"Everyone is entitled to their own opinions. But they are not entitled to their own facts." - Daniel Patrick Moynihan
NQ Mobile (NYSE:NQ) kicked off the earnings season with a bang, or a dud, depending on who you asked. However, before discussing the Company's financials, Co-CEO Omar Khan opened up the conference call with some very fiery words. Here is what he had to say:
"Before we discuss our record year and strong position for 2014 and beyond, I would like to take a few moments to clear the air, or perhaps more appropriately, to clear the waters."
Unless you have been hiding out with the cavemen for the last couple of months, you already know the "clearing the waters" statement was directed at Muddy Waters (MW). It's no secret that NQ Mobile and Carson Block, a notorious short-seller and founder of MW, do not see eye to eye. But that's another story for a different day.
Today I would like to talk about the financial results of NQ Mobile's fourth quarter and 2013 full-year results. So was the Company able to meet analyst expectations on both the top and bottom lines? In an article published last week, I pointed out that history was on the side of the longs, as NQ Mobile has not missed on the top line for the past eleven quarters.
Like usual, NQ Mobile delivered strong growth in revenues on the top line. Not only did the Company beat revenues for the twelfth straight time but it also raised guidance for the upcoming quarter and for the entire year as well. Unfortunately, at the same time, NQ Mobile came up short on the bottom line. The table below showcases the results.
|NQ's Earnings Results||Q4 Revenue||Q4 EPS||Q1 Guidance||2014 Revenue Outlook|
* EPS took a hit due to one-time costs (fund transfers, etc.)
** NQ Mobile sees revenues between $75M-$76M
*** Raised full-year 2014 guidance for the second straight quarter
Earnings: The Good And The Bad
Nothing can be more intimidating on earnings day than going over a company's financials and everything else in the quarterly report. But don't worry, I'll save you some of the trouble by showcasing the highlights and the lowlights. Let's start with the highlights.
1) Advertising revenues for the year came in at $36.6M for 2013, up 312.0% Year-over-Year (YOY).
2) Q4 revenues were $67.9M, up 126.0% YOY. For the full year, revenues came in at $196.7M, up 114.3% YOY.
3) Q1 revenues are looked to be between $75M and $76M, or up 128% YOY. Analysts expected revenues to come in around $65M-$66M.
4) Once again, NQ Mobile hiked its 2014 full-year revenue outlook from $305M-$310M to $320M-$325M. Before, NQ Mobile held its annual Analyst Day last November, analysts were expecting 2014 revenues to be in the $275M-$285M range. This new outlook now reflects a revenue increase of more than 15%.
5) Registered user accounts of consumer mobile security products were 480.8M, an increase of 70% YOY. Monthly active accounts grew 40% YOY and monthly premium accounts were 15.6M, compared with 14.8M during the last quarter.
6) FL Mobile had 18 games ranked in the top 100 on iOS during 2013. Daily Active User accounts (DAU) continue to increase growing more than 25% during the previous quarter.
7) As of December 31, 2013, the Company purchased $8.0M worth of stock on the open market. This leaves the Company with more than $27M remaining on the existing $35M authorized share buyback program.
8) As of December 31, 2013, the Company's total cash position was $283M ($179.7M in cash and cash equivalents and $103.3M in term deposits). This represents nearly 40% of the Company's total market capitalization.
1) NQ Mobile signed a series of agreements to acquire 58% of Tianjin HuaYong Wireless Technology Ltd. (vLife). Restricted shares, as well as a cash payment put the total cost just under $80M. The reason for the acquisition was to get access to vLife, which is fundamental in deriving the NQ Live platform which is an "always-on" replacement for wallpaper on Android devices. While this wasn't all bad news with the massive growth that NQ Live has already shown, dilution is still dilution.
2) Expenses, Expenses, Expenses - Cost of revenues in the fourth quarter rose to $34.7m, up 259.1% YOY. The YOY increase was primarily due to the increased hardware costs for NationSky's Enterprise Mobility business, acquisitions, increased revenue sharing with service and content providers and higher staff costs. However, if NQ Mobile wants to bolster its bottom line, it's going to have to figure out how to manage its expenses better.
