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NQ Mobile Inc. (NYSE:NQ)

Q3 2013 Earnings Call

November 13, 2013 8:00 PM ET

Executives

Michelle Ma – Director, IR and Corporate Development

Matt Mathison – VP

Henry Lin – Co-Founder, Chairman and Co-CEO

Omar Khan – Co-CEO

Gavin Kim – Chief Commercial Officer

KB Teo – CFO

William Li – Director

Analysts

Jiong Shao – Macquarie

Matt Ramsey – Canaccord Genuity

Fred Ziegel – Topeka Capital Markets

Jun Zhang – Wedge Partners

William Huang – Barclays

Ravi Sarathy – Citibank

Operator

Ladies and gentlemen, thank you for standing by and welcome to the NQ Mobile Q3 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 advice you that this conference is being recorded today, Wednesday 13 November, 2013.

I would now like to hand the call over to the Director of Investor Relations and Corporate Development, Michelle Ma. Thank you. Please go ahead.

Michelle Ma

Good evening and good morning Asia. Welcome to NQ Mobile’s third 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 KB Teo; Chief Commercial Officer Gavin Kim; and Vice President Matt Mathison. We thank you all for joining us today.

Before we begin, we would like to read you the Safe Harbor disclaimer. Please note that the 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 are included in NQ Mobile’s earning release which has been posted in NQ’s IR website.

Finally, as a reminder, this conference is being recorded. A webcast of this conference is being broadcasted on NQ Mobile’s IR website. I would also like to point everyone to our presentation that can be found under Investor Relation section of our website. We’ll be following that presentation on our call today and we encourage you to view that with us. Following management’s prepared remarks, we’ll open the line for questions.

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

Matt Mathison

Thank you, Michelle and hello to everyone on the call. We’re excited to be here with you today and to share with you more information related to our third quarter results as well as provide you update from some of our key business developments and focus areas.

As we begin this earnings call and before I turn the call over to the rest of the management team, I want to highlight a few things. Number one, this is not just an ordinary quarterly report and conference call.

As ridiculous and falls to many allegations from the recent short-seller report and coordinated other blog posts are, we are determined to provide the marketplace with transparency and action. We are energized and resolved to grow stronger from this attack. We have taken steps that no other company has taken. We have already clearly shown that the entire premise of the report is false.

In fact, in spite of the increased scrutiny on our company over the past couple of weeks, we have reported our quarterly results on time and on schedule without deviation. Further, as a reminder, in addition to everything that the company is doing, and will do in the future to overcome such attacks.

We also formed a Special Committee comprised of four independent directors of the company to conduct an independent review of the allegations. The special committee has retained the global law-firm of Sherman & Sterling to advice it in connection with this independent review. And the law-firm has in turn engaged Deloitte & Touche Financial Advisory Services Limited as forensic accountants to assist it in the matter.

The independent review of the Special Committee is still ongoing. The management of the company is fully cooperating with the special committee in its ongoing review and will continue to do so in the future. We look forward to sharing with you the findings of this independent review as the Special Committee permits.

Number two, the platform business model is working. And our financial performance is showing the impact of this great vision. Our user acquisition engine is expanding. Our user base continues to expand rapidly. Our monetization efforts are working and can continue to show the real and tangible evidence of accelerating revenue growth among our user base.

We are uniquely and strongly positioned in the key areas of the mobile platform environment, security related products, gaming and entertainment, advertising, enterprise and other promising products and technology advancements including our music search technology and applications.

NQ Mobile is uniquely positioned to lead the mobile revolution going forward. In fact, just three weeks ago, our company announced the most significant product innovation in our history, NQ Live.

Additionally, one of the key areas of focus for our management team has been in our collections and cash cycle. We are pleased to report that DSOs fell to 115 days in the third quarter from 145 days previous. The efforts over the past couple of quarters, is absolutely and undeniably working. This led to a record quarter of cash generations from operations.

Number three, as we have previously announced, NQ Mobile will be hosting its Second Annual Investor and Analyst Meeting in New York City on Tuesday, November 19. We will be sending out the details to this event later this week to those that have RSVP to investors@nq.com based on capacity. We look forward to this event.

Finally, I restate what I clearly stated on our conference call held on October 25. I am proud to be part of this team at NQ Mobile. The past two weeks has been filled with false and malicious and often times ridiculous allegations. Yet, we are resolved and resolute. This team is determined and is responding speedily and completely.

NQ Mobile will be a stronger business and a stronger organization as a result of this or any other hardship that comes our way. See, life is not about what comes your way rather it’s about how you respond to what comes your way. NQ Mobile will continue to respond fully, transparently and resolutely.

Now, I’m 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, KB Teo, will then provide the financial discussion on the quarter and outlook. Please go ahead, Dr. Lin.

Henry Lin

Thank you, Matt. And thank you everyone for joining us. Before I speak a little bit about our progress and record quarter, I want take this opportunity to speak with you about the history of our great company and great team.

I believe that a great majority of you on this call today actually do not know the history of NQ Mobile. And given the amount of inaccurate and false information out there right now, it is important for you to hear from me about how we came to be who we are today.

In 1994, I came to Beijing and studied (inaudible) with the University of Posts and Telecommunications following a humble childhood. I got my PhD Degree at this University in 2003. As the youngest associate professor in 2004, I became working at the State Laboratory of Networking Association.

We were working with Nokia and I listened to their speech about various safety concerns in future smartphones. During that speech I have a strong gut feeling that mobile devices and smartphones will literally be the center of everyone’s life in the future. And securing these devices would be a new industry for the future.

I decided to grow my company with Dr. Vincent Shi, our COO today, who was from Peking University and also my high school classmate. Along with five graduate students put together around $15,000 or around RMB100,000 and registered our company in October 2005.

We developed a mobile [and the various] [ph] software [and Android is] [ph] as a download from our website. Six months later we have nearly 100,000 user accounts coming from more than 30 countries. One year later, we have nearly 300,000 user accounts coming from almost 100 countries. It was exciting.

However it was the changing time. In early days, everything from making panel to buying computers, to finding office space was a struggle. There were so many times we almost gave up but we never did. That is why today NQ stands for never-quit. Yet it was those early years, those years of struggle and hardship that became the foundation of this great team.

The first two years of the start business benefited us tremendously. It taught us that we ought to fight through any hardship. In August 2006, we released our first annual investment, nearly RMB715,000. We developed an outstanding product and in 2007 we got our first major break and received a business loan from China’s Ministry of Industry & Information Technology front based on our quality of our mobile screen solutions.

In 2007, we completed our Series A investment from Sequoia and GSR Venture Funds and then got Series B investment from Fidelity and Ceyuan Ventures. This provided us with the platform to expand our product development, extend our sales and marketing and ultimately led to a one more pre IPO financing round from future investors including Qualcomm, MediaTek and HTC.

Before we went public on NYSE, in May of 2011, we struggled like many other small staffed companies that are building a solution set for the future. Yet, out of that struggle came refinement and experience. That is why today NQ stands for Never-quit, never-quit no matter what stands our way, never-quit changing the mobile world.

The difficult times are what make us great, these moments are only making our teams better and stronger. [Inaudible] on our company we only have highlights of a great company that we are.

I welcome you all to come to know the real NQ Mobile. Our basic assumption in the very beginning was smartphones would be very popular in the future. And open operating system will be mainstream this would mean that safety and security related those smartphones would be critical.

