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Executives

Michelle Ma – Director-Investor Relations

Matt Mathison – Vice President-Capital Markets

Henry Lin – Co-Founder and Co-Chief Executive Officer

Omar Sharif Khan – Co-Chief Executive Officer

Suhai Ji – Chief Financial Officer

Analysts

Mark R. Murphy – Piper Jaffray, Inc.

Mike Walkley – Canaccord Genuity, Inc.

Jiong Shao – Macquarie Capital Securities Ltd.

Andy Yeung – Oppenheimer Securities

Jun Zhang – Wedge Securities, LLC

William Huang – Barclays Capital Asia Ltd.

NQ Mobile Inc. (NQ) Q2 2013 Earnings Conference Call August 12, 2013 8:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the NQ Mobile Q2 2013 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, August 13, 2013.

I would now like to hand the call over to your first speaker today, Ms. Michelle Ma, Director of Investor Relations and Corporate Development. Thank you. Please go ahead ma’am.

Michelle Ma

Good evening and good morning Asia. Welcome to NQ Mobile’s second quarter 2013 earnings conference call. On today’s call, we have NQ Mobile’s Co-Founder and Co-CEO, Dr. Henry Lin; Co-CEO, Omar Khan; CFO, Suhai Ji; and Vice President, Matt Mathison. We thank you all for joining us today.

Before we begin, I like to read you the Safe Harbor disclaimer. Please note that discussion today will contain certain forward-looking statements made under the Safe Harbor provision of the U.S. 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 expectations. NQ Mobile does not assume any obligations to update any forward-looking statements except as required under applicable law.

Also please note that some of the information to be discussed includes non-GAAP financial measures as defined in Regulation G. The most direct comparable U.S. GAAP financial measures and information reconciling those non-GAAP financial measures to NQ Mobile’s financial results prepared in according with U.S. GAAP will be included in NQ Mobile’s regular earning release and filings, which will occur in August.

Finally, as a reminder, this conference is being recorded. A webcast of this conference is available on NQ Mobile’s IR website at ir.nq.com. I would also like to point everyone to our presentation that can be found on our IR website. We’ll following that presentation on our call today and we encourage you to view that with us.

With that, I will like to turn the call over to our Vice President, Matt Mathison.

Matt Mathison

Thank you, Michelle, and welcome, everyone. It is an exciting time to be at NQ. It is an exciting time to be at the vanguard of many of the most groundbreaking trends and technology, and it is an exciting time to be executing on the vision of becoming a mobile Internet platform company with global reach and accelerating monetization opportunities. Even though, it is very accelerating, we are celebrating our successes. We have a very clear vision and a thorough plan to execute, and collectively, everyone at the company is focused and working tirelessly to make that vision become a near-term reality.

The takeaway from this call today is that we are proud of what we have accomplished, but this is only just the beginning. As we begin this earnings call and before I turn the call over to the rest of the management team, to discuss our second quarter results and provide an update on our business, I want to highlight a few things and it’s on page four of the slide presentation.

Number one, the platform business model is working. Our user acquisition engine is expanding and our user base along with it. Our monetization efforts and working and showing real and tangible evidence of accelerating revenue growth. We are uniquely and strongly positioned in key areas of the mobile platform environment, namely security related products, gaming and entertainment, advertising and enterprise.

Number two, as our platform business is taking hold; it is now time to clearly lay out the right metrics and framework for measuring our progress and success. The earnings release today and our conference call will lay out the proper framework going forward. As discussed on our first quarter results, we are now reporting our revenues in four different segments: mobile value added service, which includes our consumer security and gaming business; advertising, enterprise, which is our NationSky business; and other.

Also I’m sure that you noticed that our operating metrics section in the earnings release today contained a new metric, premium users, this metric simply reflects revenue generating users. The metric includes subscription users, which was previously reported as paying accounts, plus any user that also generates revenues indirectly either through the offer wall or advertising channels. Since our strategy involved accelerating and expanding the monetization of our user base, this premium user metric and the revenues they generate are how we are measuring our success.

Number three; we are also making great progress on the areas that need improvement. This is an endless pursuit for one that we will continue to openly communicate; previously highlighted areas of improvement that the company is focused on include the creation of shareholder value, DSOs and expanding our monetization path beyond direct payment for premium products. I am pleased to report that we are improving in each of these areas. This quarter’s results are only the beginning of the evidence that these improvements are underway.

Now, I am pleased to turn the call over to our Co-Founder and Co-CEO, Dr. Henry Lin. Following his remarks; our Co-CEO, Omar Khan will discuss business highlights and trends, and our CFO; Suhai Ji will then provide the financial discussion on the quarter and the outlook.

We’re now on page five of the slide presentation. Dr. Lin?

Henry Lin

Morning, thank you, Matt, and thank you, everyone for joining us. And today, I am pleased to announce that we have achieved record revenues this quarter of US$41.3 million. We’ve also achieved record non-GAAP earning per share of $0.26. Our business continued to outperform expectations with no longer talk about becoming a mobile Internet platform company. We are a mobile Internet platform company today. We’re one of the world’s leading user acquisition engines.

In the first half of this year alone, we have engaged alone $27 million new active user accounts. We have now proven that our platform is working to monetize competitive user base. We’re now successfully generating not only security subscription revenue, but gaining revenue and advertising revenue as well. In addition, we have built Enterprise Mobility business in hyper growth mode, we renowned 100% to meet to our mobile Internet platform’s trend.

As a leading mobile Internet platform company, we will continue to grow our user base around the world and broaden our monetization capabilities. While expanding our products and specialties through leading R&D programs and continuous innovation, we’re creating more than 40 new patents per year with many new technologies in the pipeline to improve mobile discovery and engagements such as next generation voice and image-based mobile search.

As Matt said, this is an exciting time at NQ Mobile, but this is only a beginning. We’re just starting the exciting journey.

We will now turn the call over to my partner and Co-CEO Mr. Omar Khan.

Omar Khan

Thank you, Henry, and thank you, everyone for joining us. I will be now following on Slide 6. As Henry mentioned, we are very pleased with our second quarter results. Our strategy of becoming a leading mobile Internet platform company is being realized with tangible results. Just to put this in a perspective, the revenue achievement during the second quarter, we generated more net revenues than we did in all of 2011. The second milestone of our $100 million, $200 million and $ 500 million strategy is now plainly in sight, as our third quarter outlook surpasses the $50 million mark faster than we originally anticipated.

This revenue growth is also being generated in very profitable ways. Our margin performance in the quarter was strong across the board resulting in non-GAAP earnings per share of $0.26, which is a record for our company. On an annualized run rate basis, this will allow us to exceed $200 million in net revenue and $1.00 per share in non-GAAP EPS, which are both symbolic and significant milestones for our company. We remain committed to fast growth, but we are focused on doing it profitably and sustainably.

