappreview.com 8/31/12
- "NQ Mobile's Vault is the app every celebrity who had their "personal" photos stolen from their phone wishes they had." - LAPTOP 5/9/12
- "NQ Mobile helps fight mobile malware on Android devices and is popular enough to have been downloaded over 100 million times" -InformationWeek 3/8/12
- "Makes mobile internet safer and prevents frustrating internet attacks on your device" -CNET " 5 OUT OF 5 STARS!"
NQ is currently less desired by some investors given that the Company is Chinese, the market cap is small at just under $350M and the daily trading liquidity is approximately $2-3M/day. A recent blog post (since removed due to its inaccurate claims) questioned NQ's customer numbers and market share in mobile security. The blogger inquired why NQ did not include Sino MR's market share statistics in NQ's 3Q12 quarterly results. In reality, the recently released 3Q12 report from Sino MR had not been released at the time of NQ's 3Q12 quarterly report and therefore the data from Sino MR market share report was not included. The updated 3Q12 data from Sino MR is included above and shows NQ's market share actually increasing in China to 63%.
2013 Growth Drivers - A Quick Review
NQ will benefit from several additional growth drivers throughout 2013. First, NQ's retail penetration should reach over 2,000 retail mobile wireless stores by mid-2013. Recall, that NQ announced it experienced a 20% attach rate on smartphone sales through its retail partner stores. A 20% attach rate is extremely high and I expect it to decline to the 8-12% range. That said, NQ began to ramp its retail wireless store penetration in 2H12 going from 300 stores in August 2012 to 900 in December 2012. Second, NQ is being integrated into Mediatek's smartphone chipsets in 2013 so that NQ's software is pre-loaded on these smartphones. Mediatek's chipsets were in 110M smartphones in 2012. Having NQ's software pre-loaded on Mediatek's chipsets is a huge growth driver in 2013.
NQ Mobile addresses the rapidly growing pain point of privacy management and mobile malware targeting smartphones. As discussed above, NQ's massive global customer network, explosive revenue and FCF growth, and differentiated RiskRanker technology results in a sustainable competitive advantage. The stock is dirt cheap (for now), trading at approximately 3x EV/EBITDA 2013E with a 22% FCF yield (vs. enterprise value) and trades at just 3.5x P/E (ex-cash and ST investments). Any reasonable set of comps easily justifies a stock price of well over $20.