And this security backbone would open up endless possibilities and create the making of a platform business model, along mobile [inaudible]. This vision is playing out right before our eyes.

NQ Mobile has been positioning squarely from the very beginning and before any other company in the world. NQ Mobile has been a mobile first, mobile only [mover] [ph] in the world.

We have a great history, we have struggled at times, we have thought to suffice at times yet we have a great team, we have great products, we have great partners and customers and we have a great business.

I tell my employees, partners, even investors that we’re truly building a 100-year company. NQ Mobile is positioned uniquely and strongly to truly become the leading global, mobile internet services platform company. I’m excited by the progress of our business as we reported a record quarter of revenues of $54.2 million.

Our businesses are performing ahead of expectations. The goal we’re seeing is remarkable and we are just at the very beginning. Invest today. We’re also announcing that the senior management including myself and Vincent, Omar, KB, and Gavin alone are the senior management of the company. We’ll be buying NQ stock shares on open market.

Vincent and I have not sold a single share of NQ since we went public, even volunteering lock-up [inaudible] until September of 2014. We will buy more stock shares and continue to hold up vision. We’re more confident in NQ Mobile’s future than ever before.

I will now turn the call over to my partner Mr. Omar Khan. Please.

Omar Khan

Thanks Henry, and hello to everyone. I want to take a few minutes to talk about why I am here today. After completing my undergraduate in graduated degree at MIT, I spent a better part of my career growing up in the mobile industry. I’ve seen hardware innovation, I’ve seen networking innovation, I’ve seen software innovation, I’ve seen companies come and go, I’ve seen people come and go.

I have had the unique opportunity to work with the industries’ best and brightest. I’ve been part of many successes and failures in the mobile industry. I’ve learned from each of these experiences along the way. It has enabled me to form a personal vision for the future enabled by mobile.

When I first met Henry more than two years ago at the Conrad Hotel in Hong Kong, I knew I was in the presence of a true visionary, someone who stretched the limits of my own thinking. I wasn’t alone in recognizing this genius. Years before, Sequoia, GSR, Fidelity, Qualcomm, MediaTek and HTC all saw the same thing. I was thoroughly impressed and respectful of his personal story and humble beginnings. I knew immediately that this is where I belong.

I knew that I can play a significant role in commercializing and scaling products and solutions based on the core technologies the NQ has developed, invested in and incubated. In the end it’s all about people. And I’m proud and humbled to have the opportunity to work alongside Henry, Vincent and the team that they have built. This is a once in a life-time opportunity for any who have the pleasure of working with or investing in this team.

I’m a firm believer that Henry will go down as one of the great entrepreneurs of our generation, on par with any international entrepreneur focused on the internet, mobile, social or the cloud.

Early on, we looked at Japan for mobile innovation such as i-mode from DoCoMo. But today we look at China to be the leading indicator mobile innovation.

During the course of my career, I spent a considerable amount of time in China. Not only is it the single largest smartphone market in the world, but it will be the largest sill in the blank market in our lifetime, gaming, enterprise, advertising and the list goes on.

As Henry just described for you all, NQ Mobile’s tremendous history, the history of the company and the strong IP and technology leadership is something that really attracted me to this business. When I first began looking at this business, one thing I was just attracted to a consumer security products company.

I was part of a company that had tremendous mobile platform IP and a unique opportunity to participate globally in some of the strongest secular trends in any sector, the mobile revolution.

My decision to join the company with deep roots in China was based on the opportunity to globalize the set of learnings and experiences from the most competitive and dynamic mobile market in the world. Eight years of learning of how to monetize and leverage and partner with channels to create win-win business models with invaluable experience. These are extremely valuable assets to Gavin, myself, Conrad, Victoria, Chris, Jeff Caitlyn (ph) and the global team used to grow our business around the world.

Our China business is an asset. Our China billion is a competitive advantage. Our China business is diverse. Our China business is a model to be proud of in steps of standard.

Now, let’s focus on the third quarter results and how our platform strategy is working brilliantly. If we recall from our second quarter conference call, we are very focused on expanding the monetization of our user base. We’re still in the early days of our user growth but we are also in the very early days in the monetization of this user base.

Last quarter, we rolled out our premium user metric as one of the key health metrics of our monetization strategy. In the second quarter, we reported a 11.3 million premium users. I am pleased to report that our premium users continue to accelerate at an incredible pace.

In the third quarter we now have an average monthly premium, user accounts totaling 14.8 million or a monthly average of 14.8 million users that are generating revenues for our company. We grew this number of users that generate revenues by 31% quarter-over-quarter. This compares to our active user growth of approximately 10% quarter-over-quarter.

The slide on page 17, clearly shows that our monetization efforts are all working. We’re doing exactly what we said we would do a year ago. That is we are beginning to monetize our once non-paying active user base. This trend is something that really excites us. And the results continue to exceed our own expectations.

I should also note that the introduction of NQ Live will have a dramatic positive impact over time on our ability to generate revenue from our user base. We look forward to sharing more about this at our upcoming Analyst and Investor Meeting next week.

There are many segments of our business that performed amazingly well during the quarter. The advertising segment of our consumer business achieved record net revenues in the third quarter and doubled sequentially to $11 million which is now over 20% of our total revenues.

The advertising segment of our business is one area that directly captures our monetization strategy. We have a tremendous user base and an impressive user acquisition engine. And our ability to monetize this is being captured on our advertising growth.

Up until this point, we are focused mostly on third party application referrals. However, given the launch of NQ Live and future partnerships with this revolutionary new product, we will expand our advertising platform to more traditional sources. This will continue to be a key segment of growth for us.

Remember we will continue to grow our user base aggressively. But it is the growth of the number of those users that can generate revenues that we are even more focused upon. So far so good and we’re off to an incredible start.

Now, let’s move on to our FL Mobile business. I’m pleased to report to you tonight, that our recently launched game Pocket Dream has already reached the Top 10 paid apps on the iOS App-Store in China. And it’s already been in the Top 6 for the past week. This is a very successful launch and given the strong interest during our Beta test period, we are excited to see what this game can actually do.

As a reminder, we are reporting FL Mobile revenues in two different segments since last quarter, including the gaming segment in the MVAS Group in the advertising portion of the FL Mobile business within the overall advertising segment.

For the quarter, our FL Mobile business collectively achieved revenues greater than $10 million and we continue to be very excited about this segment of our business. Additionally, during the third quarter, we expanded our partnership with Tencent, sign a new strategic relationship with Perfect World and continue to add the best content for our users.

We have a strong pipeline of games to be operated over the next couple of quarters, with continued strong partnerships and strategic relationships with some – with the strongest mobile content developers.

NQ has taken our first steps to globalize FL Mobile internationally, officially launching one game Gods & Dragons in North America. The game was nominated for Best Game in the Best Mobile Apps Award for 2013. It has consistently being rating 4.5 stars in the App-Store and will be available on Android shortly.

This effort to expand the reach of FL Mobile globally is just a start of other games that are on the pipeline that are scheduled for release in the upcoming year.

Our enterprise business also performed well ahead of our plan in Q3, in fact it is very encouraging to report that the third quarter results in our enterprise mobility segment of over $15 million exceeded the total amount of revenues generated by NationSky in all of 2012. It also surpassed the total amount of revenues generated in the first half of 2013. This business is aspiring on all cylinders. The pipeline is full. The team is executing brilliantly. I want to take a moment to congratulate Charlie Hou and his entire team.