Additionally, we highlighted on our first quarter earnings call, that as a company, we were not at all satisfied with the significant gap that existed between the market valuation and our business results. We committed to creating shareholder value and putting in a relentless effort to closing that gap. It has been a very busy and successful quarter for us in terms of continuous improvement on our business fundamentals, but we also delivered on our promise to not just talk about creating a shareholder value, but also to demonstrate action and results.

Let me very clear about this. We took decisive steps in addressing this, but first, adding Matt Mathison to our team. We also brought in additional and key new shareholder support with the Atlantis transaction. We believe that the majority of the impact and improvement is still in front of us. In other words, we’ve taken steps, we have a clear plan, we are delivering on our promises, but there still remains strong value creation ahead.

Now, before I provide you with a broader update on our business segments, I want to provide more detail about the successes of our monetization strategy and platform growth. As we turn to Slide 7, you can see tangible evidence that our monetization expansion has begun to take hold and is delivering results. Our monetization is increasing significantly beyond just premium security and gaming revenue to now include the advertising net revenues through the offer wall and third-party application referral. This increase in traffic monetization through advertising is enhancing the way in which we engage with and monetize our active user base.

Our active user accounts increased nearly 11% in the quarter to exceed 138 million active user accounts. Yet, our net revenues for this segment in the quarter increased nearly 24% to over US$32 million. This is a direct benefit of monetizing our one non-paying active user base.

During the second, our average monthly premium user accounts, including both our paying security customers and these other revenue generating users via the offer wall and advertising channels, is 11.3 million users. The month-over-month results we are seeing are nothing short of astounding. We are seeing the engagement and monetization levels with our active user base jump on a monthly sequential basis. It is easy to say that the results had exceeded our expectation.

At the beginning of the quarter in April, we were measuring the premium users not including the paying security account, in tens of thousands. As we exited the quarter in June, we are now measuring the same engaged and revenue generating users in the millions. As we report, our premium user accounts on an average monthly basis, it is incredibly exciting to say that we saw an average of more than 2 million of these revenue generating user accounts average during the three months of the second quarter.

The advertising segment of our business achieved record net revenues in the second quarter of $5.5 million and has already become greater than 10% of our total net revenues. We are excited about this monetization strategy and the expanded ability we have to engage our growing and global user base.

Now, let’s turn to the FL Mobile business. You can follow along on Slide 8. As Matt discussed, we are now reporting the FL Mobile business in two parts. The gaining revenues are included in our MVAS segment and advertising is reported separately. However, on a consistent basis with last quarter, FL Mobile performed well above the expectations and grew its net revenues to $7.5 million in the second quarter.

I want to take a minute to congratulate Dr. Tony Ni and the entire FL Mobile team for an incredible performance. The FL Mobile team is surpassing our expectation and as a result, exceeded numerous performance based targets ahead of schedule. As highlighted in the press release, this resulted in an increase in share-based compensation. We’re thrilled at the performance of this business. In fact, based on the trends in the current third quarter, FL Mobile is poised to achieve an annualized net revenue run rate that keeps $40 million.

In the first half of the year, FL Mobile has operated 13 games in the top 100, including current popular games such as Gods and Dragons, Journey to the West, Mythical Edition, Legend of Kings and the FL Extreme Edition of Tencent QQYujian. Also, we have had four games break into the top 10 in the first half of this year. We are very excited about the pipeline of upcoming games for the balance of the year.

We recently announced key partnerships with important developers and operators including Tencent, China Mobile Games and Entertainment, Baidu, and China Mobile. There are other exciting partnerships on the horizon. Additionally, as we focus on a platform model of FL Mobile, we will continue to expand our channel reach to a broader set of android based communities and app stores.

Finally, in the next month, we will officially begin the expansion into international markets beginning in North America. If there aren’t already enough things to be excited about in the FL Mobile business, we have further strengthened FL Mobile team with top talent from around the industry to help fuel our global expansion.

Let’s move onto a brief update on our Enterprise Mobility business. You can turn to Slide 9 to follow along. As we announced on July 15, owning 100% of the NationSky business is a powerful addition to our overall platform strategy. The BYOD trends are bringing the consumer and enterprise needs and solutions closer together everyday.

We are at the beginning stages of the mobile device management market opportunity in China and around the world. In addition to some of the exciting deals we previously announced with GE Healthcare China and AnBang Insurance, we have also recently closed an MDM contract with the People’s Insurance Company of China. Our pipeline of future MDM customers is very full and we feel rapid and accelerating expansion.

The combination of our experienced sales organization and localized customer service capabilities along with our core IP and technology strength, give us an advantage as we go head-to-head with our competitors. We remain confident that our enterprise business will not only grow rapidly from a top line perspective, but we will be able to maintain operating margins in the 10% to 12% range over time.

There will continue to be some fluctuations from quarter-to-quarter, especially as product procurement is a leading indicator of future software and services revenues. Like all of our businesses and in everything we do, we view the marketplace as a global marketplace. Our technologies and solutions work globally and our enterprise business is no different. Over time, we will see our solutions expand across geographies and across key partners around the world.

I will now provide you with some highlights from our consumer security business internationally, and you can follow along on Page 10. As we communicated last quarter, NQ Mobile Security was officially launched in partnership of Telcel in Mexico in June of this year. Over the course of the last couple of months, Telcel and NQ have been focused on activating all distribution channels as well as initiating and optimizing several digital marketing efforts in mobile security trial promotions. Telcel and NQ are also initiating the preload planning process, as we expect to be in market preloaded on smartphones, Telcel smartphones along with retail promotion support, starting in the Q4 timeframe.

While the operators’ marketing efforts are still in the beginning stages, early results are very promising. Stay tuned for more news here as we will be launching with the America Movil operator brand Claro in Brazil in the September-October timeframe, followed by Peru, Argentina, and the remaining Latin American countries in America Movil’s footprint as well as the rollout of Vault and Family Guardian in the six months following that.

We are also pleased to have been awarded the U.S. Cellular Mobile Security bid for NQ Mobile Security and NQ Mobile Vault this past quarter. This award expands U.S. PC’s relationship with NQ Mobile and continues to validate our land and expand strategy, as we will soon be delivering our full trust suite with the operator on the fourth quarter.

All of NQ’s products are being introduced under the U.S. Cellular Protector series. The U.S. Cellular Mobile Data Security, which is based on NQ Mobile Security, was first launched in July in our joint go-to-market plan, including both retail offerings and on-device preloads across the U.S. Cellular smartphone portfolio. In October, we expect to be fully operational with the first U.S. Cellular smartphone to roll off the line with Mobile Security preloaded on the device followed by the rest of the U.S. Cellular Android portfolio shortly thereafter.

