NQ Mobile's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: NQ Mobile (NQ)

NQ Mobile Inc. (NYSE:NQ)

Q2 2012 Earnings Conference Call

August 9, 2012 08:00 AM ET

Executives

Mattan Lurie - Investor Relations

Henry Yu Lin - Co-founder, Chairman and Co-Chief Executive Officer

Omar Khan - Co-Chief Executive Officer

Vincent Shi - Co-Founder and Chief Operating Officer

Suhai Ji - Chief Financial Officer

Will Yiwei Jiang - Chief Strategy Officer

Analysts

Andy Yeung – Oppenheimer

Mark Murphy – Piper Jaffray

Mike Walkley – Canaccord-Genuity

Fred Ziegel – Topeka Capital Markets

Operator

Welcome to NQ Mobile’s Second Quarter 2012 Earnings Conference 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 Instruction) Please be advised, this conference is being recorded, today, August 09, 2012. I would now like to turn the conference over to your speaker today Mattan Lurie, NQ Mobile investor relations. Thank you sir. Please go ahead.

Mattan Lurie

Hello everyone and welcome to NQ Mobile’s second quarter 2012 earnings conference call. The company’s earnings results were released earlier today and are available on the company’s IR website ir.nq.com as well as on Newswire Services. Today, you will hear opening remarks and NQ Mobile’s Co-CEOs Dr. Henry Yu Lin and Omar Khan, followed by our Chief Financial Officer Suhai Ji who will take you through the company’s operational and financial results of the second quarter 2012 and give guidance to the third quarter and full year 2012. After their prepared remarks Dr. Lin, Mr. Khan. Mr. Ji and our Chief Strategy Officer Will Jiang will be available to answer your questions. Before we continue please note that the discussion today will contain certain forward looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from our current expectations. NQ Mobiles does not assume any obligation 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 sheet. The most directly comparable U.S. GAAP financial measures and information reconciling these non-GAAP financial measures the NQ Mobiles financial results prepared in accordance with U.S. GAAP are included in NQ Mobiles earnings release which has been posted on the company’s website at ir.nq.com. Finally, as a reminder this conference is being recorded. In addition, a webcast of this conference call will be available on NQ Mobiles investor relations website.

I will now turn the call over to NQ Mobiles Founder, Chairman and Co-CEO, Dr. Lin.

Henry Yu Lin

Thank you and welcome to everyone on the call. I am pleased to report that NQ Mobile delivered a solid second quarter with record revenues. Excluding $1.4 million revenue contribution from the NationSky acquisition, our revenues reached $18.6 million against exceeding the high end of early previously issued guidance. We also achieved another milestone in our in second quarter. As our registered user accounts surpassed the 200 million mark, nearing doubling from one year ago. (inaudible) backdrop of a continued global economic uncertainty. Our business and user base growth has maintained growth momentum. And we continue to benefit from the record increase in global smart phone shipments and customer awareness and demand for mobile security and proxy solutions. The strong growth in our user base is also clear the elevation of the global expansion strategy and invested user acquisition channel and models.

In the second quarter, we continued our customer business by launching more innovative products such as NQ Mobile Vault. We also expanded into enterprise business by completing the acquisition of NationSky and establish partnership with industry leaders such as TDMobility. Our international business, has also been gaining strong momentum and now already accounted for more than half our consumer mobile internet service revenue. With that I’d like to hand the call over to my partner and NQ Mobile’s Co-CEO Omar Khan who will give you more details about the three departments in our business.

Omar Khan

Thank you Henry and hello everyone in the call. Before I get into more details on NQ Mobiles business I must echo Henry on the enormous market opportunity that we are faced with despite the uncertain global economic outlook. Two of our biggest growth drivers are global smartphone shipment and the consumer awareness and adoption of mobile security and privacy solutions, both of which are in a rapid rise. For example, the latest IBC data shows that in the second quarter of 2012 approximately 154 million smartphones were shipped, a 42% increase year-over-over among which over 68% or 105 million were android smartphones. Android smartphones are the largest and fastest growing segment with over 100% growth. Third-party research from (inaudible) also forecasted mobile security will turn into a $3 billion market opportunity by 2015 and over 20% of smartphones and tablets will have mobile security software pre-installed by 2015. Thus it is quite obvious that we are still at an early stage of the mobile security market evolution and we want to ensure that NQ Mobile is well positioned to capture disproportionate amount of this opportunity.