We have some very exciting deals and partnerships to announce over the next couple of quarters. In fact the deals that are coming down the pipeline actually dwarf anything that we have announced to-date. This business remains extremely important to our entire platform approach.

I want to turn the call over to Gavin Kim, our Chief Commercial Officer, who will walk you through our recently announced global product collaboration deal with Samsung, the Samsung Mobile as well as provide you with an update on our international security business.

Gavin Kim

Thanks, Omar. We have recently announced a global product collaboration network with Samsung Mobile and are working with them closely to develop the enterprise mobility management services in combination with their Samsung KNOX Solution.

Our first commercial release of NQ Sky and Samsung KNOX will be available at the end of this month. This is an exciting time for our efforts in the enterprise space. Customers will have the opportunity to take advantage of the NQ Skynet platform and Samsung KNOX for bulletproof device management and security protection for Samsung devices.

We also provide enterprise customers the cross-platform support with NQ Sky, MDM platform including Android, iOS and Windows Phone for other non-Samsung devices for robust device management, mobile application management, mobile content management and mobile security management for smartphones maintained within the enterprise.

NationSky will first go to market with this Samsung KNOX product collaboration in the China market later this month as we continue to broaden our enterprise channel efforts in other global markets through the next year.

I’ll now provide you with some highlights from our consumer security business internationally. As discussed in August, at our last earnings call, NQ had officially launched in partnership with Telcel in Mexico in June of this year. We are thrilled with the interest level from consumers in the market thus far.

Results have been very promising with digital daily marketing efforts ramping to cover Telcel’s full, prepaid and postpaid Android smartphone business in Mexico. And we are working daily with the operator to better tune our marketing efforts in the region.

We are very excited to be launching Brazil in December, which has traditionally had a strong demand for mobile security due to the size of the market, very high Android penetration and overall consumer willingness to pay for this type of service.

We’ve been working closely with Claro Brazil and have a robust marketing plan ready to launch on Day-one. The other 14 markets in Latin America will be launched in late Q1 and early Q2.

Also as we discussed last quarter, Telcel and NQ had previously confirmed our efforts to initiate the preload planning process previously targeting to preload on Telcel smartphones. Because of their early successes, we have seen from our joint mobile security efforts in Mexico, we will also preload in Claro Brazil starting in Q1.

With Mexico and Brazil covering over 50% of the term, NQ will be well positioned for a strong Q4 and Q1 in our international business. We also still continue to plan then to introduce NQ Mobile Vault and NQ Family Guardian thereafter with the operator.

We are heartened by our partner’s strong commitment to our partnership and the excitement they see for these new services across their footprint. And we look forward to the opportunities that lie ahead of us, that continued to ramp our international security business performance in Latin America.

As formally announced, we have also been executing our strategy with U.S. Cellular having launched NQ Family Guardian, NQ Mobile Security and NQ Mobile Vault. We are now delivering our full trust suite with the operator launching NQ Vault as the third offering on September 30 of this year, under the U.S. Cellular Protective Service brand.

We are also currently in market with the first set of U.S. Cellular smartphones to either roll off the line pre-installed or software updated in the field with NQ Mobile Security including such devices like Samsung Galaxy Note 3, Samsung Galaxy S4 Mini and field update for devices like Samsung Galaxy S3 and Samsung Galaxy Note 2 later this month.

Furthermore our international business exposure also continues to expand with OEM preinstalled partnerships with Micromax and Intex in India and Movistar in Vietnam, as well as broad global contracts with Huawei, ZTE and Lenovo to preload NQ Mobile Security on their devices globally. Huawei will provide NQ Mobile Security on certain of their Android devices sold in the International markets. Lenovo will provide its international customers with the latest NQ Mobile Security services and ZTE has extended its agreement to pre-load mobile security for certain android devices in the global markets.

Furthermore based on interest and request we are receiving from some of our partners, we have been implementing systems capabilities to enable monthly retail billing as well as hard bundling of our security products along with partner handset protection insurance offerings.

In Q1, we expect to launch hard bundles in which mobile security is included as part of the handset protection insurance offer with select retailers and operators. The end consumer sees a single bundled price for both insurance and security as a single package and is marketed in all-in-one value proposition from the start.

The benefit to NQ is that mobile security now becomes an integral part of the mobile insurance offering an improves acquisition metrics to fall in line with mobile insurance attach rates.

As we have said it before, this is a great opportunity for NQ to increase uptake of our security business internationally. We’ll continue to share announcements with partners and customers in this area as we move forward through the next year.

As for our NQ Care product in China specifically, our early market test results are promising. It’s still early days, the first of a kind in offering in China and we’ll be adding distribution channels in the coming quarters.

Any addition to the work we have done with partners and customers globally, NQ has always made it our priority to constantly improve the capability features, value and security of our core products globally. We’ve been doing exactly that for the last eight years as the pioneers in the mobile security space, we will never stop learning, innovating and creating value for our partners and end users.

Now I turn the call back over to Omar.

Omar Khan

Thank you, Gavin. Before I turn the call over to KB to go over the financial review of the quarter and outlook, let me just make couple more comments.

As we stated before, lowering our DSOs has been one of our key priorities of the management and our team is delivering those results. Our DSOs have dropped significantly in the quarter from 145 to 115 days, the lowest – our lowest number as the public company. I want to thank the business development and finance team for their hard work in reconditioning their channels, they worked hard and the fruits of their labor are showing up intangible results.

We will have time to go through in greater detail, some of our newest products across the platform next week at our Analyst Meeting. But let me make a few quick remarks about a couple of them. As we (inaudible) and exceeded an average of 3 million unique daily search increase just after a short time after commercial launch in September.

Since then, we have continued to expand our partnerships utilizing our search technology to include the largest carrier in the world China Mobile, with licensing our technology and including it in their music player application Migu which was preloaded on every smartphone that they sell.

Additionally TTPod and Kugou will also utilize our audio search technology in their offerings. This technology and application opens up lot of exciting doors for our platform including traffic generation, revenue content sharing and other partnerships.

Even with our new partnership announcements for China Mobile, China Unicom and the sleuth of partners announced on our NQ Live conference call. Our business development pipeline remains as strong as it’s ever been, which is a testament to our product technology leadership as well as our partner friendly business models.

We also highlighted our NQ Live product announcement conference call, that are joint venture with MediaTek, key sign technology with promising messaging technology known as ISMS has approached an impressive milestone. We are seeing nearly 2 million daily active users of the ISMS platform, yes 2 million.

We have not started to include our music radar and music search technology users or ISMS users in any of our operating statistics. We look forward to sharing with you more insights into our platform of products and solutions next week.

Now let me talk about our share buyback. I want to make a few comments about this. In addition to our existing $35 million buyback that we will pursue aggressively and the senior management share purchase plan announced earlier today, the company continues to evaluate any and all uses of our capital to create additional shareholder value. It is important to note that there are many considerations around the use of our cash and cash equivalents, specifically of cash and cash equivalents on the balance sheet at the end of Q3, approximately 144 million reside on-shore in China the remainders held outside of China.