Our U.S. retail footprint now stands at 3,500 locations in the United States. We are ahead of our plan in terms of retail footprint. This primarily came from the addition of target with 1,500 new locations. Target is now selling NQ Mobile Security, NQ Mobile Vault and NQ Family Guardian. We will continue to focus on improving the ease of the activation process for new customers that acquire NQ products through retail as well as ensuring consistency in execution and training throughout the channel. Maintaining sales force mindshare is critical. In order to enable this, we have created retail sales training and train the trainer programs that we are rolling out and our scheduling consistently with our retail partners.

Furthermore, the introduction of our activatethenq.com portal has facilitated the ease by which retail sales professionals are able to activate NQ products on new customer handsets by reducing the amount of time often by as much as 10 minute to install it and activate NQ products on a newly purchased device. As we discussed on the last earnings call, Q2 was about expanding the footprint and launching Retail 2.0 activities and initiatives. We have done both by rolling out new pricing, point of sale material, product funding capability and easier activation processes.

Partners like TCC, where we have implemented our complete retail strategy along with soft bundles with handset protection insurance, have been able to maintain strong momentum and sales of mobile security. Over the next year, we will be implementing the systems capability to enable monthly retail billing in a hard bundling with handset protection insurance. We believe this will allow us to continue our strong momentum at retail and also reduce variability of performance due to sales person turnover or retail focus on other initiatives.

As I conclude my prepared remarks, I want to summarize our positioning and strategy while also providing you with an update on new products and partnerships. Let me turn to Slide 11 to follow along. While the earnings call is not an appropriate forum for announcing new products and partnerships, I will give you more insight into what is coming at NQ. As I have said before, while I am excited about the performance and potential going forward from our existing products, solutions and channels, I am even more excited about what we’ve been working on and developing for the past several years that will soon complement and expand our platform channels and channels globally.

Let me explain further. Our enterprise strategy is firmly heeled in the expansion of our NQSky platform. Through our NationSky business, we have continued to expand our enterprise customer base and develop extensive expertise on what enterprises need to mobilize their workforce. That has led to current features of the NQSky platform as well as informed its future roadmap. Some of the important technology enhancements and product roadmap initiatives include application security management, including App Wrapper and application security STK and the integration of mobile enterprise application platform, new MDM features, including the support of iOS 7 and other OEMs, finally on-premise and cloud based hosted services, which will also include key partnerships with big carriers.

From a geographic perspective, while our enterprise business has been focused on the Greater China market to-date, we look forward to 2014 and beyond. We are laying the groundwork for global expansion, working with OEM, carrier and channel partners to take NQSky global. For instance, we continue to collaborate with GEMA and Vox Mobile to assess international requirement for the NQSky platform and prepare to engage with friendly-user trials. Stay tuned for continued product, business development and customer updates.

Our consumer strategy remains focused around four key tenants; user acquisition, engagement, monetization and retention. All of our research, development and initiatives and investments can be tied back to this core strategy, which we unveiled last November at our first Analyst and Investor Day in New York. We have multiple new products targeting these areas that are launching very soon.

In the area of user acquisitions, we have launched new products such as NQ Easy Finder for iOS and Android. We have launched NQ Mobile Security version 7.0 in a public beta. We’ve expanded our iSMS deployment with MediaTek to include systems enabled by chipset models MT6589, 6589M, 6572 and 6582. The feature set includes a unified messaging experience for both, SMS and over-the-top IP messaging, as well as support of 11 content types for attachments.

In the area of user engagement, we have invested in and developed technologies around both audio and image recognition. We look forward to upcoming announcements of how these technologies will be integrated into our products and services both current and next generation. In the area of monetization, we have continued to invest in our targeted advertising platform for third-party developers and advertising partners. We continue to add high quality titles and monetize them using our proprietary in-app and cloud-based analytics and reporting engine.

In the area of retention, we have developed an anti-piracy technology called NQShield that prevents piracy of mobile applications. This enables developers not to lose valuable traffic to pirated versions of their applications. Furthermore, it prevents phishing and privacy attacks on users who maybe directed to pirated versions of applications. This gives you a high level view of where NQ Mobile is headed and how we are allocating our R&D resources.

We are working closely with many Tier 1 and global partners to launch these new products. On last quarter’s earnings call, I stated that our business development pipeline was strong. I am pleased to report that our pipeline is even stronger today than it was three months ago. In addition to the carrier and OEM partners that we have been working with historically, we have added a diverse set of global partners from the mobile ecosystem to our pipeline. I look forward to sharing specific updates and announcements with you in the near future.

I’d like to hand the call over to our CFO, Suhai Ji.

Suhai Ji

Thanks, Omar, and hello to everyone on call. At the outset, please note that unless stated otherwise, all the numbers I will discuss today are in U.S. dollars. We had another great quarter and again exceeded the high end of our previous revenue guidance.

Our total net revenue in the second quarter of 2013, were $41.4 million, up 107% year-over-year and 25% sequentially. As we disused in the Q1 earnings conference call and again today, beginning this quarter to further align with our platform strategy, we categorized our revenues into MVAS or mobile value added services, which include the consumer-facing Mobile Security and the Mobile Games business; advertising, which include the app referral and advertising revenues; Enterprise Mobility, which is our NationSky business; and other, which consists of other technical consulting and security related project based services.

In the second quarter of 2013, our MVAS revenue increased 67% year-over-year and 18% sequentially to $26.8 million. About 80% or $21.5 million of the MVAS revenue came from consumer mobile security subscription revenues. We continue to see increased contribution from overseas users outside of China, which accounted for almost 57% of consumer mobile security revenues in second quarter of 2013, compared with 51% in same quarter a year ago and 56% in the previous quarter. The remaining 20% of all $5.3 million of the MVAS revenue came from Mobile Games revenue in our FL Mobile division.

Our cumulative registered user accounts were about 372 million as of end of second quarter of 2013, up 83% year-over-year and 14% sequentially. Including 87 million registered user accounts for FL Mobile, NQ Mobile had total registered user accounts of about 460 million as of end of second quarter 2013. Average monthly active user accounts for the second quarter 2013 were 122 million, up 77% year-over-year and 10% sequentially, including FL Mobile 16.1 million average monthly active user accounts, NQ Mobile had total average monthly active user accounts of 138 million for the second quarter of 2013.

As discussed before by Matt and Omar, we have also begun to use average monthly premium user accounts beginning in the second quarter to measure the success of our monetization effort among the active user base and that number came in at 11.3 million. We define premium user account as any user account that generates revenue either through direct payments or indirect payments from third-party developers and advertisers.

This will replace the paying user account metrics that we used previously as we accelerate the monetization of our user base. And our target revenues were $5.5 million for the second quarter of 2013, up 149% year-over-year and 66% sequentially. The robust growth was due to the increased monetization through advertising and promotional revenue through the third-party application referrals. In general, we are very pleased with the result of our consumer business in second quarter. Our platform monetization effort of active user base resulted in significant growth in Mobile Games and advertising revenues with FL Mobile gaming business being a particular bright spot beating our original expectations by a wide margin.