In the second quarter, there are few things that we are particularly proud of. First, I would like to cover our new products. I am proud to report that our product teams have been extremely busy in the second quarter. We officially launched our newest consumer product NQ Mobile Vault which is a privacy protection application that enables you to just encrypt and protect their personal data and communications. NQ Mobile Vault has been getting rave reviews and has already won several awards and accolades. NQ Mobile Vault continues to gain strong user traction with over 4.2 million downloads of registered users with a very high level of active engagement.

Next, I am pleased to announce that we’ve released a public data version of NQ Mobile Vault for iOS on the iTunes app store. In addition last week in New York at BlogHer, we announced the availability of the public data of our NQ family guardian products, a new android offering that will help parents to better manage their children’s smartphone experiences. Family Guardian is a suite of services that includes an application that has downloaded and installed on the child’s smartphone and a web-based control center which can be accessed by turns from any desktop or mobile browser. The features include safety features such as browser blocker that enables parents to block inappropriate websites, app filters helping make smart choices of which applications children can download, a panic button where children can send an alert message when they need to. We also include monitoring and limit functions, including schedules where you can set up times where children can unlock their phone to make phone calls, browse the internet, text and much much more. You can monitor using NQ mobile friendly web tool, parents can keep track of the child’s location, text messages, calls, browsing history, app downloads and photos. And then finally you can have the check-in feature where parent can receive a check-in message when children arrive safely at their destination. It will also track their location if they forget to check-in.

Finally, on the product front for our consumer business, we launched a public beta of our flagship application, NQ Mobile Security version 6.6 with new innovative features such as Anti-Spam. On the enterprise product front, we announced NQ Enterprise Shield to protect businesses and bring your own device to work for mobile threats. We pride ourselves on technology and product innovation and will continue to invest in R&D to extend our technology and product leadership.

Next, I’d like to cover our business development and channel updates. In the second quarter, we worked with Vodafone to launch NQ Mobile Vault through Vodafone global apps select storefront with featured placement. We are now live in the following Vodafone storefronts including the U.K, Ireland, Germany, Spain, Russia, Portugal and Greece. We are also available in the Vodafone Google Play Tab in the U.K and Ireland as well.

And in the U.S, we announced partnerships with A Wireless and TDMobility in the second quarter and expect to see revenue generation beginning in the second half of 2012. Together with the stock and strong team that we’ve assembled since I came on board, we continue to see tremendous momentum in our business development pipeline in certain key markets such as North America, Latin America and Europe.

Frankly, the response from the channels and customers has exceeded my expectations. It’s clear to us that in order to harvest these opportunities, we need to continue investing in our international business for the remainder of the year and expand the necessary infrastructure to position us for long term growth. This infrastructure includes additional resources focused on business development, solution engineering, product and project management, sound marketing and business operations. We expect these markets to hit an inflexion point for 2013 and begin to contribute significant revenue growth as well as margin enhancement.

Finally, on the Enterprise front, we closed our acquisition of a 55% stake in NationSky, which will contribute approximately $10 to $12 million in revenues in the second half of this year. We also expect marginal improvement in the NationSky business in 2013 as the business grows and achieves additional scale. Together, with the TDMobility partnership we believe we are well positioned to seize the growth opportunity in the mobile security market for enterprise.

I will now turn the call over to our CFO, Suhai Ji to speak for the second quarter financial and operation results.

Suhai Ji

Thanks Omar and hello to everyone on the call. At the outset, please note that unless stated otherwise all the numbers I would discuss today are in U.S. dollars.

So, in the second quarter we once again felt strong user growth and reached a new height in all three sets of operating metrics that we disclosed. Our accumulative register user account reached $204 million at the end of the second quarter, up 98% year-over-year and 18% sequentially. Overseas users now accounted for 40% of total registered users, up from 35% at the end of the same period a year ago and 39% at the end of the previous quarter.

Our average monthly active user accounts were about $69 million for the second quarter, up 90% year-over-year and 15% sequentially. Active user accounts now make up about 34% of the registered user base and the breakdown between China and overseas are too similar to that of registered user accounts. Those ratios have been quite consistent for the past two years.