In addition, since the completion of the convertible bond offering after the quarter end, we continue to hold the proceeds of approximately 166 million in Hong Kong. Both the fact that a majority of our capital is held onshore in RMB and the most recent convertible bond offering coupled with the manufactured volatility all play a role in the capital allocation decisions that are made both operationally and strategically.

As we stated on the conference call, we hosted during our convertible bond offering process. Everything we do as a company, including raising capital, is done with our eyes and focus directed at strengthening, expanding differentiating and accelerating our ability to grow, lead and dominate in the mobile user acquisition, engagement, monetization and retention.

We remain committed to efficient and effective allocation of capital. We’re committed to using our existing offshore cash balance and future cash flows from operations to buy back shares for existing $35 million buyback. More importantly, our company remains poised for tremendous growth and has proven as disciplined and rigor in allocating capital for expansion, investment and acquisition.

Our international expansion and the Acquisition of NationSky and FL Mobile are perfect examples of our ability to deploy capital in an effective and accretive manner. Despite the temporary and manufactured volatility over the past two weeks, we remain laser focused and disciplined on utilizing our capital to accelerate our business strategy.

Finally, in summary, we welcome the spotlight on our great company. We encourage you all to learn more about the real history of NQ Mobile, to learn about the real heritage of our great product offerings, to learn about the real platform business that is unfolding before you, to learn about the real position of our business in the mobile revolution.

The real NQ Mobile is why I joined this company. It is why we have attracted so many other great leaders in the industry. The real NQ Mobile is supported by our great partners throughout the mobile ecosystem including the largest carriers, operators, handset OEMs, chipset makers, retailers and distributors around the world. The real NQ Mobile has great customers, who benefit from our great products and offering.

The real NQ Mobile rises above the challenges, the competition and the wide and falsehood associated by faulty and malicious blogs and intended attacks. The real NQ Mobile is the one that I remain fully confident and committed to. We are the NQ Mobile and we invite you all to actually research us, do your due diligence on our customers, our partners and discover for yourselves what makes our company so great and what makes our future so bright.

With that, I will now turn the call over to KB.

KB Teo

Thank you, Omar. Let me start by giving an update of our cash position as of 30 September. As mentioned by Omar, we have total cash of $149.5 million, 96% of our total cash which comprises cash and term deposits is Onshore in China, or approximately $144 million. 4% is offshore a little less than $6 million.

Additionally, since the close of the third quarter, the company also maintains its existing accounts with Standard Chartered Bank and HSBC in Hong Kong, where the proceeds of the recent convertible bonds offerings, totaling approximately $166 million continue to reside. The CB offering was completed after the end of the third quarter, and this cash is not included in the third quarter balance sheet.

We had another great quarter and again exceeded the high end of our previous revenue guidance. Our total net revenues in the third quarter were $54.2 million up 110% year-over-year and 31% sequentially.

Mobile value-added services revenues, which include consumer mobile security revenues and mobile games revenue increased 46.4% year-over-year and 0.3% sequentially to $26.9 million in this quarter. The slight decrease in consumer mobile security subscription revenues was primarily due to our monetization expansion to mobile advertising and mobile games in domestic China market. Our overseas consumer mobile security subscription revenues continued to grow with the increase of paid user accounts.

Our cumulative registered user accounts grew to 426.6 million at the end of the third quarter, up 77% year-over-year and 15% sequentially. Including 98.4 million registered user accounts of FL Mobile, we had total registered user accounts of 525 million as of September 30.

Our average monthly active user accounts grew to 133 million at the end of the quarter up 57% year-over-year and 69% sequentially. Including FL Mobile 19.1 million average monthly active user accounts we had total average monthly active user accounts of 152.1 million for the quarter ended 30 September.

Our average monthly premium user accounts grew to 14.8 million compared with 11.3 million for the previous quarter. We define premium user accounts as any user accounts that generates revenue either through direct payment, or indirect payment from third party developers and advertisers, via the offer wall or other forms of advertising.

The increase in mobile games revenues was primarily due to rapid user growth of FL Mobile game platform and the launch of new games in the third quarter of 2013.

FL Mobile operated and distributed a total of 22 games on iOS and 52 games on Android platforms as of September 30. Through the third quarter, FL Mobile had 11 games ranked among the Top 100 grossing applications of which three ranked among the Top 30 on Apple’s iTunes App-Store in China.

Average daily active users for FL Mobile games reached 127,448 in the third quarter up from 98,595 in the previous quarter. Advertising revenues were 11 million for the third quarter up 99.7% sequentially. The robust growth was due to increased monetization through advertising and promotional revenue through third party application referrals.

Enterprise mobility revenues increased 243% year-over-year and 90.6% sequentially to 15.3 million in the third quarter, mainly due to the strong growth in the enterprise business and new customer games. NationSky became a Tier-1 distributor for Apple in the first quarter of this year and have been ramping up its mobile device management or MDM business.

Other revenues in the third quarter was $0.9 million down 8.6% sequentially. Other revenues are generated primarily by providing technical contract services to third party, thus the revenue fluctuate as such business is driven by individual projects.

Before moving on to the cost of revenues and operating expenses, I want to refer you to our disclosure on non-GAAP financial measures, which was included in our official press release. The only difference between our GAAP and non-GAAP numbers are share based compensation or SBC expenses.

SBC expenses are 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 included in operating expense line items and we have included the reconciliation table in our earnings release showing the detailed calculation.

Our cost of revenues in the third quarter was $21.9 million up 175.7% year-over-year and 58.9% sequentially. Gross profit in the third quarter was $32.3 million up 80.8% year-over-year and 17% sequentially. Gross margin was 59.5% in the third quarter compared with 69.2% in the same quarter a year ago and 66.7% in the previous quarter.

The decline of the gross margin was mainly due to the increased revenue portion of the enterprise mobility business, NationSky, which has a lower margin. Excluding the impact of NationSky, gross margin was 73.3% in the third quarter compared with 74.6% in the previous quarter. The gross margin of NationSky in the third quarter is 24.8%.

Now on to the operating expenses. SBC expenses which were allocated to related operating cost and expense like items were $20.1 million in the third quarter, compared to $7.8 million in the corresponding period last year and $13.1 million in the second quarter. The increase in SBC expenses were mainly due to senior management compensation and also fair-value re-measurement of certain non-vested shares and share options previously granted as a result of the significant increase of our stock price as of September 30.

There was $8.2 million increase in the SBC based on the stock price increase during the quarter. Assuming in the same stock price, SBC would have been $11.9 million and would have declined sequentially.

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. Non-GAAP selling and marketing expenses were $6.1 in the third quarter up 29% year-over-year and 6% sequentially.

Non-GAAP general and administrative expenses were $5.6 million in the third quarter up 39% year-over-year and down 9% sequentially. Non-GAAP research and development expenses were $3.6 million in the third quarter up 56% year-over-year and 15% sequentially.

Non-GAAP operating income was $17.1 million in the third quarter, up 150.1% year-over-year and 24.9% sequentially. Non-GAAP operating margin was 31.5% in the third quarter compared with 26.4% in the same quarter a year ago and 33% in the previous quarter. Excluding the impact from NationSky non-GAAP operating margin was 39% in the third quarter compared with 38.3% in the previous quarter.

Operating margin for NationSky was about 12.3% in the third quarter compared with 10.8% in the previous quarter. Net loss from operations was $3.1 million and net loss attributable to NQ Mobile was $2.7 million, mainly due to $20.1 million in shared SBC expense in the third quarter, compared with the operating loss of $1 million and net income attributable to NQ Mobile of $0.3 million in this corresponding period of 2012.