Average Daily Active Users or DAUs for FL Mobile's games reached 98,595 in the second quarter of 2013, up from 68,810 in the first quarter of 2013. In the second quarter, FL Mobile also had nine games ranked among the Top 100 Grossing Apps, of which, three ranked among the Top 30 on Apple's iTunes App Store in China. The significant outperformance of FL Mobile in second quarter also resulted in a large increase in share-based compensation that came from accelerated operating and performance goals in the period. I will discuss the specifics of this a little later.

Our Enterprise Mobility revenue also experienced very strong growth in the second quarter, up 32% sequentially to $8.1 million. NationSky became a Tier 1 distributor for Apple in the first quarter of 2013 and has been ramping up its MDM business, both of which contributed to the significant increase in the Enterprise Mobility revenues. Product revenue increased 25% sequentially to $5.2 million and software and the services revenue increased 45% sequentially to $2.9 million in the second quarter of 2013.

As of June 30, 2013, NationSky had over 20 mobile device metric enterprise customers and over about 1,250 total enterprise customers. Other revenues in the second quarter of 2013 were about $1 million, up 288% year-over-year and down 4% sequentially. Other revenues are generated primarily by providing technical contract services to third parties.

Before moving on to the cost of revenues and operating expenses, I want to refer you to our disclosure of non-GAAP financial metrics, which was included in our official press release. The only difference between our GAAP and non-GAAP numbers are shared-based compensation or SBC expenses. SBC expenses are included across cost of revenues and operating expenses on a GAAP basis, but are excluded to derive our non-GAAP numbers. Most of the SBC expenses are incurred in operating expenses line items and we have included a reconciliation table in our earnings release showing the detailed calculation.

Cost of revenues in second quarter of 2013 was about $13.8 million, up 194% year-over-year and 32% sequentially. Gross profit in second quarter was $27.6 million, up 81% year-over-year and 21% sequentially. Gross margin was 67% in the second quarter of 2013, compared with 77% in same quarter year ago and 69% in the previous quarter. Excluding the impact for NationSky, gross margin was 75% in the second quarter of 2013, compared with 76% in the previous quarter.

NationSky’s gross margin in the second quarter was 33.9%, above flat from the previous quarter. So overall, our gross margins have remained relatively stable in the past quarter.

Now on to the operating expenses, for second quarter of 2013, second quarter of 2012 and first quarter of 2013, we’ve recorded total SBC expenses of $13.1 million, $5 million and $7.6 million respectively, across the three operating expense line items. As discussed earlier, part of the $13.1 million SBC expenses in this quarter, $6.8 million was due to FL Mobile exceeding the operating and performance targets in the period, and accordingly was awarded addition of shares for the original acquisition agreement. Our total SBC without the FL Mobile performance-based awards would have been $6.3 million or down sequentially from the first quarter.

To make the quarterly comparison more consistent, I would like to address the following line items on a non-GAAP basis, which exclude SBC expenses. Non-GAAP selling and marketing expenses were $5.8 million in the second quarter, up 71% year-over-year and 39% sequentially. Non-GAAP general and administrative expenses were $5.2 million in second quarter, up 40% year-over-year and down 12% sequentially. Non-GAAP research and development expenses were $3.1 million in the second quarter, up 84% year-over-year and 7% sequentially.

So non-GAAP operating income was $13.7 million in the second quarter, up 109% year-over-year and 37% sequentially. Non-GAAP operating margin was 33% in the second quarter, almost unchanged from the same quarter year ago and up from 30% in the previous quarter. So thus we’re continuing to realize operating leverage in our business, especially in the G&A and the R&D areas.

Excluding the impact for NationSky, non-GAAP operating margin was 38.3% in second quarter, compared with 33.4% in the previous quarter. Operating margin for NationSky was about 10.8% in the second quarter, compared with 14.8% in the previous quarter.

Income from operations in the second quarter was $0.5 million, down 66% year-over-year and 78% sequentially. Operating margin was 1.3% in the second quarter, compared with 77.5% in the same quarter a year ago and 7% in the previous quarter.

Again, this is due to the high SBC expenses that we recorded in the second quarter this year of which, the majority of the increase quarter-over-quarter was due to the FL Mobile operating and performance-based acceleration. If we take out the 6.8% of the SBC in the second quarter tied to accelerated performance targets at FL Mobile. our income from operations would have been a record $7.3 million and our operating margins would have been 17.7%.

Income tax expenses were $0.06 million and the effective tax rate was 2.7% in the second quarter, compared with an income tax expense of $0.1 million in the same quarter a year ago and an income tax expense of $0.3 million in the previous quarter. The low effective tax rate was primarily due to the preferential tax treatment enjoyed by certain subsidiaries of the company.

So, net income attributable to NQ Mobile was $1.9 million in the second quarter, compared with $2.1 million in the same quarter a year ago and $2.9 million in the previous quarter. Non-GAAP net income attributable to NQ Mobile was a record $15 million in the second quarter of 2013, compared with $7.1 million in the second quarter of 2012 and $10.5 million in the first quarter of 2013.

GAAP fully diluted earnings per ADS was $0.03 and non-GAAP fully diluted earnings per ADS was $0.26. The big difference between the GAAP and non-GAAP EPS is again, due to the SBC expenses. While excluding the additional SBC expenses recorded by FL Mobile, the GAAP EPS would have been a record $0.15.

We’ve also recorded a very strong deferred revenue and operating cash flow in the second quarter. Our deferred revenue grew 21% sequentially to $17.4 million by end of the second quarter and our operating cash flow in the second quarter was $11.1 million, compared with $1.9 million in the same quarter a year ago and $4.4 million in the previous quarter.

So lastly, I want to discuss our accounts receivable days and that’s one financial metric that we’ve continued to focus on improving. In the second quarter, our total AR days came down from one to 58 days in the first quarter to 145 days, a 8.2% decrease.

As a reminder, our DSOs are higher in some regions out of China like Southeast Asia and the Middle East. Our collection period will continue to improve, as the rest of our businesses in other geographies grow. additionally, we’ve continued to point you the fact that despite the length of DSO, the quality is extremely high. you can take them out that that expenses that the qualities remain excellent. We have a long history of visit; you should pick up covers and have gone through several cycles of dealing some collection. We would expect to see even faster improvement of this situation beginning the 12th quarter, as our efforts to change the channels over the past five months will probably show up more dramatically.

Finally, let me provide our outlook. Looking forward, we expect net revenues to be in the range of $50 million to $51 million for third quarter of 2013 and we’ve made the full year of 2013 net revenue guidance from the previous issued range of $179 million to $184 million to $185 million to $188 million.