Our average monthly paying user accounts were $7.4 million for the second quarter, up 74% year-over-year and 14% sequentially. Overseas paying users now account for about 30% of the total paying users compared with 28% for the same period a year ago and 29.5% for the previous quarter. The conversion ratio from active to paying users remained flat at around 11% from the previous quarter as we had yet to turn on the payment option in certain markets who are experiencing strong active user growths across all markets.

As I discussed in previous earnings calls, we may experience fluctuations in both directions as we continue to expand globally, so overall strong increase in our user base was again driven by the growth in the smartphone industry, the continued proliferation of mobile internet applications and to increase awareness on mobile security among consumers worldwide. It also reflects our execution ability to establish effective user acquisition channels and the delivered user friendly innovative products to drive user adoption, such as NQ Mobile Vault that Omar had just discussed earlier.

Now moving on to the financials. Total net revenues reached $20 million in the second quarter, up about 125% year-over-year and 25% sequentially. The increases were mainly due to the strong growth in revenues from premium mobile internet services, revenues from other services and also revenue contribution from NationSky which amounted to $1.4 million in the second quarter.

Net revenues from premium mobile internet services were about 16 million in the second quarter, up 109% year-over-year and 16% sequentially. The increases were once again due to the strong and steady growth in the number of paying user accounts, which reflected growth in number registered and active user accounts, as well as increased use of premium services particular amount overseas paying user accounts, which generally pay a higher subscription rate.

Revenue contribution from overseas users continued to increase and now accounted for 51.2% of total net revenues from premium mobile internet services in the second quarter, compared with 49.5% in the same period a year ago and 50.8% in the previous quarter.

In terms of average revenue per paying user, or ARPU, is measured on a quarterly basis. Our blended quarterly ARPU were $2.18 for the second quarter compared with $1.82 for the same period a year ago, and $2.14 for the previous quarter. ARPU for domestic China users were $1.51 for the second quarter compared with $1.27 for the same period a year ago, and $1.49 for the previous quarter. ARPU for overseas users was $3.73 for the second quarter compared with $3.24 for the same period a year ago, and $3.69 for the previous quarter. We expect ARPU for China to remain relatively stable as we launch new additional premium services at different price points all experienced significant change in the midst of payment channels. Just like the conversion ratios from active to paying for overseas users, overseas ARPU also tend to fluctuate because it depends on the pricing strategy with that in each country and the timing while return to bidding switch. But as the overseas pricing is generally higher than China and overseas revenue carries more and more weight, we expect the blended ARPU to continue to trend up over time.

Net revenues from other services in the second quarter, which includes revenue from NationSky, increased 231% year-over-year and 86% sequentially to a $3.9 million. Excluding the revenue of $1.4 million from NationSky, net revenues from other services were $2.5 million representing an increase of 111% year-over-year and 19% sequentially. The increase was mainly due to the growth in revenues from secured downloads and delivery services for mobile applications produced by third party. Excluding revenues from NationSky, net revenues from other services as a percentage of total net revenues, again excluding NationSky, was 13.4% in the second quarter compared with 13.3% in the same period a year ago and 13.1% in the previous quarter.

So 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 are excluded to drive our non-GAAP numbers. Most of the SBC expenses are incurred in operating expenses line items and we have included a reconciliation table in our earnings release showing the detailed calculation.

Cost of revenues in the second quarter was $4.7 million, representing an increase of 160% year-over-year and 37% sequentially. Excluding the $1.1 million of NationSky's contribution, cost of revenues increased 97% year-over-year and 4% sequentially to $3.6 million. The year-over-year increase was primarily due to the increased customer acquisition costs as a result of more users acquired in the second quarter and higher revenue sharing with mobile payment service providers which is consistent with the increase of revenue from mobile payment service providers while the sequential increase was primarily due to increased staff cost due to headcount increase and intangible asset amortization cost resulted from the NationSky acquisition.

Gross profit in the second quarter was $15.3 million, representing an increase of 116% year-over-year and 22% sequentially. Gross margin was 77% in the second quarter compared with 80% in the same period a year ago, and 79% in the previous quarter. Excluding the impact from NationSky, gross margin was 81% in the second quarter of 2012. Given NationSky’s lower margin business nature, gross margin is expected to decline further in the second half of 2012 as NationSky’s revenue contribution becomes greater. NationSky’s gross margin in the second quarter was about 20% on a standalone basis and the cost of revenues for NationSky primarily consist of the hardware device procurement cost. So going forward, and assuming there are no major shifts in the mix of payment channels, we expect gross margin to remain stable for the NQ Mobile business, excluding NationSky. We also expect the gross margin for NationSky to improve in 2013 as the business scales up and generate more service revenues.