$8.2 million of SBC was due to the reevaluation of the pool of equity and option awards based on the stock price appreciation during the quarter. The SBC would have been 11.9 million assuming the same stock price that was used at the end of second quarter which would have led to a GAAP profit from - GAAP income from operations of $5.1 million and a net income attributable to NQ Mobile of $5.5 million.

Income tax expenses were $0.9 million and the effective tax rate was negative 48.2% in the third quarter compared with the income tax expense of $0.31 million in the same quarter a year ago, and income tax expense of $0.06 million in the previous quarter.

The negative effective cash rate was primarily due to the loss before income tax as a result of increased SBC expenses.

Net loss attributable to NQ Mobile was $2.7 million in the third quarter, compared with net income of $0.3 million in the same quarter a year ago and $1.9 million in the previous quarter. The decline is mainly due to $21.1 million in SBC expense in the third quarter.

Non-GAAP net income attributable to NQ Mobile was $17.4 million in the third quarter compared to $8.1 million in the third quarter of last year and $15 million in the second quarter.

Net cash flows generated from operations was $22.2 million in the third quarter compared with $6.9 million in this corresponding period of 2012.

Cash and cash equivalents and term deposits together amount to $149.5 million as of 30 December. Lastly, I want to discuss accounts receivable days as that one financial metric that we have been focusing on improving and make good progress in this quarter.

In the third quarter, our total AR days came down to 115 days from 145 days in the previous quarter, decreasing 20.7% sequentially.

Finally, let me provide our outlook. Looking forward, we expect net revenues to be in the range of $62 million to $63 million for the fourth quarter of 2013. And raise the full year 2013 net revenue guidance from the previously issued range of $184 million to $188 million to $191 million to $192 million.

This concludes my remarks. And I will now hand the call back over to Matt.

Matt Mathison

Thank you, KB. And once again thank you all for joining us. Before we turn the call over to the operator to open up for Q&A, let me just summarize the key points of today’s call. Number one, operational results are tremendous, record revenues, strong operating margins, record cash flows, and DSOs declined significantly.

Number two, the platform strategy is working and we are poised for future growth. We saw strong growth in the monetization of active users clearly shown in the premium user growth. We continue to expand our product offerings including music and audio based search and NQ Live.

Lastly, our company is stronger today than it has ever been and the future is bright for the NQ Mobile team comprised of our employees, our partners, our customers and our shareholders. Thanks.

And Valerie, would you please open up the lines for Q&A.

Question-and-Answer Session

Operator

Certainly. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Jiong Shao of Macquarie. Please go ahead.

Jiong Shao – Macquarie

Good morning. Thank you for taking my questions. Good results. I have some housekeeping questions and some of the longer-term questions. Let me go one by one. First question is about your MAUs and premium users. Could you give us a breakdown for the users in China and overseas?

And somewhat related to that, I have not seen your PPT slides yet, could you talk about the segment of revenue for your China Mobile Security and overseas as well as the mobile games in your MVAS business? So, that’s my first question.

KB Teo

Okay, thanks Jiong. I’ll give you the breakdown of the mobile value added services for the third quarter and the changes relative to the breakdown. So, we’ve got the MVAS was $26.9 million as you know. Of that the gaming revenues were approximately $5.7 million. And the security revenues were $21.2 million and of that international accounted for about $12.5 million in revenue.

Henry Lin

Yes, I guess roughly speaking I mean, in China the premium – the number of premium users nearly two third of total premium users and for international one.

Jiong Shao – Macquarie

Okay.

Henry Lin

And that accounts for the total $14 million.

Jiong Shao – Macquarie

Okay, great. Thanks for that detail. And just a follow-up on that, it looks like I think you highlight in your press release as well. Your China Mobile Security business saw some weakness quarter-over-quarter. Could you talk about the competitive landscape because this is just some of the free products out there putting pressure on this particular product of the business?

Henry Lin

I think our platform is changing. It means, when we come direct to the user traffic to more channels to monetize our user base. For example, we can monetize our user base not only from a security subscription model but also through mobile enhancement and mobile games. You’ll find its more important we to increase user ARPU and maximize the monetization of our user base.

Jiong Shao – Macquarie

I see. So you’re moving slightly away from the subscription base to more monetizing the traffic?

Henry Lin

Yes. It’s more important, it’s enhanced business model. It means that we can have multiple channel to monetize our user base, not only I mean security subscription models. And furthermore the new and more monetization channels in the future.

Omar Khan

So I think, what, just add into what Henry just said. You got to remember Jiong, this was exactly the strategy we laid out a year ago. So as we expand monetization of our non-paying active user base, what you’ll see is we actually had an expansion in terms of the number of users that became premium users as a percentage of our active user base. So it was up to 10% last quarter that shows that we’re doing a better job of monetizing our non-paying active user base.

And that really comes from the fact that you not – you can’t only just look mobile security revenues as the monetization engine, you have to look at advertising and the cross platform monetization mechanisms of how we are basically monetizing the remainder of the active user base. And that’s exactly what’s working and that’s what yielded the 14.8 million premium users or 31% user growth quarter-over-quarter.

Jiong Shao – Macquarie

That’s right, okay. Thank you for that. That’s a good segue into my second question which is advertising business. It’s great to see doubling revenue quarter-over-quarter. Could you sort of put – give us some more details about how much of that business is from failure, how much is from the other – for example security products and other products in your portfolio. And what are the other key drivers than what you’re already highlighted in your prepared remarks behind is a tremendous growth?

Omar Khan

Yes, no, great question. So, obviously the $11 million which was that doubling quarter-over-quarter for advertising revenues was driven by both the gaming side of the business and security and other application side of the business. The gaming portion is $4.7 million and the remainder is $6.3 million.

So the gaming portion as an example grew from $2.2 million in the previous quarter to $4.7 million this past quarter. And the remainder grew from $3.3 million to $6.3 million. And that’s really driven by the gaming portion obviously would get added back into the failure or FL Mobile revenues which was over $10 for the quarter versus $7.5 million last quarter if you look at it that way.

And then the way to look at the monetization of the remaining part of the active user base is really, it’s coming primarily today from third party application referrals and connecting our platform partners and people who use our platform with our end users. And that’s really the testament to how we’re opening up our user base to connect with advertisers.

Jiong Shao – Macquarie

Okay, that sounds good. And then, moving down to the P&L. On the NationSky business, could you please give us the breakdown between hardware – between the products and the services?

KB Teo

The product revenue is around $11 million and then the service revenue as reflected in our balance sheet is around $4.3 million.

Jiong Shao – Macquarie

Okay.

Omar Khan

And I think, Jiong, the great thing to take away from that breakdown and hardware at 70%, software and services at 30%. And I’ve said this on previous conference calls is that, the hardware revenues and what’s going through our channel’s from a hardware perspective is an excellent leading indicator of the ongoing strength of the software and services revenue of the business.

So, as we engage with larger and larger customers such as the AnBang Insurance, that’s what gives us the ability to generate ongoing software and services revenue. So, when we look at the business, to me I look at that as an extremely positive health indicator of what sort of software and services revenues are to come in the future.

Jiong Shao – Macquarie

Okay. Thanks for the additional color. Could you also talk about how much of the revenue from NationSky is from the MDM related businesses?

