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NQ Mobile Inc. (NYSE:NQ)

F4Q 2013 Earnings Conference Call

April 10, 2014 8:00 PM ET

Executives

Michelle Ma – Director of IR and Corporate Development

Henry Lin – Co-Founder and Co-CEO

Omar Khan – Co-CEO

K.B. Teo – CFO

Matt Mathison – VP, Capital Markets

Analysts

Jiong Shao – Macquarie

Michael Walkley – Cannacord Genuity

Jun Zhang – Rosenblatt Securities

Frederick Ziegel – Topeka Capital Markets

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the NQ Mobile Q4 2013 earnings conference call.

[Operator Instructions] I must advise you that this conference is being recorded today, the 11th of April, 2014.

I would now like to hand the conference over to your speaker today, Ms. Michelle Ma, Director of Investor Relations and Corporate Development for NQ Mobile. Thank you, and please go ahead.

Michelle Ma

Thank you. Good evening and good morning, Asia. We welcome you to NT Mobile's 2013 fourth quarter and full-year earnings conference call. On today's call, we will have NT Mobile's Co-Founder and Co-CEO Dr. Henry Lin, Co-CEO Omar Khan, CFO K.B. Teo, and Vice President Matt Mathison.

We thank you for joining us. Before we begin, let me 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 19 million9 million5. 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 US GAAP financial measures and information reconciling those non-GAAP financial measures to NQ Mobile's financial results prepared in according with US GAAP will be included in NQ Mobile's regular earning release and filing.

Finally, as a reminder, this conference is being recorded. In addition, a webcast of this conference will be available on NQ Mobile's Investor Relations website. With that said, I would also like to point everyone to our presentation on our Investor Relation section of our website. We will be following that presentation on our call today and we encourage you to view that with us. Now I would like to turn the call over to our Co-CEO, Omar Khan.

Omar Khan

Thank you, Michelle. Hello everyone, and thank you for joining our call. Before we discuss our record year and strong position for 2014 and beyond, I'd like to take a few moments to clear the air, or perhaps more appropriately, clear the waters.

The American Statesman, Daniel Patrick Moynihan, once said, "Everyone is entitled to their own opinion, but they are not entitled to their own facts." Ladies and gentlemen, I want to share a few facts.

The fact is, the work of the special committee, the attorneys, the forensic accountants they hired is independent. It is not management's place to speak directly to the many questions you may have about the special committee's work. The special committee will speak for itself in due course, as highlighted in our statement in the earnings release, in conjunction with the filing of our annual 20-F Form.

However, the fact is that management, our entire organization, our Board of Directors, and our independent auditors are here, and remain focused on our respective responsibilities. As an organization, we are addressing the sizable opportunities in the markets every single day, by the way we continue to run our business, by the way our products and services continue to solve problems, provide entertainment, and create value for our platform partners and our end-users, and demonstrated by the way we -- way our position in the market is stronger than ever before.

The fact is your management has unrelenting resolve and commitment to continue expanding and accelerating our business partnerships and relationships, to drive results and achieve robust growth. Every employee at NQ Mobile is working tirelessly to hit our goals and to make our vision and strategy a reality.

The fact is in the past five months alone we have added more than 10 new major partnerships and business deals, from mobile giants and industry leaders, including Sprint, Samsung, Ubisoft, China Mobile, Huawei, The National Bureau of Statistics in China and Telkomsel, among others.

We have introduced new products and services that are solving pain points and enhancing and delighting customers and businesses, alike.

We have grown the monetization of our engaged user base dramatically. And we have taken, in only two quarters, our annualized revenue run rate, from just over $160 million to now over $300 million, with our Q1 guidance.

The fact is, as a management team and as a Company, we remain confident in our business, our financials, our competitive positioning, and our business strategy.

Now that you've heard the facts, I invite you to share the opinions held by your management, the company’s employees and everyone who partners and works with us, that NQ Mobile is poised for continued, unprecedented growth.

Now let's move on to our record results and strong positioning for 2014. Matt?

Matt Mathison

Thank you, Omar. And again, thank you everyone, for joining us. With that said, we are definitely ready to move forward. Let's turn our attention to the fourth quarter results and to update you with our strong outlook for 2014.

On the call today, you will hear first from our Co-Founder and Co-CEO, Dr. Henry Lin. We will then hear again from our Co-CEO, Omar Khan. Our CFO, KD Teo, will then review the financials, as well as provide commentary on the financial outlook for NQ. We will then have time for Q&A.

Now before I turn the call over to Dr. Lin, I want to highlight three key points up front, that you should get out of this call, in addition to a good, comprehensive update on our business and strategic focus. Number one, as described in our earnings release, there were extraordinary costs associated with the special circumstances the Company had to manage, associated with the manufactured volatility and the special committee's work.

In addition, there were one-time costs from the convertible bond offering. These costs impacted our profitability and margins. And even though some of these costs will continue in Q1, these items are not a reflection of our operating model, going forward. But even including these extraordinary costs and the business mix in Q4, which included incredible growth in our enterprise and advertising segments, which both have a lower margin profile, we were still able to achieve our stated profitability targets for the 2013 full year.

Looking ahead, while there are quarterly fluctuations, related to investing and the expansion of our platform business and emerging products, as well as revenue mix shifts, we remain confident in our long-term operating model, even if quarterly fluctuations will continue in the near term. I would also like to just point out that in the recently concluded Q4 period, our DSOs in the quarter fell below 100 days and came in at 9 million7 days.

Number two, our revenue outlook is something that should highlight the significant power of our platform and specifically how it is meaningfully taking hold. Q1 is typically seasonally lower in enterprise and advertising. Yet we are seeing continued strength in these businesses, sequentially. Our revenue trajectory is well ahead of even our own expectations.

