Seeking Alpha
Profile| Send Message|
( followers)  

This analysis of NetQin Mobile (NYSE:NQ) was provided to TradingIPOs subscribers in advance of its IPO. On Thursday, May 5, the company announced that its initial public offering of 7,750,000 American depositary shares, each representing five Class A common shares of the Company, was priced at $11.50 per ADS.

-----

NetQin Mobile plans on offering 8.2 million ADS (assuming overs) at a range of $9.50-$11.50. Piper Jaffray is leading the deal, Cannacord and Oppenheimer co-managing. Post-IPO NQ will have 46.3 million ADS equivalent shares outstanding for a market cap of $486 million on a pricing of $10.50. IPO proceeds will be used for sales efforts, R&D and general corporate purposes.

Chairman and CEO will own 27% of NQ post-IPO. Sequoia Capital will own 7%.
No sense burying the lead:
On 3/15/11 a piece on CCTV (China Central TV) reported complaints of fraudulent practices against NQ. These accusations included uploading malware or viruses to mobile phones to promote NQ's mobile security products. Since major China media outlets have reported that China’s Ministry of Industry and Information Technology, or MIIT, directed the three major telecom operators in China to cease offering NQ's mobile security applications on their respective online application stores, the three major telecom operators have terminated their business relationships and contracts with NQ. In addition Nokia (NYSE:NOK) has removed NQ's products from their mobile online store.

From the prospectus: 'We are a leading software-as-a-service, or SaaS provider of consumer-centric mobile Internet services focusing on security and productivity.'

This is a Chinese mobile security software operation, a play on the growing number of smartphones and internet data transfer over mobile devices. It's a cloud platform and client side application combination, that provides mobile anti-malware, anti-spam, privacy protection, data backup and restore. It operates much like non-mobile internet security offerings, with a continuously updating database of malware and spamware evolving over time.

It has 68% market share in the Chinese mobile security sector, with 86 million registered users in over 100 countries. Service is free with the option to choose from premium paid services, and is compatible with Android, Symbian, iOS, Blackberry and Windows Mobile.
67% of registered users are in China. While there are 86 million registered users, there were actually 30 million users in the month of 3/11.

Interesting - The 2011 Technology Pioneer Award was bestowed on the company by the Davos World Economic Forum.

NQ's solutions:

  • Mobile Security - Protecting users from malware, data theft and private intrusions. Mobile malware scanning, internet firewall, account and communication safety, anti-theft, performance optimization, hostile software rating and reporting and other services.
  • Mobile Productivity - Enhance time and relationship management, including screening incoming calls, filtering unwanted spam short messaging services messages, or SMS messages, protecting communication privacy and managing calendar activities. In addition, cloud-side synchronization of personal data, including address books, text messages, calendars and other data.
  • Cloud Services - Synchronized contacts/calendars. Mobile users’ contact information can be used to link calendar activities across related contacts.

Revenues are derived by selling subscriptions to premium services. While NQ had 30 million users in 3/11, only 3.67 million were paying accounts. Very large market cap here for just 3.67 million monthly paying users at what appears to be a $5 annual average subscription rate.
Key going forward obviously is converting user base into paying users. Thus far migration to pay services seems to be a bit slow as the first quarter of 2011 saw just 12% of users converted to paying users.
Note that approximately half of revenues are actually collected by the wireless carriers.
21% of revenues are derived through mobile payment service provider Yidatong. Yidatong is owned by a former NQ consultant. NQ had provided Yidatong with interest free advances in order to fund liquidity needs. Yidatong has paid back these advances prior to this IPO.
Competitors include QIHOO 360 Technology (QIHU), Kingsoft and international security operations.

Financials
$1.50 per ADS in cash post-IPO.
Revenues here are minuscule to date. I am perplexed at the attempted market cap here with such a small current revenue stream.
2010 - Revenues tripled, however just $17.7 million in total revenues. Gross margins of 71%. Operating margins of 12 1/2%, net margins of 10%. EPS of $0.04.
First quarter of 2011 looked strong with $7.6 million in revenues, a tripling of first quarter 2010.
2011 - Until we see the fallout in quarter two of China's big 3 mobile operators barring NQ, we simply cannot project 2011. One of the 'Big 3', China Unicom (NYSE:CHU), did not offer NQ's products, the other two did. I simply at this point do not have enough information to project 2011. If first quarter momentum were to continue I do believe NQ would book $40 million in 2011 revenues, more than double 2010. EPS would be $0.25. It was a very good first quarter, however the issues mentioned above cast a shadow on the 2nd quarter.

Conclusion
Attempting a nearly $500 million market cap with just $17 million in 2010 revenues. On top of that just a month ago China's 3 largest mobile operators have ceased doing business with NQ due to accusations of fraud. To be fair, one of the three did not offer NQ's products anyway. Very surprised they are going through with this IPO right now and not waiting another quarter or two. Yes, a great first quarter of 2011 here. However I'd rather wait and see how revenues are affected in the 2nd quarter before considering entry here. Aggressive market cap here on IPO even without the recent malware accusations. With them, this is a 'wait and see' deal to me.

Source: NetQin Mobile's IPO: A Wait and See Deal