Omar Khan

So that’s what – it’s captured in the software and services portion. Obviously Jiong, so that’s what is in that – in the $4.3 million or so that its part of the $4.3 million that he mentioned.

Jiong Shao – Macquarie

Okay, all right. Thanks. Another financial question is on your DSO. It’s great to see again DSO it’s gone from 145 to 115 quarter-over-quarter. Could you elaborate a bit on the drivers behind that? Where did you achieve the most improvement, either China, either overseas, what are the regions, what are some of the reasons behind that improvement?

Matt Mathison

Hi, Jiong, this is Matt. I’ll answer that question. There two key drivers to the DSOs declining. First, in our international and overseas business which we’ve highlighted in the past is really having the highest collection times. We based on our channel reconditioning effort, we had a great collection quarter. And that drove the largest improvement in the DSOs.

The secondary was in China, in our China business. And really just from a business mix and the growth of our NationSky business, our gaming and advertising business – this business mix is having a positive impact on our China DSOs as well. So those were two key drivers.

Jiong Shao – Macquarie

I See. So the mix-trend probably will continue. But for the international business, do you feel like now the level is a new norm or we should continue to expect the further improvement from this point on now?

Omar Khan

No, I mean, it’s – we’re in the process of reconditioning channels. And then obviously it’s always – there is always and had been flow. But we’ve done, I think I want to congratulate the team on the job that they’ve done in working with international distribution partners, retailers, distributors for working on collections in the cash to cash cycles. So I mean, I think just stay tuned.

Jiong Shao – Macquarie

Okay, great. My last question before I pass the mic to somebody else on the phone is on your acquisitions. I think you announced three small acquisitions in your press release in the last few months. Could you elaborate a bit on the – what will these companies do exactly, why they are buying them and are they bringing any revenues or customers, any additional information would be helpful? Thank you.

William Li

Hi Jiong, this is Will. So, all acquisitions that we have announced will have continuously accretive impact to our financial performances, in the short run then in the long-term.

We’re actually executing these acquisitions based on our platform strategy that was laid out at the end of last year. And we believe each acquisition will play a very important role going forward, in our platform strategy. Specifically that partner, we would expect our user acquisition in both online and offline channel in China. While KI and badge partner would also add to our advertising monetization capability. I currently mentioned earlier, to expand our monetization capability.

We’ve also completed the acquisition of NationSky especially the outstanding 45% that we didn’t own in Q3, to accelerate the product synergy and security and to provide probability solutions.

Jiong Shao – Macquarie

Okay, great. Thank you all. Great results. Congratulations.

Operator

Thank you. And our next question comes from the line of Mike Walkley from Canaccord Genuity. Please go ahead.

Matt Ramsey – Canaccord Genuity

Yes, thank you good morning. This is Matt Ramsey on for Mike, he apologizes for being stuck on a delayed flight. Thank you for taking our questions. I guess the first one I wanted to dig into is obviously the gross margin in the quarter was affected by the hardware sales mix for NationSky. In particular not just the mix but the gross margin of those particular hardware products was down to I guess a bit of 1% in the quarter. Maybe you guys could talk a bit going forward about two things.

One, what do you expect the hardware revenue to be or what’s implied in the Q4 guidance as a driver of margins? And what the long-time margin is that hardware in the NationSky business would be because it’s jumped around quite a bit? Thanks.

KB Teo

So I think that’s – this is KB. I think to address that the decline in the gross margins this quarter. So essentially it’s really due to the revenue – the increased revenue contribution of the enterprise mobility difference which has a lower margin. So if you look at the contribution of NationSky to our third quarter revenue just that increased from 19% in the second quarter to 28%.

So, if you exclude the impact from NationSky, actually our gross margin is 73.3% in the third quarter compared to 74.6% in the previous quarter. And overall the gross margins for NationSky in the third quarter is 24.8%.

Matt Ramsey – Canaccord Genuity

Great. Thanks for that detail, I appreciate that. I was just trying to get sort of a going forward indicator of maybe what a run-rate should be or what’s implied in your Q4 guidance from a hardware sales level, I mean, is that a fairly material driver of the overall company gross margin going forward. So, I mean, can you talk maybe going forward or what the right rate is for hardware to assume model going forward is driving those margins?

Omar Khan

Yes, I mean, I think if you take a look at, Matt, from a deals perspective. We’ve been hovering around the same sort of 70-30ish ratio plus or minus a handful of percentage points from hardware versus software and services revenue. And you’ve seen the gross margins hover in the mid-20s for that business. I think the way to model it, I mean, I think – you’ve got – the growth is going to come obviously from a seasonality perspective. We know that the enterprise business is generally higher in the fourth quarter and that’s something that we’ve been very transparent about.

And so it’s really going to be a mix on – from a blended margins perspective. You shouldn’t – I don’t think you should expect, I would say appreciable differences in terms of mix on hardware and software and services. But so I think you’ve got the – I think the model itself is pretty consistent.

Matt Ramsey – Canaccord Genuity

All right, great. Thanks Omar. I guess the next question from us is around I guess following on the previous caller’s questions around the three additional acquisitions that you guys made in the quarter that are disclosed in the press release. Are there any revenue or OpEx impacts in it, implied in your guidance for Q4 from the three businesses that you acquired maybe you can sort of break that down for us, there is anything implied. And if not, I guess one with the revenue are cost impacts of those three additional acquisitions hit the model?

Omar Khan

So, and our guidance takes in for the four quarter Matt, any revenue impact and also from a margins perspective. We’ve continued to state that our business will continue to operate at 30% plus net operating margin. It takes into account the impact of any of those acquisitions from an OpEx perspective.

We’re operating and the discipline we’re using from an acquisition and investments perspective Matt, is very similar to what we’ve talked about. And it actually remains incredibly consistent. We’re doing things from a disciplined manner when it comes to the transactions themselves being accretive. So you can expect the contributions of those to be factored in already into the guidance that we’ve given.

And I think the way to look at the overall margin mix of the model, that you and others probably have is just, I’m trying to understand the mix between the enterprise and the consumer business in the fourth quarter.

Matt Ramsey – Canaccord Genuity

Thanks for that. That makes a lot of sense. And I guess, the last question for us, maybe Omar, Gavin, you could elaborate a little bit more, I appreciate what you guys discussed in your prepared remarks. But about the specific momentum in Latin America with the American Movil properties. Any additional color you could give around attach rates or adoption rates or monetization rates of the – of the early indications of Mexico would be really helpful?

And then if you could discuss some metrics with smaller U.S. point of sale and carriers in the past about introducing some of these products and what the attach rates were so if you get on that would be really helpful?

Gavin Kim

Hi Matt, this opportunity is always a big undertaking for us and for partners. But we are seeing really great results from Mexico. We’re already there marketing across our full prepaid and postpaid base. But that is really a digital marketing acquisition technique.

What we’re doing now is, obviously we’re beginning to focus what the operator have launched on a pre-installed basis. Obviously, pre-installed versus digital marketing acquisition we expect good things from that type of collaboration. And then broadening that opportunity, we’re going to press on pretty quickly here to Brazil as we get through December and then pre-load on those devices end market.

The business for us is obviously going to be positive as we move towards more preinstalled but obviously everything at this point is largely digital marketing acquisition base, which is pretty consistent with what we see across other markets.