Number three, we will provide additional details later in this call about our operating metrics. But we do continue to see accelerating user and traffic growth, both within our own products, as well as part of our platform of traffic and advertising. The operating metrics detailed in today's earnings release do not include some very important products and traffic users, as well as premium user totals. We will begin reporting these user metrics, to more accurately reflect this platform in the future. And in a few moments, we'll provide you with some of the details, so that you'll be able to accurately analyze our important user acquisition, engagement and monetization trends.

Now I am pleased to turn the call over to our Co-Founder and Co-CEO, Dr. Henry Lin. Henry, go ahead, please.

Henry Lin

Thank you, Matt. Hello everyone, and thank you for joining us today. I want to take the opportunity to thank our employees and managers for your hard work, effort and results.

We just complete a record year for revenues and earnings. More important, NQ Mobile is now positioned to not just participate in the evolution of mobile platform, but to lead the way globally.

We already have one of the world's leading mobile user acquisition engines and we're not just acquiring users, but we have been expanding product and service offerings to engage and [administrate] [ph] to monetize these users. We have many new technologies in the pipeline to improve mobile discovery and user engagement for both consumers and businesses.

The opportunity in front of NQ Mobile is huge. We are proud of our record year, yet we're much more focused on making the future years even better. Mobility trends are changing the way consumers interact with their devices. These same trends are also changing the demands and needs on how enterprises work with employees and data.

We're seeing a complete transformation of everyday life. And we're prepared to lead this transformation. Our journey is just beginning.

Now, before I turn the call over to my partner and Co-CEO, Mr. Omar Khan, let me spend several minutes talking about our enterprise business.

Since the last time we spoke, we announced and delivered one of the most ground-breaking enterprise deals in China. We have now deployed and are supporting more than 700,000 seats with the National Bureau of Statistics in China, and that deal will grow further. This deal alone has positioned us as the go-to enterprise mobility provider in China market. The effects of this relationship are showing up in many ways, including the busiest business development pipeline we have seen so far. In fact, our pipeline has grown from just a couple hundred thousand seats a couple of quarters ago, to now over 1 million seats in our current pipeline.

We are rapidly growing our headcount in this business and believe that there is a very long runway of growth ahead. We have already demonstrated success in financial services, insurance and government segments of the market. While these continue to be important sectors, I want to spend a few minutes talking about some of the early success stories in one of our emerging verticals, in the health care industry, one that we believe will become our largest vertical.

In a developed market, like the United States, healthcare represents almost 18% of GDP, according to the most recent data from World Bank. In China, healthcare only represents 5%, yet it still accounts for a large portion of all Internet search traffic. There is tremendous growth ahead in the healthcare sector in China. Our services and solutions in the healthcare vertical currently include mobile enterprise application development and deployment, mobile search investment, healthcare provider, patient communication and monitoring, and device management.

One success story I would like to highlight is at West China Hospital in Sichuan Province, which is one of the largest -- the world's largest single-point hospital. NQ Mobile is working with the hospital to develop a dedicated mobile health platform. This platform will be tailored initially for stroke recovery, providing [tracking] [ph] and guidance for patients and their doctors. This innovation has been designated for a national demonstration project by China's Ministry of Health.

NQ is also working with West China Hospital as a provider of MDM solutions. We beat out industry giants like IBM and Hitachi for this significant contract. This is a 30,000 device deal and represents the beginning of a very rewarding business opportunity.

So you can see, the opportunities in mobile enterprise management for verticals such as healthcare and financial services are enormous for NQ Mobile. The market size and opportunity is huge. This is also especially exciting personally, as I have a passion to use mobile technology to improve accessibility and affordability of healthcare services to the broader Chinese population.

I would now like to turn the call over to my partner and Co-CEO, Mr. Omar Khan.

Omar Khan

Thank you, Henry. I would also like to congratulate the team for a record-setting year, across the board. Henry just gave us a great summary of the performance and potential of our enterprise business. I will now do the same for our consumer business.

When we set out our 2013 operating plans and objectives, back in November of 2012, in addition to our financial goals and targets that we set and surpassed, we also communicated the following fundamental operating goals. One, we wanted to build credibility and scale in executing against our platform strategy.

Two, we wanted to begin commercialization of our R&D investment. Three, we wanted to procure at least one additional tier-one global carrier. Four, we wanted to broaden our monetization opportunities. And finally, we wanted to drive deeper engagement with our users. I'm proud to say that we not only accomplished but significantly exceeded all of these goals and objectives for 2013.

All that being said, it's still just the beginning. The vision for our Company, going forward, is to continue being a leading mobile internet platform company on a global scale, that is unparalleled in operating and financial performance. To put this in the simplest of terms, first, we must have compelling and engaging products and services, products and services that address user needs and delight them.

Second, we must have dominant user acquisition channels and an ability to distribute products and services directly to end users, and on behalf of third-party carriers and our manufacturing partners. Finally, we must be able to monetize for ourselves and for our platform partners.

Everything we do as a Company fits into one of these three main focus areas, including our R&D priorities, partnerships and corporate relationships, our business development effort, talent acquisition and hiring, and our investments in M&A.

If you review some of the strategic and important new relationships, as well as newly introduced products and updates, you can see how each one strengthened and better-positioned our Company in one of these three main areas, products and services, user acquisition and engagement, and monetization.

It's hard to believe it's only been 17 months since we first unveiled this platform strategy. Many people looked at us and said, why you? Five months ago, at our second analyst and investor day, I opened the presentation with numerous slides, illustrating recent tangible results and facts validating our ability to execute this platform strategy and answer all of those questions.

