NQ Mobile Bounces Back After Strong Guidance, FL Mobile Deal

Jun. 4.14 | About: NQ Mobile (NQ)


NQ Mobile raised revenue forecasts for the first and second quarter.

FL Mobile's $425M valuation sets a floor for shares of NQ Mobile.

FL Mobile's valuation shows investors just how undervalued NQ Mobile is right now.

Do the recent press releases signal that the audit and 20-F report will be released shortly?

Shares of NQ Mobile (NYSE:NQ) bounced back in a big way last Friday, popping as much as 29% after the Company reported a plethora of positive announcements. So without further ado, here is a quick recap of those announcements.

  1. Q1 revenue will exceed the previously announced revenue guidance range of $75M-$76M, an increase of more than 125% over the prior year comparable period.
  2. Q2 revenue guidance came in at $83M-$84M, above the $78.9M consensus that analysts were predicting. According to the report, strong guidance was bolstered by solid underlying business trends and continued financial visibility.
  3. NQ Mobile is selling up to a 5.88% stake in its mobile gaming unit (FL Mobile) unit to Bison Mobile Limited, a division of Bison Capital Co Ltd and $10M from other investors, at a pre-money valuation of $400M, or post-money valuation of $425M.

Takeaways From These Announcements

1) Q1 Revenue - While the results are not official as of yet, NQ Mobile is on track to beat earning expectations on the top line for the fourteenth consecutive time. Not bad for a Company who has been dealing with multiple distractions over the last couple of years, thanks in large part to short sellers accusations.

"We remain diligently focused and confident in our business, our strategy, and our future." ... "With our preliminary Q1 expectations exceeding our previously issued guidance and the continued strength of our businesses demonstrated by our strong second quarter guidance, we remain excited about our trajectory and opportunities to continue to grow our business in 2014. Our employees have done a remarkable job staying focused and delivering results during a period of distractions." - Dr. Henry Lin Co-Founder/Co-CEO of NQ Mobile

2) Q2 Revenue - Business continues to boom for NQ Mobile as the Company once again raised its Q2 outlook. Management expects revenues to come in 7%-8% higher then what analysts were expecting, thanks in large part to the Company's strong underlying business trends and continued financial visibility.

3) FL Mobile's $425M Valuation - Probably one of the smartest announcements the Company has ever made was when they disclosed that they were selling a 5.88% stake in its gaming business. I believe this was one of the biggest announcements for the Company because of these reasons:

First, it gave investors something they could actually value. Over the years, NQ Mobile has partnered with some of the biggest companies in the world (Sprint, China Mobile, etc.,). While the partnerships and acquisitions were welcoming to investors, they didn't really give investors anything to value at the moment. Nobody knew if the partnerships or acquisitions were going to boost revenues by 100% or 1%.

Also, with a valuation out on FL Mobile, a floor ($7.04) was essentially created and shows just how severely undervalued NQ Mobile. As of today, FL Mobile makes up more than 92% of NQ's total market cap, even though it contributes just 11% in total revenues for the Company. Talk about a disconnection! This means that the Company's assets, (Cash, trademarks, partnerships, offices, etc,.) make up the remaining 8% or $35M of the Company. Clearly anyone can see that investors are not trading on the fundamentals, as all eyes are still awaiting the audit and 20-F report.

Second, the deal values FL Mobile at $425M. This means the gaming company is being valued at more than 20 times revenues. Yet, at the same time, the entire business of NQ Mobile is going for just 1.35. If NQ Mobile traded on FL Mobile's valuation, shares would be well over $100. But that is a different story for another day.

The question now is, who is Bison Capital, what do they do and why do they like NQ Mobile and its gaming platform? First, Peixin Xu is the founder and managing partner of Bison Mobile Limited, an affiliate of Bison Capital Holding Company and has more than 18 years of experience in the information technology industry. Second, Xu likes the gaming company because the huge amount of growth that is in front of the Company.

"We are excited about the opportunity to invest in NQ Mobile's wholly owned subsidiary, FL Mobile." ... "We believe that the mobile gaming market is one of the fast growing segments in mobile Internet. FL Mobile has tremendous momentum and is positioned to be a leading player within this sector going forward." - Peixin Xu

It should be noted that Bison Capital is located in Beijing, China, which not surprisingly, is exactly where NQ Mobile operates and has headquarters. With tens of millions of dollars at stake, it's clear that Bison did its due diligence on the Company. Not only did they seem to come away impressed, but they felt comfortable putting an offer on the table, even with all of the negative publicity that has been put out about NQ Mobile.

Again, ask yourself this question, why would Bison risk doing business with such a "fraudulent company"? The same thing applies to companies like Sprint (NYSE:S) as well as many other large corporations that do business with NQ Mobile. We all know that investing is all about risk vs reward and clearly the reward outweighs any risk at this point for Bison, as well as for the many other hedge funds and institutional investors that are on the long side.


Investors need to realize that management is in a very tough spot right now. While I am sure they would love to talk more freely about what is going on and give updates to shareholders about the audit and 20-F reports, the fact of the matter is, it's not in their power to do so. They are limited in what they can and cannot say due to a number of reasons (legal, etc.).

That's why I believe the press releases were a very smart move by management because it allowed them to show investors that management and NQ Mobile's employees are still hard at work. On top of that, the Bison deal gives investors a correct valuation of FL Mobile and now sets a floor on the share price. As you can see in the chart below, NQ Mobile has essentially a floor price of *9.00 a share. The table below shows you how I came to this figure.

NQ Mobile's floor price
Cash ($117M)* $1.94
FL Mobile ($425M) $7.04
Total =$8.98
Click to enlarge

* Convertible senior notes taken into account

As we can see based on FL Mobile's valuation as well as the cash on hand, shares of NQ Mobile have a floor around $9.00 a share. Of course, short sellers will quickly point out that the cash is fake and until the audit report comes back clean, the cash should not be priced in as of yet. As we can see by the current share price, the market is indeed discounting the cash on hand and is essentially valuing NQ Mobile just off of FL Mobile's valuation. Certainly a positive audit would send shares of NQ mobile soaring as short sellers have openly admitted that a positive outcome would triple the price of shares.

The last question that investors should ask themselves is why did the Company put out a press release talking about Q1 and Q2 figures? Clearly the market is focused on one thing and that my friends is the audit report. Forward guidance is not going to move the stock because everything is tied right back to the audit. Of course we all know the reason why the second release was necessary (FL Mobile/Bison deal), but the first one still leaves me intrigued.

As investors have seen, management has been tied in what they can and cannot say due to legal implications. So why issue a release about Q1 and Q2 revenues? Could it be that the recent press releases are a signal that the audit and 20-F report will be released shortly? While there is certainly no guarantee, I get the feeling that with everything that has gone on lately, the audit, internal investigation and 20-F report are just around the corner.

Additional Information: Investors should know that no date has been set for NQ Mobile's Q1 and Q2 earnings, as the audit and internal investigation is still underway. Also, due to the ongoing audit investigation and legal reasons, management is limited as to what they can share about the audit, but not about unaudited Q1 and Q2 results.

Disclaimer: Investors are always reminded that before making any investment, you should do your own proper due diligence on any stock mentioned in this article. On that note, 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.