Omar Khan

Yes, and just to add in, obviously the revenues from one – the results, Matt, have been very, very exciting and promising both from our perspective and our customer’s perspective.

The financial results associated with our traction in those markets, are and will continue to be reported in our financials. But we defer to our customer’s policies in terms of sharing specific results when it comes to user metrics or broken down metrics from our regional by a country by country basis. I know you spend a lot of time in the telecom industry and you know we’re partner with the carriers. So, we defer to our partners from a metrics disclosure perspective, if that makes sense.

Matt Ramsey – Canaccord Genuity

Thanks guys for that. And I think that’s so the end of my questions for the night. All the best and continue your ongoing efforts. And we look forward from hearing more about your future strategy in your next lead. Thanks.

Operator

All right, thank you. And our next question comes from the line of Fred Ziegel from Topeka Capital Markets. Please go ahead.

Fred Ziegel – Topeka Capital Markets

Good morning guys. Let me ask you one question on the inventory which went from I think a couple of hundred thousand in Q2 to 5 million in Q3. I’m assuming that is BlackBerry/Apple Products. And how far in advance – I guess my question is how much is that near term leading indicator of what is dragging so long with service revenues?

KB Teo

So, this is KB. Just confirm that those actually are hardware that’s being helped by NationSky. So, you’re right. You could include some of the put up liquidating asset – that is being held by NationSky.

Fred Ziegel – Topeka Capital Markets

Okay.

Omar Khan

Yes, so. And then just as a follow-up Fred, obviously to me, one this is a snapshot in time from an inventory perspective. But hardware, remember the larger the deals in the pipeline and I mentioned this on the conference call in my prepared remarks, the deals that we have in our pipeline to user verbatim dwarf the deals that we’ve announced today.

So the larger the deals in the pipeline the larger the hardware components but also the larger the leading indicator it is of the hardware, of the service and software component that follow on from that. So, again, a very, very good leading indicator.

Each deal varies from a lead time perspective depending on the customization required and the number of modules that we implement as well the number of vertical applications that need to get implemented from an integrations perspective. So, each – to be honest with you – each deal is somewhat unique in that respect.

Fred Ziegel – Topeka Capital Markets

What’s kind of the timeframe if you have a customer A, who buys X amount of BlackBerrys or iPhones, which is obviously in your inventory number and deployed. So, when – how quickly does that start to swing from a hardware revenue to a service revenue predominantly?

William Li

Hi, Fred, this is Will. So, I think as Omar had mentioned there is always a leading period. Usually it’s about a couple of months up to a couple of quarters. Really it’s a case by base where you need to its situation. But I’d like to correct you on really you really right now, most of the NationSky sells our focused arm Apple and Android platforms. The BlackBerry has been a legacy service that they offer, it’s still ongoing. But ever since we refocused here Apple and Android. Thank you.

Fred Ziegel – Topeka Capital Markets

Okay. Thank you. And if you think about what you’re trying to do longer term I guess in technology that’s like tomorrow. But maybe over the next two or three years if I think about it in three buckets between mobile security, advertising and NationSky. What do you think that mix looks like in a couple of years?

Omar Khan

That’s a good question, Fred. I think we’ve had this discussion. It’s – I’ve got three kids, it’s like trying to pick with somebody asking me who your favorite kid is, it’s like picking between your three kids naming him the favorite. I mean, NationSky as an enterprise business you’re seeing quarter-over-quarter and year-over-year the tremendous growth that we’re seeing there.

The pipeline is extremely strong when it comes to the enterprises that we’re doing business with. And it’s still pretty early stages Fred for enterprise development and deployment in China. I mean, one of the key factors that I think is really important when you think about greater China and some of the other emerging markets that we can expand to over the time. They’re skipping the PC generation altogether from an enterprise deployment perspective.

So we’re going straight to mobile. And that is a great tailwind for us from an enterprise deployment perspective. If you think about the gaming and advertising business, I mean, today gaming is still probably the single largest monetization engine on mobile from a consumer perspective. And given the secret sauce that FL Mobile has in terms of both identifying, operating and optimizing games for play as well as for user acquisition, it’s something that has worked extremely well which is why partners like Tencent and Perfect World and others have continued to double down on FL Mobile from a partnership perspective.

The security business, I think we’ve got some pretty good tailwinds in the international market both from a Latin America perspective as well as from a just from the partnerships we’re doing to support the security business in global market.

So you’ve got to layer in all of those growth opportunities Fred. I think that right now NationSky is transpiring – and so you’re going to see tremendous impact from the NationSky business over the next several quarters from a growth perspective.

Advertising and gaming are continuing to grow at a very, very fast clip. And the international security business has re-ramped with carriers and partners around the world will continue to grow.

And we haven’t even factored in by the way Fred. NQ Live which I think will actually put some probably jet-fuel into the advertising bucket because it’s a new modality of how consumers can integrate – sorry interact with the content partners that we’ve got. So, that’s a question I have a difficult time answering, just the same way I have a difficult time picking my favorite of my three kids.

Fred Ziegel – Topeka Capital Markets

So, when you think about what you’re trying to do going forward, is it more around the addressable market, you tried to think about NationSky as an example with margins blended in the low 30s. Are you more inclined and going to be looking at terms from a revenue perspective and margins will be little less?

Matt Mathison

Hi Fred, this is Matt. Again, we have consistently stated. We’re a company in hyper growth mode. We’re obviously going to take advantage and focus on growing. But we’re going to do that and obviously keep in mind the profitability behind it. We’ve committed to keeping our operating margins in the 30% range as we do focus on accelerating our top line growth. But that’s where our focus is.

Omar Khan

Yes, I mean, I think you can see Fred from just the operating results that we’ve had and we’ve said this in past quarters that we see the opportunity from a revenue perspective to invest in the business as a percentage of revenues. We don’t feel that we are in a mode of having to invest in the business ahead of revenues. So, I think we can keep leverage in our business model at this point.

Fred Ziegel – Topeka Capital Markets

Okay. Thanks.

Operator

All right. Thank you. And our next question comes from the line of Jun Zhang of Wedge Partners. Please go ahead.

Jun Zhang – Wedge Partners

Thanks for taking my question. Congrats on the strong results. My first question is, I want to ask about there are not many investor went to a company to do a lot of knowledge work and due diligence work. I’m just wondering how is auditing progress going before the Q3 and did PWC become more strict on some auditing progress? Thanks.

Omar Khan

Thank you, Jun for the question. So, just to talk about I think you have two parts to your question. Obviously, we’ve had multiple investors/third parties come to Beijing to visit us to sort of look under the hood and continue due diligence. We’re working with them closely in opening up everything that they’ve been, wanting to see.

And as probably have gotten feedback that process is being going very well. From an auditor perspective obviously we’ve been working, we work very closely with PWC as their processes are very stringent, very robust and very, disciplined.

And they’ve continued to be that way and partnered with us and worked with us very, very closely in their normal stringent process is to help us close the quarter and get our results announced on time. And obviously we’ve reported record results today. Even during the course of this increased scrutiny and the events that have happened over the last couple of weeks. So we work with them very closely and their processes remain extremely strict and stringent.

Jun Zhang – Wedge Partners

Okay, thanks. So my second question is that advertising business. So, what the gross margin looks like on those advertising set of a business. And also should we expect this segment to be one of the biggest driver – that’s your large NTO life in the next couple of months? Thanks.