Over the last five months, we've had a lot of visitors who have come and spent a considerable amount of time with the team. They have all remarked about the energy, excitement level and vision of our organization. This is the most exciting time to be at NQ. Personally, I'm having more fun than I've ever had at any time in my entire career.

We have more tools at our disposal that make us more relevant to a broader set of constituents than the days when I was at Samsung or Motorola. We are relevant to and engaging in business discussions today, with enterprises, carriers, manufacturers, consumers, advertisers, developers and others, on a global playing field. It's hard not to be confident and excited about the future.

We continue to expand our products and services, and are achieving this as we move up the engagement ladder of things that are front-of-mind to consumers and enterprises. Over the last two years, we have significantly elevated our product portfolio, in terms of user engagement and delight. We've realized this, while continuously expanding our channel partnerships and monetization capabilities.

This started nearly two years ago, with our productivity applications, when we rolled out Vault and Family Guardian, both of which uniquely address consumer pain points and drive higher engagement beyond mobile security. In the past year alone, we've expanded our user acquisition partners for these productivity applications to include America Mobile, Telkomsel, China Unicom, just to name a few. We expect to be able to share new announcements of tier-one partners soon.

In addition, we expanded our monetization capabilities beyond direct consumer service revenue, to include advertising. Our retail business continues to successfully build out and we are actively working with our insurance partners to drive new insurance bundle offerings.

In fact, we will be commercializing our first insurance and security bundle in the next two quarters, and are planning an aggressive migration of our retail footprint to this new model, not moving completely away from our standalone retail business, but rather adding insurance bundling into the retail mix and carrier partners.

The benefits to NQ are very simple. While we continue to see 20% attach rate in retail locations where proper sales and support training exist, we believe that the insurance bundling will move our attach rate to as much as 50%, on a more consistent basis.

We continued moving up the user engagement ladder, with the addition and growth of our mobile gaming portfolio. Our FL Mobile business continues to shine. For the fourth quarter, our FL Mobile business collectively, including gaming and advertising, achieved record revenues of $14 million. Besides now being on annualized run rate of almost $60 million, we're excited about the accelerating engagement metrics. I

In the fourth quarter, we saw our largest quarter-over-quarter increase in DAU, from 127,000 in Q3, to now more than 160,000 at the end of Q4. We also continued to extend important key relationships, like Tencent. And we signed a new strategic deal with Ubisoft. We have a strong pipeline of games to be operated over the next few quarters, and we'll continue to bring the best content to our users and the best platform for a strong -- for the strongest mobile content developers.

But we didn't stop thinking about consumers, their evolving desires and engagement with just mobile gaming. We have begun rolling out the two most exciting consumer products in the history of NQ, our audio search technology, packaged into the Music Radar application, and NQ Live.

Since Music Radar launched, we've had approximately 20 million downloads. And the Music Radar search technology has been licensed and integrated into third-party services, including China Mobile's unique new [ph] music player, Tugo [ph], Ttpod, and most recently with Huawei ring back tone services, all of which today drive more than 7 million unique daily search queries, which his higher than the 6 million number we reported just a few weeks ago.

We expect to exceed 10 million daily search queries later this year. This is an enormous milestone, and we are excited to share with you the progress of this impressive traffic, going forward. There will be more partnership announcements from Music Radar in the near future.

While mobile music is definitely a passion point for consumers and has raised the engagement level of our offering, NQ Live goes even further. Consumers pick up and look at their phone, on average, 150 times per day. As we have previously discussed, NQ Live is an innovative platform that enables content developers and partners, including ourselves, to engage users on a real-time basis, through the home screen.

As a reminder, we have recently announced--we have already announced partnerships and pre-load relationships with Sprint, China Telecom, VTE, and numerous other manufacturers. Since we announced NQ Live, we are excited to share with you today that we have already exceeded 8 million monthly active users, with daily active user accounts exceeding 2 million.

Even in this early stage, NQ Live has been shipped on more than 35 million devices, and the rollout will accelerate in the second half of this year. It has been an incredibly fast ramp thus far, and has exceeded our own projection. We expect that the number of monthly active users on our NQ Live platform will reach 60 million users next year. Once again, we have a strong pipeline of still unannounced channel and content partners, and we look forward to updating you on our progress in the coming quarters.

Further up the user engagement curve still is our mobile messaging product, iSMS, and our joint venture, Hissage with MediaTek. While still in the very early stages of commercialization, early results have been very positive. As we have previously stated, we have nearly 2 million daily active users, currently, and expect this number to grow quickly in the future, as this messaging client is preloaded on more of MediaTek's most successful smartphone chipset solutions. We will share more details about this product, as the rollout continues. These emerging high engagement consumer technologies present an extremely exciting and lucrative opportunity for our Company and our partners.

In recent history, there are very few products or platforms that have seen this type of early stage growth and engagement. To think that we have two emerging products, NQ Live and Music Radar that are already seeing active user totals that I described is staggering. Our focus to products such as NQ Live, Music Radar and iSMS is to invest in continued innovation, user experience optimization and growth of the engaged user base.

At NQ, similar to other large, diversified internet players, we have the ability to incubate, grow and focus on scaling the user base, while also maintaining a healthy balance between investment and profitability.

Like these companies, our investment capacity is provided by our existing businesses, growth and profitability. However, NQ is unique, in that we do not bear the full burden of investing, in scaling these new businesses alone. Our products and services are critical to a broad set of channel partners, who invest alongside us, in product customization and user acquisition.