3) Accounting overstatement - With fraud still being thrown around by short-sellers and the media, the accounting overstatement involving share-based compensation expenses during the third quarter did not help NQ Mobile. Because the audit results were not released with its earnings report, fraud will continue to loom over the Company until the problem is resolved.
4) Audit still underway - Investors who have been looking forward to the audit results will have to continue waiting until NQ Mobile submits its 20-F before the end of the month. The markets never like uncertainty and many, including analysts, thought the audit results would have been released by now. Of course that was all speculation as each audit has its own specific timeline. The good news for investors is that the results will be included in the Company's 20-F, which will be filed before the end of the month.
In a note to investors last week, Macquarie analyst Jiong Shao wrote that NQ Mobile's fourth quarter results were "solid." Shao cited that the company has made new deals with organizations in the healthcare sector and the growth in its user base has enabled ad revenue to surge. Shao maintains an Outperform rating on the stock with a $26 price target.
Michael Walkley, an analyst at Canaccord Genuity, cut his price target from $29 to $27, but still maintains his BUY rating. Walkley believes near-term spending will cut into the Company's bottom line. Because of this, he has cut his full-year EPS to $1.31, down from $1.50.
"With NQ Mobile investing in new growth engines such as NQ Live and Music Radar, we anticipate continued strong revenue growth and improving margins longer term." -Michael Walkley
Frederick Ziegel of Topeka Capital maintained a BUY rating on NQ Mobile, but reduced its price target to $30.00 from $36.75. The reason for the price cut was due to reflect the margin dynamics of NQ Mobile's business model. Ziegel cut his 2014 earnings estimate to $1.18 a share from $1.47. Although revenue estimates increased again, the lower margin services will not likely improve as the year progresses, Ziegel said.
Certainly it's hard for anybody to watch their investment fall, especially when it's double digits like NQ Mobile experienced Friday. In an instance like this, investors need to ask themselves this question. That is, has anything changed with the investment? If anything significant has come to pass, then investors need to re-think their plan and options. If nothing has changed, then why would you sell your shares at these levels? If anything, you would thank investors for this opportunity to double down on your position.
Because the audit results did not come out, investors sold first and asked questions later. Things didn't get any better as reports centered around NQ Mobile's "unaudited" quarterly report. He is what Omar Khan said during the conference call on the matter;
"... when you release Q4, technically, they are unaudited financials and the audited comes out in association with the 20-F. ... we are currently planning on meeting the statutory deadline to the 20-F which is April 30th."
If you take a long look at other major Chinese companies (BIDU, SINA, SOHU, NTES, DANG, RENN, YOKU, etc.), you will see at the top of every quarterly report, it says "unaudited financial results." Certainly, some investors are trying to make a big deal out of it when in fact, it's nothing new. Like Khan has already stated, the 20-F will have the audited quarterly results, as well as the audit and independent committee's findings.
Last year NQ Mobile filed its 20-F (Annual report) on April 19, 2013. This shows us that the Company is used to filing its annual report during this time frame. With all that has gone on lately, there is a good chance that the annual report comes out a bit later than last year's report. At the same time, the report could come out sooner as the Company restores confidence back to its shareholders. One thing is for sure, nobody knows the date or the hour of when it will be released.
As most of you already know, NQ Mobile is not trading based on its fundamentals. If it were so, shares would be trading higher right now. Why else do analysts have price targets in the $26-$30 range? While quarterly reports are important, nothing is more important right now than the findings of the audit and independent committee reports. Based on where shares are trading right now, the market doesn't seem to be expecting much.
Because NQ Mobile is a battleground stock, investors need to be on their toes at all times. This isn't for the faint-hearted as price swings can be pretty substantial in either direction. While Friday's dropped scared plenty of investors away, I remain long, and will continue looking to add on the dips. I fully expect volatility to continue until the 20-F is released. So on that note, invest and trade accordingly.
As always, I'm providing you with my track record and other stocks that I recommend. The link provided will show you all of my picks, how they have fared, and where I think they will be going in the near future. I think you will find my track record to be very impressive and useful.
Disclaimer: Investors are always reminded that before making any investment, you should do your own proper diligence on any stock mentioned in this article. Have a great day and as always, I look forward to hearing your thoughts or questions that you might have.
Disclosure: I am long NQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.