So this concludes my remarks, and I will now hand the call back over to Matt.

Matt Mathison

Thank you, Suhai. Before we open up the call to the operator for our Q&A, let me just conclude by summarizing the following three things, and this is on the last slide page 24. Number one, the platform business model and strategy are working and we’re monetizing more of our active user base. Number two; we are making progress in key areas including financial, operating and strategic focuses. And finally, we have an exciting second half of the year lined up with a full pipeline of both products and partnerships.

Rosy, with that, we’d like to open up the call to Q&A.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Mark Murphy from Piper Jaffray. Please ask your question.

Mark R. Murphy – Piper Jaffray, Inc.

Yes, thank you. Congratulations on the results. Omar, you’ve announced partnerships with Tencent, Baidu and China Mobile in rapid succession here. What do you think is driving these very large technology leaders to want to get this kind of exposure to your platform including the gaming platform? And also, I realized that, you said the business development pipeline is actually stronger than it was three months ago. I guess, I’m wondering what would you consider to be stronger than Tencent, Baidu and China Mobile. Are you strategizing with other tier one carriers or are you referring to handset deals or is there something else going on in the background?

Omar Sharif Khan

Thanks, Mark. Thanks for the questions, I’ll answer those. They’re sort of connected, but I’ll answer them separately. The first one in terms of what large partners are you seeing from us? I think they’re seeing a handful of things. First and foremost, they’re seeing a tremendous capability in our gaming business specifically in FL Mobile from a game operations platform. What they’re seeing is a leading edge capacity from both the user acquisition and engagement perspective in terms of how we go to market, not as just a traditional app store, but through a community based, interest based profiling mechanism.

In addition, I think you’re seeing the power of our analytics and optimization engine, when we hope to work with our developers on our operating games to optimize them from an engagement and from an ARPU perspective. And I think if that credibility that we built in, frankly speaking, margin comes down to result. The reason those partners are coming on board, we’re delivering results for them and as we deliver results that success that gets more success and that’s a reason they’re coming on board.

Hope that answered that the first part of your question, but the second part of your question related specifically to the business development pipeline, now you are absolutely right, I mean those are really big partners and they’re strong partners. I think they’re indicative of what I’m talking about, which is there are some significant partners outside of the traditional, let’s say carrier and OEM space that we’re starting to engage, both in the currently public parts of our business around gaming and some of the other monetization engines like advertising, as well as some of the next generation technologies. But what I mean specifically by that comment is that there is a strong pipeline of those types of partners out ahead of us, not just in China, but globally.

So in addition to the tier one carriers and OEMs that we’re working with to its various stages of the business development pipeline, which include things like RFP, selection, development, testing and launch where we have multiple partners in various stages of our pipeline.

We’ve also engaged over the past few quarters, a broader set of mobile ecosystem partners. And I think you’ve just seen the beginning of those partnerships such as Baidu, such as Tencent. And I think that gives you an indicator of the types of folks that are interested in our platform. the power of the platform, Mark, itself is valuable not just OEMs and carriers, but anyone from a content perspective who is looking to, 1) engage with mobile users around the world and 2) monetize them and retain them. So it’s safe to say that the attraction of our platform extends well beyond just traditional partners such as carriers and OEMs. Feel free to ask a follow-up question if you want, Mark.

Mark R. Murphy – Piper Jaffray, Inc.

Yes. thank you, that’s a very helpful color, Omar. I wanted to follow up on the expanded monetization efforts where you’ve had obviously a long history with recurring subscription revenues and you’re adding on the gaming and advertising revenues. So clearly, the Q2 results are much stronger than we all expected. but what can you share maybe, in terms of any metrics or any user behavior that you have seen thus far. and I know it’s the early innings, when you’re providing this option for your active users to, I guess essentially to try out some of the games coming out of FL Mobile.

Omar Sharif Khan

Yeah. and so Mark, on that specifically, I think for the first time you’ve seen us unveil a new metric, which is premium users, which takes into account, not just our security paying users, but also users that are, basically, revenue generating users for us via our advertising channels, which includes both the offer wall and third-party application referrals. and so the health of that business from a metrics perspective, the way we look at it is, really going back to page seven of the presentation, we look at it in terms of total active user accounts. secondly, how well we are engaging that active user base, the metric of that is really premium users, which stands at 11.3, and then the revenues that we’re generating from them.

So you can see that the fact is, if you just look at it from the pure numbers perspective, the growth of the gaming business to be 100% plus, as well as advertising, which grew at 67%, which is really traffic monetization that really speaks to the capabilities of that broader engagement that’s a measure in the 11.3 million number of premium users. so that’s really the health indicator to look at, which is how well are we engaging our active user base, one; and then the monetization that results from them, which is directly reflected in revenues.

Mark R. Murphy – Piper Jaffray, Inc.

Okay. So I had one-follow up question, because it’s essentially relating to that. and perhaps, maybe, this is a question for Suhai, but you do have this premium user accounts metric, which is replacing the paying user accounts as you said, is there anyway to try to project forward, maybe, as you try to build out our models for instance, what type of ratio would you model for the premium user accounts as a percentage of active user accounts, because going back historically, there have been certain ratios there that you’ve tried to hold year-to-year between all the kind of user account classifications. and I’m just wondering maybe, what you think is possible there with the premium accounts?

Suhai Ji

Yeah, Mark. actually I wanted to just real quickly correct one of the percentages as dated, our gaming business grew 200% quarter-over-quarter. and so just to answer your questions specifically, Mark, I think the ratio is very important, but I think it’s fairly early, we need to get a couple of quarters in our belt to see tremendous growth, but I think if you remember back to what I said on the conference call earlier, at the beginning of the quarter, if you just look at premium users minus security paying users, we are measuring them in the tens of thousands, at the end of the quarter, they were in the million. So you can see the tremendous growth that we’re seeing there. So I think we need to get a couple of quarters under our belt of seeing that metric growing. We’re seeing it grow dramatically month-over-month and then see how that ratio balances out over time. It is the right way to look at it, but I think we need to get a little bit more history under our belt, one is showing tremendous success, it’s exceeding our expectations, but the forecasts are out of ratio over time. It’s going to require some, a couple more quarters of data.

Mark R. Murphy – Piper Jaffray, Inc.

Okay. Thank you very for taking my questions.

Suhai Ji

Thanks, Mark.

Operator

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

Mike Walkley – Canaccord Genuity, Inc.

Great, thank you. Maybe just, building on Mark’s question, congratulations on the monetization strategy, clearly, you’re seeing some strong growth in the new businesses that you’ve added, a little slower growth in the more mature security business. But what are some of the key metrics as that revenue per premium user, what are the key metrics that we should look at to look at the health of the business growth going forward?