Someone we all know very well recently said, "Services in the world that have 1b people using them are incredibly valuable. Now whether or not we get to post that on our Facebook page or not remains to be seen. But make no mistake, the opportunity we see before us at NQ is huge. And we will continue to invest behind these -- these next-generation products and services, as well as their channels.

In addition to our own products and services, and user acquisition channels that comprise our platform, I mentioned earlier the ability to open that platform to enable third parties to acquire users and generate traffic for their own products and services. This becomes extremely valuable for our advertising partners.

The advertising business performed incredibly well in the fourth quarter 2014 and represented a quarter of our overall revenues in the period, and is growing rapidly. As we entered 2013, we faced a lot of questions about our ability to find success, offering third-party application referrals via advertising channels. We exited 2013 in the fourth quarter, already with a greater than $65 million annualized run rate. We believe we'll be at $100 million annualized run rate within the next year. This is very exciting and still early in our execution.

At our analyst meeting in November, we cited some interesting metrics of our -- about our advertising business. Let me provide you with an update on some of the key trends we're focused on in our advertising business.

First, we had more than 40 million successful click-through activations across our ads platform. That means more third-party developers saw successful use of advertising dollars. We also more than 11,000 developers and more than 1,000 advertisers now, who have access to advertise and deploy to over 200 million users.

This business segment is no longer just a desire to get some extra monetization from our user traffic. Rather, this is a compelling ad networking platform that is firmly positioned to grow materially over time.

Before I turn the call over to K.B., I wanted to address something that Matt already touched on. We are currently not counting the majority of our advertising users and traffic, as well as numerous new products, like NQ Live, Music Radar and iSMS in any of our operating metrics. We are in the process of determining the best way to demonstrate our direct users, along with our platform traffic user metrics and premium total, and we will do that in the future.

If we did include these metrics, based on the data that I just shared with you, about these various emerging products and platform traffic, it's easy to see that we are beginning to accelerate our monthly active users and premium user total. This is a reflection that our platform strategy is clearly working.

Now let me turn the call over to our CFO, K.B.

K.B. Teo

Thank you, Omar. We had another great quarter, and again exceeded the high end of our revenue guidance. Net revenue in the fourth quarter of 2013 was $67.9 million.

Mobile value-added services revenues, which include consumer mobile security revenues and mobile games revenues, increased to $37.1 million in the fourth quarter. The increase in mobile value-added service revenues was primarily due to the growth of mobile games revenues, and partially offset by the decline of mobile security subscription revenues, as we migrate the monetization of security and productivity applications into advertising.

Advertising revenues were $50.7 million for the fourth quarter. The robust growth was due to increased monetization, through advertising and promotion revenue in the form of third-party application referrals through our mobile security product, mobile games in our advertising network platforms.

Enterprise mobility revenues increased to $33.5 million in the fourth quarter, due to the strong growth in the enterprise business and new customer gains. Other revenues in the fourth quarter was $0.5 million. Other revenues are generated primarily by providing technical contract services to third party and thus the revenues fluctuate as such, since the business is driven by individual projects.

Cost of revenues in the fourth quarter were $34.7 million. Gross profit in the fourth quarter was $33.1 million. Gross margin, or gross profit, as a percentage of net revenues was 48.8% in the fourth quarter, compared to 67.8% in the same quarter a year ago and 59 million.5% in the previous quarter.

Excluding the impact from Nation Sky, gross margin was 53.6% in the fourth quarter, compared with 73.3% in the previous quarter. The decline of the gross margin was mainly due to increased revenue contribution of mobile games and advertising, which have lower growth margins in the mobile security subscription revenues.

Nation Sky's gross margin in the fourth quarter was approximately 20.6%, compared with 34.8% in the previous quarter. And the cost of revenues for Nation Sky primarily consist of hardware device procurement costs. The decline of Nation Sky's gross margin in this quarter was mainly due to the higher percentage of hardware sales revenue, which has lower gross margin.

Total operating expenses in the fourth quarter were $37.8 million. Non-GAAP operating expenses were $20.5 million in the fourth quarter.

Non-GAAP selling and marketing expenses were $7.5 million. Non-GAAP general and administrative expenses were $7.3. Non-GAAP R&D expenses were $5.7 million.

Operating loss in the fourth quarter of 2013 was $4.7 million, compared with operating income of $0.4 million in the same quarter a year ago, and an operating loss of $2.7 million in the previous quarter.

Non-GAAP operating income was $12.6 million in the fourth quarter of 2013. Non-GAAP operating margin was 18.6% in the fourth quarter, compared to 26.2% in the same quarter a year ago, and 31.5% in the previous quarter. Excluding the impact from Nation Sky, Non-GAAP operating margin was 22% in the fourth quarter. The total share-based comp for this quarter was $14.9 million, and expenses relating to handling short-term allocations [ph] were $2.4 million. Nation Sky GAAP operating margin in the fourth quarter was 12.1%, compared with 12.3% in the previous quarter.

Now let me take a moment and walk you through our operating model and profile as there are several things to highlight. As Matt has already mentioned, while we still feel confident in our long-term model for consumer enterprise business target, there are really three things that impacted the fourth quarter and will continue to do so in the near term.

First, there are numerous extraordinary costs associated with managing the manufacture volatility and the special committee's work. The direct extraordinary measures totaled $2.4 million in the fourth quarter, as broken out in our non-GAAP figures. There are also indirect costs tied to these extraordinary measures in sales and marketing items that were not broken out in the non-GAAP figures totaling roughly $1 million. These costs will continue in the first quarter and will be higher as there will be a full quarter's worth instead of just the partial impact by Q4. This is not easy to understand and will not have any impact on the ongoing operating model.