Now on to the operating expenses. For the second quarter of 2012, second quarter of 2011, and first quarter of 2012, we recorded total SBC expenses of $5 million, $3.2 million, and $4.3 million, respectively across the three operating expenses line. The higher SBC in the second quarter this year was primarily due to the additional restricted share grant to newly hired executives and acquisition of NationSky. 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 $3.4 million in the second quarter of 2012, representing an increase of 275% year-over-year and 22% sequentially. The year-over-year increase was primarily due to the higher marketing and advertising spending and higher staff costs as a result of increase in salary and headcount while the sequential increase was primarily due to higher staff cost and office related expenses.

Non-GAAP general and administrative expenses were $3.7 million in the second quarter of 2012, representing an increase of 144% year-over-year and 25% sequentially. The year-over-year increase was primarily due to higher staff costs from salary and headcount increase, higher legal and professional fees resulted from the contemplated follow-on offering and higher office related expenses, while the sequential increase was primarily due to higher legal and professional fees resulted from the contemplated follow-on offering and higher office related expenses, partially offset by lower staff costs caused mainly by a one-time signing bonus paid to a newly hired executive in the first quarter of 2012.

Non-GAAP research and development expenses were $1.7 million in the second quarter, representing an increase of 75% year-over-year and 33% sequentially. The year-over-year and sequential increases were primarily due to higher staff costs from salary and headcount increases.

As a result, our non-GAAP operating income was $6.5 million in the second quarter, representing an increase of 78% year-over-year and 17% sequentially. Non-GAAP operating margin was 32.8% in the second quarter of 2012, compared with 41.6% in the same period a year ago, and 35% in the previous quarter. Excluding the impact from NationSky, non-GAAP operating margin was 34.5% in the second quarter of 2012. NationSky’s operating margin was about 10.4% on a standalone basis in the second quarter of 2012.

In the second quarter, we continued to record interest income resulted from our strong cash and deposit position. Interest income was $0.8 million in the second quarter compared to $0.2 million in the same period a year ago, and $0.7 million in the previous quarter. The significant year-over-year increase was primarily due to the higher deposit position resulting from the May 2011 IPO proceeds.

We also had a foreign exchange loss of $0.3 million in the second quarter of this year, compared with a gain of $0.4 million in the same period a year ago, and a loss of $0.06 million in the first quarter of 2012. The larger foreign exchange loss increases was primarily attributable to the depreciation of RMB against US dollar as a significant portion of IPO proceeds was converted into RMB and placed in bank deposits since the second quarter of 2011.

The income tax expenses were $0.12 million and the effective tax rate was 5.7% in the second quarter of this year, compared with an income tax benefit of $0.02 million in the same period a year ago, and an income tax expense of $0.07 million in the previous quarter. The low effective tax rate was primarily due to the preferential tax treatment enjoyed by certain subsidiaries of the company. We expect the effective income tax rate to remain below 10% for the remainder of 2012.

Net income attributable to NQ Mobile was $2.1 million in the second quarter, compared with $1.1 million in the same period a year ago, and $2.1 million in the previous quarter. Non-GAAP net income attributable to NQ Mobile was $7.1 million in the second quarter this year, compared with $4.3 million in the same period a year ago, and $6.4 million in the previous quarter. NationSky contributed about only $0.05 million to net income in the second quarter of 2012.

On an EPS basis, our second quarter GAAP earnings per EDS is $0.042 on a fully diluted basis, and non-GAAP earnings per EDS was about $0.142.

In the second quarter of 2012, we continued to generate positive cash flows. Our cash flow generated from operations for the second quarter was $1.9 million, compared with $3 million for the same period a year ago, and $6.8 million for the previous quarter. The fluctuation of cash flow mainly has to do with the changes in working capital. Our deferred revenue has gone further to $9.5 million from $8.6 million at the end of the previous quarter, which gives us better visibility and more confidence in future revenues.

As a last point, I would also like to update you on the status of our senior management share purchase program announced on June 6 of this year. As of June 30 of this year, those officers have bought a total of 83,887 ADSs amounting to $631,000. So the average purchase price per ADS was about $7.52. They may continue to buy the company’s ADS subject to applicable legal restrictions and other factors as they continue to believe in the long term success of NQ Mobile.