Suhai Ji

Thanks, Mike for asking the question. I think it’s very similar to the answer I gave Mark, right. We’re doing specifically from a premium user perspective, it’s driving additional monetization of the active user base and that really comes from a CPA based advertising model through both the offer wall and third-party application referral. It also comes obviously from the broader engagement of our user-base and in terms of monetizing them through gaming revenues. But again, I think from a metrics perspective, we’ve honed into a few valuable metrics, one continues to be the active user base and the active user accounts, the second continues to, is now the premium user account and the third being the revenues that we’re generating from those in terms of MVAS and advertising revenues and that’s really where we’ve locked into from a metric and a health perspective. I think over time, we will continue as any business does, evaluating additional metrics or health indicators in terms of what we can give you, in terms of the color. But those are the ones, we’re really focused on from a business perspective, and then we’re focused on measuring those and we’re focused on growing those and optimizing those over time.

So with me, I will look forward to sharing more data on those with you in the future, but that’s where we’re focused today.

Mike Walkley – Canaccord Genuity, Inc.

Okay. As you’re carrying on these monetization engines, should we expect kind of the premium user, call it an ARPU, would that be a trending upward from what you just reported this quarter. Is that a fair way to think about or there’s more, just driving more of these premium users?

Suhai Ji

Yeah. I think ARPU is, I’m not sure I would look at it as an ARPU metric, but if you wanted to take premium users and you wanted to take MVAS and advertising and do a division, you would see an incremental effect, you would see an improvement on, that both of those businesses and premium users have added to our business. So it’s been a positive effect on our business. I think again, similar to the question Mark asked earlier in terms of data and trending it forward, we need a couple more quarters of data, related to the growth of both premium users and the revenues generated from it, it’s trending at a very positive direction, but I won’t look at it as a metric today as a point in time to lock into. But again, as we get more data over the next couple of quarters, I think it’s something that we’ll be able to discuss more.

Mike Walkley – Canaccord Genuity, Inc.

Okay, great. Thanks.

Suhai Ji

The initial results are extremely positive.

Mike Walkley – Canaccord Genuity, Inc.

Yeah, it sounds like it, and then if you could give a little more about America Movil, just a little more color on the early attaches, you said, in some of your fixed comments and will this type of customer be accretive to revenue per user?

Suhai Ji

Yeah. I’m going to ask, Gavin is also joined us on the call, Mike. So I’m going to ask Gavin to handle the America Movil question and then we can also talk about the accretive nature with you.

Gavin Kim

Yeah, so I know Mark covered a little bit of this in his comments. But NQ Mobile Security was launched under the Telcel brand in Mexico in June. I think primarily bringing up a channel like that is larger channel as the American Movil is, obviously, we’ve been spending a lot of time and effort on making that happen. But we’ve activated largely all distribution channels right now through Telcel that includes several digital marketing efforts and as we mentioned several new mobile security trial promotions.

When I think it’s also interesting and what we are looking forward to is that we’ve started going through the planning process for their preloads with our marketing teams. And we do fully expect to be preloaded on Telcel smartphones, along with and this is important that retail promotional support activity starting in the Q4 timeframe. It’s still early, kind of beginning stages, but the results are promising. We are kind of excited about what we are going to continue to do with them. I mentioned before obviously, we had Telcel today. We are going to be bringing on Claro in Brazil, which is another big portion of Telcel’s overall footprint in the September and October timeframe, and then quickly follow-up then with Peru, Argentina and then the remaining Latin American countries. And that’s only Mobile Security followed then by Vault and Family Guardian thereafter.

Suhai Ji

And then just to answer your question Mike very distinctly. In the ARPUs, we see Latin America I think are more reflective. The emerging market ARPUs and as well the China, I think plus or minus. So but we can share more color on that as we go forward.

Mike Walkley – Canaccord Genuity, Inc.

Okay, great. And then see just for the next quarter, Omar made in his some of his comments that you can add some have some lumpiness from NationSky. Is there any seasonality, which consider our NationSky or anything that will change maybe the gross margins from the current quarter and then also, if you can maybe help us think about that model OpEx for the rest of the year?

Omar Sharif Khan

Yeah, NationSky continued to have strong quarter and it’s seasonal in terms of backend loaded, second half, which generates more revenue, but in terms of operating margin for NationSky, which you will guide June 10% to 12%. You will have on front rations as we saw it in the first quarter and second quarter depending a mix of the hardware business and the stock buyback services component, but we expect a strong close in NationSky overall. For the operating margin, outside NationSky was too bad above 30%, but from the last couple of quarters, you can see the increasing, offering the leverage in that business as well.

Mike Walkley – Canaccord Genuity, Inc.

Okay. And then OpEx, just for the company in general just steadily growing as you invest?

Omar Sharif Khan

Yeah, actual dollar terms you will increase, but in Q2 you see the leverage in the G&A and the R&D areas in particular, but as in terms of percentage of revenue we’re guiding 30% above for the business outside the NationSky and For NationSky leveraging 10% to 12%.

Mike Walkley – Canaccord Genuity, Inc.

Okay, great. Thanks for taking my questions. I look forward to see you at the conference little later in the week.

Omar Sharif Khan

Thanks Mike.

Operator

Your next question comes from the line of Jiong Shao from Macquarie. Please ask your question.

Jiong Shao – Macquarie Capital Securities Ltd.

Good morning. Thank you very much for taking my questions and congrats on a very good results and guidance. I have two questions, first, on your advertising business, it’s very encouraging to see, it gave me a lot of traction in mobile advertising, which is a very naked and new market. Since NQ Mobile is sort of mobile, all mobile all the time. I was wondering, could you just talk about, so what are some of the advertiser verticals for your advertising business, and how you price those adverts and where you put those adverts. Any details or color will be helpful? That’s my first question.

Omar Sharif Khan

Okay, thanks, Jiong, for the first question. Really, the way we look at it as a mobile, first mobile only company where there’s a couple of places in terms of how we look at advertising. the majority of our business really comes from third-party application referrals. so it’s not the traditional, I would say banner advertising type of approach. It really comes from third-party application referrals, which comes from the targeted nature of our business.

and so the way we look at it is that it comes from mobile application and games from a vertical’s perspective. so we’re not out there, targeting specific verticals outside of applications and within the applications, they’d come from a broad set of applications and gaming partners that it’s driving our advertising revenue. and the way we engage them is through our advertising platform, specifically meaning that we’ve got an analytic and reporting engine that allows us to understand what the users are doing, and measure the value of users, and then also presented them a much more targeted viewpoint from an ads perspective or from a third-party app recommendation perspective.

Now in the future, we may have a broader set of verticals that we may target at we are going to get broader in terms of the partners that we’re also deploying. So you could anticipate from us, as we head into the future from an advertising perspective that we will broaden the contingent fee of ad supply beyond just applications and gaming vendors to brand advertising and beyond.

Jiong Shao – Macquarie Capital Securities Ltd.