The next factor is revenue mix. Our enterprise business is well-defined and operating in the 10% to 12% range and we are pleased in the performance, as the business segment continues to grow even faster than we anticipated. The blended operating margin impact will be obvious.

The other business segment that is impacting our mix is our advertising business. Advertising has a lower margin profile than the other component of the consumer business and thus impact our blended ratio. In the fourth quarter alone, enterprise and advertising make up 60% of our total revenues. This strength in those business lines will continue in the near term and especially at our emerging platform product like NQ Live and Music Radar still are ahead of monetization. We expect the revenues generated by emerging products like NQ Live and Music Radar to be accretive to the consumer business once they are being monetized.

Therefore, as we monetize this consumer product, we see the revenue contribution mix normalizing in the future, and as that happens, we expect to see our operating margins to normalize in line with our long-term model. Importantly, for the year, we feel confident in the absolute profit generation of the business and the strength in our topline will help offset the near-term business mix.

Net loss attributable to NQ Mobile was $5.2 million in the fourth quarter, compared with net income of $4.9 million in the same quarter a year ago, and a loss of 2.4 million in the previous quarter.

Non-GAAP net income attributable to NQ Mobile was $14.9 million in the fourth quarter. The interest expenses and fair value changes of embedded core options of convertible debt was $2.8 million and the forfeiture [ph] interest income due to early termination of term deposits was $1.6 million in the fourth quarter.

Net cash flow used in operation for the fourth quarter was $13.4 million. The [indiscernible] cash flow from operations was mainly the result of prepayment for game content and titles, prepayments for marketing and to our business partners in this quarter, as well as the significant pay-down of accounts payable to suppliers during the quarter.

As of December 31st, 2013, the company's total cash position is $283 million, mainly comprised of RMB756 million [ph] in Mainland China and $158 million in Hong Kong. The significant increase of cash position in Q4 is mainly due to the issue of convertible debt of $166 million [ph].

Now for the results of the full fiscal year 2013. For the fiscal year 2013, net revenues were $19 million6.7 million, up from $9 million1.8 million in 2012. Mobile value added services revenues was $103.5 million in 2013 compared with the revenues of $50.3 million in 2012. The increase was mainly due to increase in the mobile consumer, mobile securities revenues and mobile games revenues.

Advertising revenues was $36.6 million for 2013, up from $8.9 million in 2012. The robust growth was due to the increased monetization to advertising and promotional revenues in the form of third party application referrals through our mobile security products, mobile game and our advertising network platform.

Enterprise mobility revenues increased to $53 million in 2013, up from $12.6 million for the three quarters of 2012, due to the strong growth in the enterprise business and new customer gains. Other revenues in fiscal year 2013 was $3.6 million, up from $2 million in 2012. Other revenues [indiscernible] primarily by providing technical contract services to third party, and hence the revenues fluctuate. As such, this business is driven by individual projects.

Total revenue in fiscal year 2013 was $82.9 million, up from $25.7 million in 2012.

Gross profit in fiscal year 2013 was $115.8 million, up from $66 million in 2012. Gross margin was 58.9 million% in fiscal year 2013, compared to the 72% in 2012. Excluding impact from NationSky, gross profit for NQ Mobile in 2013 was $102.3 million and the gross margin was 31.2%. Total operating expenses in fiscal year 2013 was $120.3 million, up from $63.8 million in 2012, non-GAAP operating expenses was $62.9 million in fiscal year 2013, up from $39 million.4 million in 2012.

Non-GAAP selling and marketing expenses was $33.5 million in 2013, up from $50.1 million in 2012. Non-GAAP general and administrative expenses was $33.9 million in 2013, up from $15.2 million in 2012. Non-GAAP R&D expenses were $15.4 million in 2013, up from $8.1 million in 2012.

Loss from operations or operating loss for 2013 was $4.5 million down from the income of $2.3 million in 2012. Non-GAAP operating income for 2013 increased to $53.3 million from $36.8 million in 2012.

Excluding operating income contribution of $6.5 million from NationSky, non-GAAP operating income increased to $46.8 million with a margin of 32.5%. The total share based comps for 2013 were $55.4 million. Net loss attributable to NQ Mobile for 2013 was $2.8 million, down from net income of $9 million.4 million in 2012. Mainly due to the significant increase in share based compensation expense recorded in 2013. Non-GAAP net income attributable to NQ Mobile for 2013 increased 70% year-over-year to $57.8 million from $34 million in 2012.

Now let me conclude my remarks by stating our revised guidance for the first quarter of 2014 and for the full year. We expect net revenue to be between $75 million and $76 million for Q1 2014, and we now see the full year 2014 to be between $320 million and $325 million up from the previously stated guidance of $305 million to $310 million.

I would now turn the call back to Matt.

Matt Mathison

Thank you, K.B.

Now as we turn the call back over to the operator to open it up for Q&A, let me just reiterate two things. Number one, the management is confident, and moving forward, cash flow to manufactured volatility with resolve, determination and excitement about the future.

And number two, the solid revenue trajectory that we are now on has exceeded eve our own expectations as we laid them out as recently as our analyst meeting in November. The trends in our platform and the monetization that is ramping our topline and our revenue trend is very exciting and just getting started.

Now, with that, we would like to open up the call for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Jiong Shao of Macquarie. Jiong, please ask your question.

Jiong Shao – Macquarie

Congratulations on a very strong Q4 and 2013 results. I have a few questions. Firstly, on your guidance for Q1, as you talk about the Q1 typically is a seasonally weaker quarter for advertising and enterprise, you’re still providing I think very strong double-digit sequential growth. Could you talk about some of the key drivers behind that Q1 revenue guidance?