Omar Khan

Yes, so for the advertising business obviously it’s in the consumer side of the business, Jun. So, I mean, it’s rolled up and that’s consistent with the consumer side of the business if you will. You’ve seen that – it’s in the consumer side of the business is in the load, in the mid-70s. The enterprise set up the business in the mid-20s and the operating margins continue to be well over 30 in the consumer side of the business, so the advertising business blends into that business model very, very well.

As we go forward from an NQ Live perspective our other components of advertising I think, those operating models will remain consistent with the current margin structures that we’ve got in the consumer side of the business.

Jun Zhang – Wedge Partners

Okay. Should we expect that the gross margins will gradually improve as the software and the advertising business growth in the next couple of quarters?

Omar Khan

Yes. I mean, I think the way to think about the gross margins specifically. And I just want to make sure we’re very clear, right. We’re managing the business to net operating margins. And just going back to the gross margin question specifically the consumer side of the business operates let’s say in the mid-70s. That’s really driven by two factors, right. One on the consumer side of the business, our security business has operated at or above or at or around 80% gross margins. The FL Mobile side of the business has operated closer to the – let’s call the mid-50s and for a blended operating margin in the low 30s for the entire business.

So, we continue to focus our business on maintaining net operating margins at or above 30% and that’s really what we measure our teams on, what we incent our teams on and how we structure our business.

Jun Zhang – Wedge Partners

Okay, thanks. And the last question is that, so for the Q4, how should we look at the disruption of Muddy Waters thing affect your Q4 OpEx and other items in the income statements. Thanks.

Omar Khan

So, from a guidance perspective, I’ll let also KB answer. But our guidance that KB gave earlier as well as that was included in the quarter, already factors in obviously any or all known factors going into the quarter. So, we’re giving our guidance today.

KB Teo

Basically – yeah. Just to circle back on the question about the extra cost, obviously as we move forward with the independent audit and the Special Committee cost and things like that, we’ll be breaking those out as one-time and we’ll be providing more details as we get further along in the process, so.

Jun Zhang – Wedge Partners

Okay. Thanks. That’s all my questions.

Operator

All right, thank you. And our next question comes from the line of William Huang of Barclays. Please go ahead.

William Huang – Barclays

Hello, thank you for taking my call. I have a couple of questions. My first question is about SBC which is about $20 million this quarter. Can you guys – roughly breakdown the training management salary versus the optional revaluation?

And the second question is about your FL Mobile revenues. Can we know the Top 10 revenue contribution this quarter and also can you update us in terms of your oversea strategy? It seems like your first game launch is very sufficed for in U.S. And so, what have you guys planned to do going forward to migrate your security uses into game users? And also further monetize the game revenues in international markets? Thank you. And I have some other questions.

KB Teo

We’ll address the first question SBC, so approximately $8.2 million of SBC was due to the re-measurement of the portion of our pool of equity and option of work that was previously granted. As a result the stock price increased during the quarter. And the remainder is due to banking events, new grants and then performance base grants relating to acquisitions.

Omar Khan

And then, just to add to the second part of your question William. From a games perspective the MVAS, I think I mentioned this earlier is about $5.7 million in the quarter. And I’m going to let Gavin talk a little bit about the international strategy when it comes to the gaming business.

Gavin Kim

Yes. So, I mean, I think that’s already as we’ve already discussed, we’ve already taken first steps to globalize FL Mobile’s region or nationally. We have launched as we’ve explained that one game Gods & Dragons in North America, specifically in Canada and U.S.

For us, localizing or sorry, globalizing games is not just about language pack changes it really is about working with a developer to do things like changing game play, changing mechanics, social, building of integration etcetera for non-tenure markets. I think that so far the effort has been a great success. We’ve been nominated for the Best Game in the Mobile – Best Mobile App Awards for 2013. We’ve consistently been rated 4.5 stars in the Apple App-Store. And we’re about to go live on Android shortly.

It’s the first of many games in the pipeline that we’re going to be bringing into North America and we’ve got a good handle on a number of games obviously from the China market that we think seems to profile for inter-rationalization and we got to continue to do that.

William Huang – Barclays

Okay. Well, back to game revenue. Can you share with us like – if we just look at Top 5 games, what is the overall contribution roughly speaking?

KB Teo

On this question, the Top 5 games contribute about 60% to probably 70% for sort of gaming revenue for this quarter.

William Huang – Barclays

Okay. And I have two more questions, and on the security user side. We understand part of your users, are actually using your Y-Labor products. Do you guys have some like maybe roughly breakdown, how much kind of the percentage of the user base using like Y-labor security products versus your in-house brand like NQ Mobile security products? Thank you.

Henry Lin

I see nearly 20%.

William Huang – Barclays

Okay. What the last question is like, previously you announced about $35 million share buyback plan after resolve. Do you speak to that client and what is the roughly like the maturity date? Any update will be appreciated? Thank you.

Omar Khan

So, yeah, thanks for the question. Yes, no, I announced that obviously the share buyback plan that we have in place is $35 million. In addition we announced a management purchase on the open market using personal funds at $3 million. We remained committed to both in the open windows that we have – in the opening windows that we have ahead of us. So I think it’s consistent with our effective and interesting use of capital.

In addition to that obviously I stated the board of the management team are looking at every opportunity for efficient and effective use of capital and we’re going to continue to do so.

William Huang – Barclays

Thank you. Congrats to a very solid quarter. Thank you.

Operator

Thank you. Due to time constraint, we have question for one last caller. And it’s from the line of Ravi Sarathy from Citibank. Please go ahead.

Ravi Sarathy – Citibank

Thank you very much for taking my question and congratulations on another very solid quarter. My key question really revolves around your vision for the NQ Live product. When we can expect to see an impact from that and how you – what your vision for that part that would be going forward in terms of user interaction and the potential for different revenue streams? Thanks you.

Omar Khan

Thanks for the question, Ravi. Yes, it’s three weeks ago today that we announced NQ Live. It seems like an eternity ago. But we are – I can’t tell you how excited I am about NQ Live. It completely changes the paradigm of user interaction and it starts to monetize and engage users.

On a piece of real-estate on the home-screen that has never been done before in the way that we’re doing. What I can tell you is that – as we had four in terms of the vision four, we’re opening that platform to third parties and partners whether it be third party content developers, advertisers, carriers, OEMs, we’ve got interest across the board from every single piece of that value chain or ecosystem.

And really, the primary mechanism there is really advertising. When it comes to the monetization schemes that I believe that will result in financial benefit both for us and our partners.

In addition to that, it is a platform so there is platform service revenue capacity for them to implement as well. And the final piece of it obviously is premium content that can be delivered via the platform as well.

And so, as an entry point for our partners, they have existing assets in mobile, whether it be mobile browser website or mobile applications. And it really starts to take users back into content and applications that are already being supported by our partners.

And just from a financial contribution standpoint, I think that as we had four, that’s really in the early days, it’s about gaining traction, it’s about gaining a user base, it’s about gaining engagement and then monetization will obviously be a big part of the equation. And I would say in the next fiscal year in 2014, we should start to expect NQ Live to start to contribute two of our – both our top-line and bottom-line.

Ravi Sarathy – Citibank

Thank you very much, and congratulations again on a very, very solid growth and some great strategic developments. Cheers.

Matt Mathison

Thanks Ravi.

Operator

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

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