NQ Mobile: Disputing The Short Thesis Of A Receivables Problem

| About: NQ Mobile (NQ)

On a recent Seeking Alpha instablog post, the author of the blog claimed NQ Mobile (NYSE:NQ) has extremely high DSO's (Days Sales Outstanding). While Seeking Alpha did not publish the blog, it caused a stir nevertheless. What the author believes is that it takes the company too long to collect some of its receivables and that some of its receivables will not become cash. Therefore, the author continues, NQ Mobile will have to lower some of the revenue it reported in the past. To understand whether the author has a legitimate thesis I emailed NQ Mobil's investor relations head, Matt Mathison, about the DSO issue and here was his response:

"Thanks for your inquiry.

As a company, we have been very transparent and vocal about the DSOs. Let me just remind you about what we have repeatedly said and explain the matter for you. First, the 2 geographies where we have the highest collection period is in the Middle East and in the South East Asia regions. The recent article on a blog on seeking alpha erroneously stated that our China business was the high collection market. This is not true and shows a lack of accurate basic due diligence on our company as we have publicly walked everyone through this before. Secondly, to better understand the reasons for the high collections in the ME and SE Asia, in those markets we offer terms to our distributor partners of generally 90 days (very normal terms). However, in those markets, this distributors in turn offer terms to the retailer/end customers of anywhere from 90-120 day terms. In essence more than doubling our normal collection times in those specific markets. These markets are very good markets for our International security business and were some of the early paying adopters for our security products. It is important to note that we have been through many billing cycles with these partners and continue to have high confidence in the quality of these receivables. Additionally, our auditor, PwC also does careful aging analysis and collection analysis and we adequately account for any risk of collections in our bad debt expense line -- which continues to be very low as a % of our total receivables.

As a company we have stated that this is an area for us to improve. We are doing a lot of work to 1) re-condition those existing markets on improving collection times. 2) we are also adding business lines and geographies that generally have much better collection terms. Given these efforts, we will continue to see our DSOs improve over time. It doesn't happen overnight, but we continue to show progress on this front.

Finally, one last comment about the erroneous and baseless article about the matter. It tries to claim that somehow when we purchased FL Mobile, we purchased a lot of potentially bad receivables. This is the most ludicrous statement and further shows that the author has not taken the time to do any kind of basic research on the company. Keep in mind that when we bought FL mobile the business was only doing single digit millions in revenues. In fact, in Q4, we reported the FL Mobile revenues at only 700K. There is clearly no large sum of receivables in this business. FL Mobile, and NationSky as well, have a much lower collection profile than the remaining business and as those businesses grow will only aid in our overall DSO declining.

The bottom line is that this is something the company is focused on. We are working on improving it. We will show progress. We are comfortable with the receivables and conservatively account for any bad debt expense. Our efforts as a company to improve this will continue to show up over the coming quarters.

I hope this answers your questions."

Let me summarize what Matt's main points were. The author of the Seeking Alpha post had some of his facts wrong. Not only does the author claim that the high DSO number stems from China (WRONG), he also claims FL Mobile's receivables are a big reason for the high DSO number (WRONG). Without a doubt on paper the DSO number may look rather high, however, Matt's response should more than put to rest any concern over the high DSO number. To summarize what Matt said, basically NQ gives its distributors 90 days to pay and then these distributors sell it to end customers and give these customers 90 days to pay resulting in ~180 days before NQ gets paid. Matt was very confident that this model works and highlighted that NQ has been through this billing cycle for some time now and has been collecting all of the receivables it expects to collect. The following was taken from NQ's financial statements [figure 1 sorry it's blurry]. It says NQ had an allowance for doubtful accounts of $636,000 in 2011 for receivables that totaled $21,379,000, which is 2.9% of the total accounts. In 2012 the allowance for doubtful accounts was $1,095,000 for receivables that totaled $54,475,000, which is 2% of total receivables. Lastly in figure 2 the allowance for doubtful accounts was $2,283,000 on receivables of $70,850,000, which is 3.2% of total receivables. As Matt noted above, NQ sets the allowance for doubtful accounts numbers using conservative estimates. Therefore, since receivables increased substantially, NQ conservatively increased its allowance for bad debt.

Figure 1

Figure 2


NQ Mobile does not have a DSO problem, despite the high DSO number. NQ has been through the billing cycle with the businesses that contribute to the high DSO number but the company has had no problems receiving payments from these businesses. This is another short argument that has been put to rest.

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.