So, looking forward to the third quarter and beyond, we expect net revenues to be in the range of $24 million to $25 million for the third quarter of 2012, representing 112% to 120% year-over-year growth, and 20% to 25% sequential growth. For the full year of 2012, we are raising our guidance from the previously issued $73 million to $75 million to the new range of $86 million to $89 million. Please note that the above guidance also includes the impact from the NationSky acquisition.

So, this concludes my remarks and I will now hand the call over to the operator and open the line for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Andy Yeung of Oppenheimer.

Andy Yeung – Oppenheimer

Hi, good morning. Thank you for taking my questions. My first question is about your enterprise marketing strategies. I think NationSky has a lower margin profile due to some of the hardware costs, so, can you give us some colors on what kind of hardware and software solution NationSky provide to their customer? And also, would you bring those solutions to the international market?

Will Yiwei Jiang

Good morning Andy this is Will. So let me answer this question. NationSky currently provides software and services solutions based on iOS, Android and BlackBerry platforms. In some of the certain sell scenarios enterprises would actually require NationSky to procure and subsidize the hardware portion of the solution that includes client devices and service. So, their current software solution actually do include middleware management of devices, integration application with enterprises’ existing IT infrastructure, whereas the services include deployments, management of the mobile client. We also plan to develop enterprise wide security products that is expected to ship in late 2012 and to be integrated and sell through NationSky’s channels. We don’t actually right now have any immediate plan to bring NationSky solution to international market.

Andy Yeung – Oppenheimer

Okay, I see. My next question is, it seems like you have some investments in a couple of startup companies, can you give us a little bit more color on those investments? And going forward, what are your plans for your cash?

Will Yiwei Jiang

Sure. We actually did complete a couple of early stage investments to increase our strength and also partnership in the mobile call technology and also use acquisition channels. We plan to continuously look into acquisition targets that offer complementary solutions and also beefing up our intellectual property offerings.

Andy Yeung – Oppenheimer

Are those in China, or are those in overseas markets?

Will Yiwei Jiang

These early stage investments are in China right now.

Andy Yeung – Oppenheimer

Great, thank you.

Operator

And your next question comes from the line of Mark Murphy of Piper Jaffray.

Mark Murphy – Piper Jaffray

Yes, thank you. Omar, I wanted to take your temperature on any preliminary discussions with major U.S. carriers. Do you sense any inclination to possibly engage in a prelude agreement or perhaps an in-store promotion or anything else, just among the major U.S. carriers?

Omar Khan

Thanks Mark, for the questions. I can’t specifically speak to a deal or a specific customer. I mentioned earlier during the call that we had a very, very strong business development pipeline, and that’s reflective of carriers and other channel partners as well in North America, Latin America and in Western Europe.

What I can tell you is the fact that many of those, we have multiple deals that are in late stages in terms of the business development life cycle and they span various types of relationships, include preload, they include app store relationships with promotions as well as in-store type of offering like we have got with the Verizon dealers that we have announced.

I am very optimistic that, that we will be able to materialize these deals in the near term and they will contribute significantly in 2013.

Mark Murphy – Piper Jaffray

Okay. Great. Now, I wanted to ask as well about the competitive dynamic within China. How are consumer preferences evolving relative to the free versus paid products and business models that are available out there for smart phone security and do you expect that, that’s going to fluctuate at all with the economic cycle within China?

Will Yiwei Jiang

We believe as validated by third-party research, our market share in China in mobile security has remained above 60% for the past few quarters, and we expect this from the position to continue to take place in China. We don’t think a free versus premium is an issue for us, as we do have a flexible premium business model. In fact, we are competing with a free service provider with our free services, in addition to the innovative premium service of how we deliver. We continuously innovate our product, so that will offer more and more of premium services make them available to the consumers, and this is why we are seeing that our premium user conversion, paying the conversion has remained quite stable for the past eight or nine quarters, and we expect this trend to continue.

So, all in all, we don’t think the consumer mobile security service is being impacted by the economic fluctuation at all, mainly because the user paying for the service is quite nominal right now in China. It’s only 5 RMB per month. So, this is nominal price for a smart phone user to pay in China.

Mark Murphy – Piper Jaffray

So, just to be clear on that, Will, you think that your market share is holding steady in China, and you think that is easing that is increasing rapidly internationally, is that a fair way to sum it up?