Okay, great, thanks. That’s helpful. Second question I have is, on your MDM business, again, that’s another very new and nascent market. Could you sort of talk about when, how big have you estimated the market is in China, if you look at the states as a benchmark and who are some of the players here? and also when you go to pitch through a big customer like a bank of insurance companies, do you usually start with like one department, one location how you price, are you offering? is that a maintenance contract, is that on per users or per device? Thank you.

Gavin Kim

Hi, so let me try to, this is Gavin Kim. Let me talk a little bit about, I guess your comments related to the competitive landscape that we see with MDM. Actually EnfoDesk, which is an independent research firm that we’re focused in China. Just last month, they released a report that profile of the competitive landscape, the MDM market in China. And I actually see this as a good representation of the landscape there.

So in terms of just competitors, we do see likes of Huawei, MobileIron and Citrix, as well as some local players. And just a comment on them, briefly, Huawei, is a platform that is only compatible with Huawei devices whereas NQSky is platform agnostic. MobileIron, they’ve been in market since 2010 and Citrix has really gone to the market through their acquisition of Zenprise, which is a little bit different than a traditional mobile device management platform, but both have an early entrance in the China MDM market, both have import solutions that typically find implementation difficulties due to the customers’ nature of the local IT infrastructure that is specific to China.

NQSky is a recent entrant into market. We have seen incredibly quick traction and great results demonstrating really what is a weak – what we think it as immediate product strength, and leadership and execution for companies in China, which gives us a great platform as we think about globalization going forward.

Jiong Shao – Macquarie Capital Securities Ltd.

Okay.

Gavin Kim

And then just to talk about specifically, the types of kind of our monetization. so in China, the platform or the method that we use, what we call aCal, basically it’s a number that represents numbers of users per deployment, it’s actually not terribly different than it’s used by other companies. So it’s more a traditional market pricing method that we use in market.

Gavin Kim

And then just from the perspective that you just asked about also Jiong in terms of how we go to market. Usually we answer, let’s say with FSI or Financial Services and Insurance companies, we’ll do let’s say approximately 5% of their market of their users and then expand in the future and you’ve heard me say that before that we’ve got specifically large customer basis. If we just further penetrate the current customer base that we have and expand beyond, expand to their full mobile workforce, we have tremendous growth out ahead of the enterprise business, just by expanding within the current customer base.

Jiong Shao - Macquarie Capital Securities Ltd.

Right, great. Thank you very much, guys. This is very helpful, great quarter. Thank you.

Operator

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

Andy Yeung – Oppenheimer Securities

Hi, good morning. Thank you for taking my question. My first question is that, quick questions on FL Mobile. In terms of revenues by platform, can you give a little colors in term of division between iOS and Android? And my next question is a follow-up on that, which is for FL Mobile, what’s your go-to-market strategy for the international market and when do you expect that to roll-out, say overseas market?

Omar Sharif Khan

Yeah. So I will answer that question, I mean specifically we don’t break out the FL Mobile business between Android and iOS. But here is the color I’ll give you obviously, we’ve had tremendous success historically on iOS within the FL Gaming or the FL Mobile Gaming business, we are the number one platform from a publishing perspective on iOS in China as rated by third-party. And so we’ve experienced tremendous growth, we’re going to continue to experience tremendous growth out ahead of us. What we’re looking at as we go forward is, we are expanding our relationships that continue giving us and extending our monetization capabilities within Android, such as the relationship with Baidu and China Mobile, which will expand our capabilities and footprint within the Android portfolio and add significant growth, not just from iOS, but also from the Android business as well or the Android footprint in terms of installed base of devices as well.

Andy Yeung – Oppenheimer Securities

Great. And then I think, Matt mentioned that you want to launch FL Mobile in the Internet in the certain markets, do you guys have a schedule for that?

Omar Sharif Khan

Yeah. So I mean I discussed in on the conference call, we are going to be starting in North America in the next month. And the strategy for us remains fairly similar, because really there are leading developers and content providers in the Asia markets that we work with and the capability for us to bring the relevant content globally is exactly that we’re working on doing. And so we will launch our first set of titles here in the next couple of months and we look forward to tremendous international growth.

We can’t change the branding of the business to FL Mobile, I mean in the last quarter and that’s part of the beginning of the internationalization of the business. We’ve brought in a talented team in the bay area and starting to grow our team in the bay area with talent from around the industry, if you had a chance, some folks had a chance to tend to casual connect conference, we presented during San Francisco last week and received tremendous feedback from both the attendees and as well as the media. So we’re looking forward to the capabilities in terms of growing that business internationally.

Andy Yeung – Oppenheimer Securities

Thanks, Omar. Congrats on another great quarter.

Operator

Your next question comes from the line of Jun Zhang from Wedge Partners. Please ask your question.

Jun Zhang – Wedge Securities, LLC

Thanks for taking my question. Congrats on the great results. My first question is about the path one strategy. You mentioned a lot of the path one strategy I know, the Feiliu mobile has some positioned on IRS platform such as the Feiliu Game Centre and NQ has pretty good position on the CBN and Android platform. So what’s the company strategy moving forward to combine those strengths covered with across device platform. Is there a new product going to launch or for the company, maybe focused on the monetization of the current product offering? Thanks.

Omar Sharif Khan

Yeah so, thanks Jun for the question. I mean, there is absolutely synergy from a platform expertise perspective between the FL Mobile team and the NQ team. But when I’ll say is that they both have done well on both platforms. So, if you look at the NQ traditional security based applications and privacy-based applications, we’ve continued to expand those over the time within the iOS platform. We have first launched our NQ Mobile growth product as well as contact management. We’ve launched Easy Finder just recently in the last quarter. And then we are continuing to expand. On the enterprise side, which is also a platform capability developed in-house here at NQ. NQSky supports the iOS platform and we are going to be supporting iOS 7 as we go forward as well. So there’s a tremendous R&D capability and knowledge within the company around iOS.

In addition, obviously from a distribution perspective, FL has done very well not only in iOS, but they have done well on the Android platform as well. The way to look at that Jun from a synergy perspective is we have a tremendous user acquisition pipeline. And the ability for us to acquire both registered user accounts and active user accounts in the Android landscape give us the ability to monetize using a broader set of monetization engine, the first one being our premium security subscription business, but the second one being games and then the final one being traffic monetization through advertising. So, there is absolutely a synergy, but both businesses have the talent and expertise in both iOS and Android. The key really is leveraging the active user base across the entire business on the consumer side as well as leveraging newly acquired users across the entire business.

Jun Zhang – Wedge Securities LLC

Okay. Great, thanks. My second question is about the mobile game. So starting Q2 then breakdown the mobile game revenue, but as company guides, given the full-year guidance on the mobile game, I just want to make sure the guidance still functions and how much the payers are coming from those mobile game indirect payment? Thanks.