Omar Khan

Hi, Jiong. Thanks for the question. So actually, Q1, despite it being seasonally weak on advertising, for us, we're actually -- from our guidance, you can see we're carrying through the strength of both the enterprise business and the advertising business into Q1. So the majority of the upside or increase in Q1 is definitely coming from both the advertising business and the enterprise. So we're seeing continued strength in the Q1 from both of those businesses.

Jiong Shao – Macquarie

Okay. Should we expect a sequential growth for your Feiliu business as well in Q1?

Omar Khan

Yes, you should. Because there's two components to the Feiliu business, right, both from gaming and from advertising.

Jiong Shao – Macquarie

Okay, that's great. Thanks, Omar. And also you mentioned in your prepared remarks about 2 million DAU and 8 million MAU for the NQ Live product, which is great. Could you talk about the sort of regional geographic breakdown for those operating metrics? Where are you having these users and what is your projection, if you can share with us. So what are the numbers for these two metrics we should be looking at about end of the year and how are they going to be subdivided along the regional lines?

Omar Khan

Yes. Great question. I think you know from the announcement for NQ Live as well as what we've announced publicly as well as the pre-load agreement, the majority of users today are coming from the Greater China market due to the fact that both the timing as well as the partnerships that we have commercialized thus far.

You know also from our recent announcements that, you know, probably one of the most exciting announcement was our Sprint partnership in NQ Live, our Sprint Live. We're in the process of commercializing that. So I think as we build that user base over the next year and commercialize Sprint and other partners that are in the pipeline, you will start to see a more global mix of that active user base for NQ Live. But initially, just to answer your question, that's -- the concentration is in Greater China but will globalize as we launch Sprint and then bring on content partners that are more relevant to U.S. consumers, to Western European consumers and other you know, non-Greater China consumers.

Jiong Shao – Macquarie

Do you have a target by the end of the year for the MAU for these products?

Omar Khan

I mean I think the, you know, for us, what we have said was we expect [60 million] [ph] active users for NQ Live in the next year. And we're confident both based on pre-load relationships as well as the content partnerships and unannounced deals that we have in our pipeline, that trajectory, I mean the current trajectory pretty much gets us there. So we're confident on both the target as well as the potential of that business.

It's a very unique opportunity. The one thing we've talked about thus far is very much the channel partnerships. You know, it's very relevant to carriers, to OEMs, and also from a consumer perspective. But the other part of the ecosystem that I think is equally if not more excited about this is -- are the developers and the content partners that want to leverage this, to communicate with their users. And that's a simultaneous business development effort that is underway to bring the content to NQ Live along with our business development partners.

And I think, you know, Henry is probably going to add a few more thoughts to your question as well.

Henry Lin

Jiong, hi, it's Henry. We think we can achieve 40 million monthly active users at the end of this year for NQ Live platform.

Jiong Shao – Macquarie

Okay. Great. Thank you. And could you -- while we are talking on this topic, could you please elaborate a bit more for the monetization or the -- I know you have talked in the past, I think, maybe perhaps [indiscernible] of how you're going to work with the service providers and with content providers and when you sort of have a sizeable user base, what's the primary monetization model for NQ Live?

Omar Khan

Yes, I mean the primary monetization, there's multiple monetization methods for NQ Live. From a partnership perspective, obviously there's platform licensing. That's not the primary revenue source obviously. That's usually to offset R&D costs or to -- from an implementation and customization standpoint.

The two primary means are really advertising and also premium content revenue sharing to the extent where premium content is exposed and sold or discovered through NQ Live. But the former, meaning advertising, will be the dominant revenue monetization model for NQ Live per our expectations and our partners' expectation.

Jiong Shao – Macquarie

Okay. Great. And also you mentioned in your prepared remarks about, very briefly, about a messaging product. Would you be able to elaborate a bit more on this product? And how the -- how is your product different from the other like WhatsApp and WeChat mobile product, what's the differentiation?

Omar Khan

Yes, I think -- yes. Let me think about it and then I think Henry will also add in. Our product is unique from the perspective that we are partnered with a chipset manufacturer called MediaTek, which has a very successful business and obviously have grown their smartphone chipset business.

We have been working with them to both develop, optimize, and certify the product to be preloaded on their smartphone chipsets. So the primary difference obviously is from a go to market model in terms of how it’s integrated as the default messaging [set] [ph] on the chipset and then how that gets integrated into OEM loads and gets exposed to the customer. From a user experience perspective, obviously we support both SMS as well as over-the-top IP messaging, as well as nearly a dozen different attachment types within the product.

But really the main - primary differentiation is how we go to market and the partnership in terms of how deep in the stack it's embedded. And I think --

Henry Lin

Yes, I think -- iSMS is like, I mean, iMessage service to IOS platform. We have integrated the short message service with the IP message service together in one application. So I mean, it had been bundled with MediaTek, I mean, most popular chipset, to global market. So we can [foresee] [ph] this service will get at least several hundred million users in the near future.

Jiong Shao – Macquarie

Okay. This MediaTek chipset, do you have a sales estimate, unit sale estimate for this year for example, or for next year, when this chip with your messaging app embedded become available to the handset manufacturers?

Henry Lin

Now, it has been available; I think for MediaTek smartphone chipset the sales this year it will exceed 300 million. So long term I believe it will be nearly 500 million per year.

Jiong Shao – Macquarie

Okay. Great. Okay. So my last question, sorry about all this questions, my last question is on the financial. I think, K.B., I heard you talked about I think $2.4 million extraordinary cost in Q4 due to all these [indiscernible] related expenses. But I also heard you say something like $1 million something else, maybe one-time. And were also the [CD] [ph] expenses included in any of the figures or is that something separate?