Omar Sharif Khan

Yeah. I mean, obviously, Jun, you know, that we’ve reclassified our business. Last quarter, you’ve seen tremendous strength in the FL Mobile business. If you look at it, the way we’ve looked at last quarter, FL Mobile did $7.5 million in net revenue in the past quarter and so you are seeing tremendous strength and growth in the FL Mobile business. As we look forward, obviously, we are not giving necessary guidance broken up the same way that we did for FL Mobile, but you can anticipate that it would be even stronger than the previous guidance. The one thing I did say on the conference call was that, if you look at FL Mobile’s performance, within the current quarter in Q3 that we’re already seeing halfway through the quarter, they are on pace already to have an annualized run rate based on Q3 performance that we are outlooking of over US$40 million in net revenue. So you can anticipate that, that business is growing extremely well and…

Matt Mathison

Yeah. this is Matt, Jun. And just to be clear, remember, we’re providing those numbers on a consistent basis with how we reported FL Mobile previously, remember in the current quarter in Q2 and in the current quarter going forward, we’re breaking out the gaming business in our MVAS segment, and then the advertising portion obviously, in the Advertising segment. so, let’s just didn’t want you to confuse the two numbers.

Jun Zhang – Wedge Securities LLC

Okay, okay, that’s great, thanks. And my last question is about hiPage, I remember that Omar mentioned there’s some preloads agreement with MediaTek under new smartphone that you quoted top most platform, success platform. As we all know that the Tencent WeChat has been becoming a dominant mobile platform in China. So I just want to know, what’s the current status of hiPage and hiPage is going to be a new mobile Internet platform that NQ is going to take advantage of in the near future?

Matt Mathison

Yeah. so I mean absolutely, we entered this partnership with MediaTek and in terms of investing and co-investing and leading the product roadmap of Hesine Technologies and the product set is based on hiPage and the first product is iSMS. We absolutely look at it, one, it is the native messaging experience, it is both the SMS experience as well as the over-the-top messaging experience on those devices. We are in very early stages in terms of how it is being integrated and preloaded onto the chipset I gave a view, which chipset is being preloaded on. and we absolutely look at that as a future user acquisition engine for NQ.

so as users come in, and remember one of the most exciting things about the messaging layer is it drives daily active engagement. So that active user that comes in from that has tremendous value for us in the future in terms of how we’ll be able to engage with them and monetize them and adds value to the media type chips and as well to users and the end customers that they’ve been shipped to. It’s very early. Obviously with chipsets, you have to go through a qualification process and then go through a preload process, and then it makes weighing the channels. But we’re giving a preview of the types of chipsets that were preloaded on, and then in the upcoming quarters, we’ll share with you more results around, how that’s doing and how it’s performing in the market.

Jun Zhang – Wedge Securities LLC

Okay, that’s great, thanks. The last question is for Suhai. So is SBC going to continue impact the GAAP earning in the second half?

Suhai Ji

Hi, Jun. Thanks for the question. I think it’s probably difficult to predict the performance-based portion of the equity in sense of our acquisition, but as we can see the base portion will continue to trend at the lower levels. Actually, it has been trending down in the last quarter. So yeah, because this quarter, the SBC outside of the FL Mobile portion actually came down quarter-over-quarter.

Jun Zhang – Wedge Securities LLC

Okay, sure. Thanks a lot. Congrats again on the great quarter.

Operator

Your final question comes from the line of William Huang from Barclays. Please ask your question.

William Huang – Barclays Capital Asia Ltd.

Hi, good morning. Thank you for taking my call and congratulations to a very solid quarter. I have two questions. My first question is just a follow-up on your Mobile Game business for Feiliu. can you share with us your top gaming contribution ARPU trends of users and how should we view any impact from Tencent given that the company released WeChat Version 5 with a new gaming center last week? And second question is regarding margin trends, how should we expect sales and marketing R&D expenses going forward in light of your kind of upcoming promotion play and new products innovation? Thank you.

Omar Sharif Khan

Hi. Thanks for your question. I’ll answer both of those. On the first question, while the Mobile Game business is very difficult to track, obviously the success of a game is measured in days, and often not times in months, in quarters or years. But the way we like to view this is a top 30 game, generates roughly US$10,000 per day and a top 10 game generates US$15,000 per day. So that’s a metric. It obviously has a lot of variation. The difference between a number one game and a number 10 game is wide, and likewise the number 11 game and a number 30, but that’s how we view the games and the success of it, and I think that’s a good metric that you can use for modeling going forward.

In terms of the sales and marketing question, again, I think Suhai has already stated. At the end of the day, we’re a company in very fast hyper growth mode, but we’re also doing it profitably, and so on the cost of sales side, including sales and marketing, you should expect a consistent ratio going forward as it relates to our revenue growth.

William Huang – Barclays Capital Asia Ltd.

Okay, thank you. And just a follow-up on the game app store business, particularly, after 91 Wireless being acquired by Baidu, and we actually noted more company kind of have switching their focus into this area, and now, there have been many similar game apps stores in China. So just want to know management view in terms of your core competitive advantages and when do you see, do you expect margin may start to consolidate and what do you view might be your biggest changes going forward to build up your – to further enhance your momentum of Feiliu business? Thank you.

Omar Sharif Khan

All right. Thank you, William. Yeah, I’ve talked about this before and it’s actually something we’re really proud of. We don’t approach the gaming business from a traditional sense, right. So we don’t approach necessarily the gaming business from just a sense being an app store or just a contextual search based distribution platform. We approach it from a community based approach. We approach it from a platform perspective where we have gaming communities that we operate. Within those gaming communities, where we have over 16 million active user accounts, we’re available to develop user profiles that connect them in a high quality fashion with titles and offers that they have a high propensity to consume, which is why leading content partners continue to bring their titles to us.

They look at what we bring them from a user base perspective and from a quality perspective as truly incremental, and that’s what allows us to continue to bring high quality content and titles to market. And obviously, I think it’s our analytics engine that we put in place both from an analysis perspective and from an optimization perspective that allows us to continuously grow and optimize the performance of the games that we operate, but also helps to identify titles and developers that we want to bring on to the platform. And that’s really the differentiation that we put in place.

We are an IP intensive company. We have a lot of intellectual property. I think, Henry mentioned on the call, we are generating over 40 new patents per year and we have over 100 patents already filed and issued. Many of these patents are in the phase of operating our platform from an analytics perspective, from an optimization perspective and that’s really the way we approach it. So we don’t look at ourselves as just an app store. We don’t look at ourselves just as a publishing engine. We look at ourselves as a truly value-added operations platform for our own titles as well as for our third-party operator tittles.

William Huang – Barclays Capital Asia Ltd.

Okay, thank you. Congratulation once again to a very good quarter. Thank you.

Omar Sharif Khan

Thank you.

Operator

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

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