K.B. Teo

Just to clarify, I think the one is the $2.4 million expenses relating to handling the Feiliu allegation, and that is when we do the non-GAAP reconciliation, that is taking up from operating income. And so the other indirect costs which have not been taken up, and this includes the marketing and hiring of PR, and that we estimate roughly around $1 million.

And on the [CD] [ph], there is interest expense as long as the fair value of the embedded options, and that actually impacts the net income line, and that's in total $2.8 million. So the first two actually impact the operating line and then the [CD] [ph] interest expense as well as the fair value of the embedded option hits the net income line.

Jiong Shao – Macquarie

Okay. That's clear. Thank you so much all.

Omar Khan

Thanks, Jiong.

K.B. Teo

Thank you.

Operator

Your next question comes from the line of Mike Walkley of Cannacord Genuity. Mike, please ask your question.

Michael Walkley – Cannacord Genuity

I was wondering if you could help us with some modeling with your updated 2014 revenue guidance. At your Analyst Day you shared a revenue mix you expected for 2014, but it certainly seems like it's changing quite a bit so I was hoping you could maybe share with us the revenue mix implied in your guidance. Thank you.

Matt Mathison

Sure. Hey, Mike. It's Matt. I'll take that question.

I think in our prepared remarks, we talked about kind of the linearity over the course of this year. Obviously the first half of this year is likely going to exhibit the revenue mix trend that we saw in Q4, just because the rapid growth and strength of our enterprise business is continuing. Obviously, a couple of big high-profile deals with the National Bureau of Statistics, as well as the hospital deal that Henry outlined earlier is going to have an impact to that continued growth in the first half of this year. And our advertising business again is on a torrid pace. And so that's going to continue in the first half of the year.

It's going to start to moderate though as we get into the second half of the year in terms of revenue mix, back towards consumer side, for a couple of reasons. I think the biggest part of that is obviously some of our new and emerging products, NQ Live and Music Radar being the most prominent. We're focused on really driving and scaling our traffic right now, but the monetization will start to impact things and start to help moderate the consumer business next -- in the second half of the year.

And secondly, even on the productivity application side, again, in the last half of last year there were numerous carrier deals, whether it was Telkomsel, SmartFriend, America Movil, and we have a number of those deals that are obviously being worked on for commercialization and deployment, and those things will also up the productivity applications, start to pick up in the back half of the year. And so I think similar trend to Q4 continuing in the first half and then moderating back towards the consumer side in the back half.

Michael Walkley – Cannacord Genuity

Okay. That's helpful. Would you think you would exit the year closing back in on your longer term operating margin targets or the more longer-term just given some of these large enterprise deals and the changing mix of the business?

Matt Mathison

Yes, absolutely, we do believe that we will be on track to get back to those long-term operating margin target as we exit the year, yes.

Michael Walkley – Cannacord Genuity

Okay. And just a clarification for me, during the call you mentioned some manufacturing volatility impacting the business this quarter. Can you elaborate on what that is?

Matt Mathison

Not manufacturing volatility: manufactured volatility, so the events that occurred in Q4, obviously there were extraordinary costs associated with addressing and dealing with those related to the special committee, as well as some additional sales and marketing cost related to that. So those will not impact the operating model, as K.B. said during his prepared remarks.

Michael Walkley – Cannacord Genuity

Okay, that's helpful. I thought I missed a new term that was invented there. I appreciate the clarification.

And then just on another modeling question, just could you share with us or give us some direction on just the differential between kind of on your core mobile security gross margins in the advertising? I know advertising is lower, but can you get any hint on the magnitude of how it flows so we can flow that through the models correctly?

Omar Khan

Yes. So from a margin perspective, obviously, we historically have had operating margins on the consumer side that, on a blended basis we talked about 30%. The advertising business operates in the 20s, and then the remainder part of the consumer business operates as we talked about, closer to the traditional operating margins. And so that's where the blended mix comes from.

Now as we start to monetize NQ Live and Music Radar, we'll start to see that -- that was part of Matt's and K.B.'s answers in terms of how it moderates is both by the growth in monetization of NQ Live and Music Radar, the emerging platforms. And in addition to that, as we cascade in the growth coming from the recently announced deals for the productivity apps and they start to scale and launch from a commercialization perspective.

Michael Walkley – Cannacord Genuity

Okay, that's helpful. And I guess just last question from me and I'll pass it on, is, any updated timing on just when the 20-F might be filed? Is there a certain date in mind or is there a certain deadline you have to have that filed by just to -- just that'd be helpful. Thank you.

Omar Khan

Yes. Thanks, Mike. So based on the current fully integrated schedule that all the parties associated with the process are working from, we are planning on meeting the statutory deadline for the 20-F.

Michael Walkley – Cannacord Genuity

And what is that date?

Omar Khan

The end of the month. The end of April.

Michael Walkley – Cannacord Genuity

Okay. Great. Thank you.

Operator

Your next question comes from the line of Jun Zhang of Rosenblatt Securities. Jun, please ask your questions.

Jun Zhang – Rosenblatt Securities

Thanks for taking my questions. So my first question is, does the 2014 revenue guidance include some of the revenues from the new products NQ Live or Music Radar? Thanks.

Omar Khan

Yes. So a couple of things, Jun. So as you saw from the announcement today and our release today, we rolled through the strength that we found the enterprise and the advertising business into both Q1 and our full year raised. And that's really what accounts primarily for the raise in the guidance. So the growth that we are planning on seeing and the trajectory that we are seeing from both the NQ Live and the Music Radar business is by and large, not factored in yet.

Jun Zhang – Rosenblatt Securities

Okay, okay. And my second question is as we -- there were a lot of concerns over you know, independent result and the auditing process in the past couple of weeks. So my question is do today's earnings numbers have been audited by the auditors and how could you comment on the third party investigation process? Should we expect that it is coming before the end of April? Thanks.

Omar Khan

Okay, so, let me answer, I think there are two pieces, and I think Mike also asked the latter part of your question as well. But the work that goes into the audit is you know, is normally very, very thorough and obviously, you know, the norm and is actually encompassed within the Q4 earnings audit process. So the work that goes in to both the full year as well as the Q4 is the same from an auditing process.

But when you release Q4, technically, they are unaudited financials and the audited comes out in association with the 20F and going back to the answer, based on the current schedule, the fully integrated schedule that all the parties that are associated with the process are working form, we are planning on -- we are currently planning on meeting the statutory deadline to the 20F which is April 30th.

Jun Zhang – Rosenblatt Securities

Okay. Thanks. And also, regarding the gross margins, in addition to the revenue mix towards -- more towards the hardware [ph] business in Q4, which affected the gross margin, anything else we should take into that might affect the gross margin going forward? Because I know the mobile gaming market is very competitive and also you have mobile advertising business at lower gross margin. So how should we be modeling the gross margin going forward in 2014?

And also, you know, you just mentioned, by the end of this year we should expect the operating margin get back to the normal trend. Could you also give some color on that? Thanks.

K.B. Teo

This is K.B. here, Jun. I think on the mobile gaming business, one of the factors that impact operating margins is the fact that when we operate games that we are exclusive publisher, we actually recognize this gaming revenue on the gross basis, so that results in lower gross profit margin.

So for the fourth quarter, in enterprise, we did operate a significant number of games where we were the exclusive publisher. So overall, I think the, you know, that is one impact on the mobile game. So the mobile game gross margin could range between 40% to 50%, or 55%. And then the advertising also has a slightly lower gross margin in the, in the 40s. So as the business mix change and subsequently the contribution of advertising and mobile games have increased, to increase contribution to total revenue, that will also impact the gross margin.

But I would also like to add that actually, for our business, our focus remains on managing of businesses based on operating income margin line, and less focus on the gross margin line.

Jun Zhang – Rosenblatt Securities

Okay. And on the operating cost, do you expect the operating costs associated with [indiscernible] continue into the Q1? And also, I saw the -- interest expense in Q4 will also get -- expect interest expense will remain at the same level in the next couple of quarters. Thanks.

K.B. Teo

So in terms of the additional costs associated with the short dollar allegation, there'll be another $5 million to $8 million for the first quarter, and we expect additional expense. Again, as what we mentioned earlier, this does not impact the long-term operating model.

And on the interest expense, as we turn to normal treasury operations, so we do want to put some of our excess cash into term deposits to generate interest. And as you know, actually there was -- we used to have generally about a million of interest income basis on our excess cash. And that, because of that [indiscernible] we are in, that we actually move them up, terminate the deposit earlier. So going forward we should expect a higher interest income from our excess cash.

Jun Zhang – Rosenblatt Securities

Great. Is that the main reason you transferred all the cash back to the local banks, is that right?

K.B. Teo

That's correct. That's correct.

Jun Zhang – Rosenblatt Securities

Okay. Okay, thanks a lot. That's all my questions.

Operator

Your last question comes from the line of Fred Ziegel of Topeka Capital Markets. Fred, please ask your question.

Frederick Ziegel – Topeka Capital Markets

Good morning everybody. First question, the breakdown FL Mobile between [indiscernible] between gaming and advertising is what?

Omar Khan

I've got it here. Go ahead.

K.B. Teo

Total $14 million, $7.9 million is mobile games and $6.1 million is advertising from -- for FL Mobile.

Frederick Ziegel – Topeka Capital Markets

Just to clarify, on the operating models going forward, when you say you turn to the more normalized model, off of the third quarter call you were talking about 30% operating margins, is that the number you're trying to get back to by the end of the year or is it -- that seems awfully aggressive if -- and that's a pretty big mix shift going the other way from what's happened. So could talk a little bit about that?

Matt Mathison

Sure. Hey, Fred, it's Matt. Just to be clear, at the analyst meeting we -- our operating margin guidance and really our long-term operating model is for the consumer related -- you know, we have business on consumer and enterprise. The consumer related business to be at the 40% range and at the enterprise side, obviously, well-defined in the 10% to 12% side. So that's the long-term operating model.

The revenue mix is the revenue mix between those two, but those are how we operate and manage the business.

Frederick Ziegel – Topeka Capital Markets

Okay. And then last question for me, could you talk about the acquisition or the 58% partial acquisition relative to the NQ Live technology? Why not buy the whole thing?

Omar Khan

Fred, I mean, as you have seen with us historically, it is just a -- it's a capital equation for us how we do it. We obviously wanted to get control. We took the technology and helped harden it and really make that key interactive wallpaper technology. And that's really what made the NQ Live platform what it is becoming today.

But in terms of why we chose to buy the majority of it and not the whole thing, it's a capital question.

Frederick Ziegel – Topeka Capital Markets

And that -- there were a couple of typos in the press release, I think, but was the total around $80 million?

K.B. Teo

That's correct.

Matt Mathison

Yes, I think it's just under. Yes.

Frederick Ziegel – Topeka Capital Markets

Okay. That's okay. That's all I have.

Omar Khan

Great. We, I think we just wanted, again, thank everyone for their time on this call. I know it's late in the U.S. and we wish everyone a great day in Asia and a good evening in the U.S. Thank you and we'll talk to you soon.

Operator

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

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