Will Yiwei Jiang

That will be fair, yes.

Mark Murphy – Piper Jaffray

Okay. Suhai, I wanted to ask you, in terms of NationSky, is the Q2 margin structure here, which I believe you are seeing 20% gross margin, 10% operating margin. Is that representative of what it is going to do on a full-year basis? And the reason that I ask is that I believe it’s a very seasonal business in the second half of the year and very little revenue in the first half of the year, which means we need to model that appropriately for Q1 and Q2 of next year. So, just really a question overall on NationSky seasonality.

Suhai Ji

Yes, that’s good question. Thanks Mark. I think as you understand NationSky’s seasonality, it’s similar to a particular enterprise software company, as far as 30% is in the first half and then 70% in the second half. But overall, it’s still a small company. It’s hyper growth stage and customer acquisition stage. So, now the priority for NationSky is also to capture the market share at the moment, and that will inevitably impact the gross margin. I think in the second quarter, in the financial (inaudible) from the supplemental that we disclosed the separate financials. And in the near term, we think the margin structure just to conservative, we remain similar levels, but as we go into next year, as the revenue scales up and as the company kind of upsell more software and services to their enterprise account, we think the gross margins or operating margins will have room for improvement, heading to 2013.

But again, please bear in mind that NationSky, it’s only one component of our total enterprise revenue, as we started generating in enterprise revenue from overseas market from our partnership with TDMobility or with RRRM [ph]. They all have a much higher marketing structure. So, we think that we will continue to improve going into 2013, and eventually, we will separate the enterprise revenue as a new line item of our income statement.

Mark Murphy – Piper Jaffray

Okay, great. And Suhai, just following on that. Any thoughts on the overall margin structure? I think most companies growing, say over 100%, I think a lot of them wouldn’t be profitable at all at this stage. And that said, NQ has or we have observed a much more efficient business model, so you have been extremely comfortable. I think what I am not clear on at this point is maybe what might be the lower boundary of where you would let operating margins go just as you are considering some of the large deals that you might have in the pipeline where you might need to build up the infrastructure? And I don’t know if you are prepared to comment on that, but I am just wondering is there any high-level thought on where that can go overtime?

Suhai Ji

Yes, that’s a very good question, Mark. And indeed, we are very proud of the fact that as a very high, high growth company. We are able to maintain the gross rate, and also at the same time, have very good profitability and that has to do with scalability and the validity of our business model, the premium model that has been working very well.

And as Omar mentioned in his remarks earlier, we see enormous opportunity, especially in international markets. So, we are continuing to invest and that we are building a great team, as you know, and laying out all the operational infrastructure position for further revenue ramp-up in overseas market, beginning for our next year. We will see significant revenue contributions. So, that will offset some of the margins that comes with the investment. But I think the lower bond rate is for the existing NQ Mobile business, not counting on NationSky. We think we are going to maintain above 30% operating margin.

Mark Murphy – Piper Jaffray

Okay. So, you are above 30% for the quarter. We are going to just have to, I guess we are going to take 20% growth and 10% operating on NationSky, and then we will just run that through our models for next year. Is that the best way to think about this?

Suhai Ji

Yes, I think that would be the conservative approach.

Mark Murphy – Piper Jaffray

Okay. And, sorry, I had one last one, and Omar, I was wondering if go back. Is there any earlier feedback on the conversion rates from, I guess I am thinking maybe the cellular connection, there could be some data points there or maybe a wireless, kind of off that too early, but I guess I am wondering if a 100 consumers walk into one of the stores, how many do you think are going to walk out with NQ on their smart phone in terms of the paid subscriptions?

Omar Khan

Yes, it’s good question. We are looking at it pretty closely. We have run from Control Check Test, if you want in terms of soft launches in a few stores. We are in the process of ramping those stores right now. We have done training. If we get a chance, once we get a lot of the collateral materials, in those stores, we are going to have window banners, we have got stickers on the stores and retail cards as well, in addition to the training itself. So, that’s some of the investment obviously that we are making from a channel marketing perspective to make sure those channel are ready to ramp.

The initial – I can’t specifically share numbers in terms of cash rate. Now, that’s what you are asking, Mark, is specifically what’s the attach rate and smart phone sold in the store. I can tell you that the control test that we have done in terms of soft launch have been very positive, and they have exceeded the expectation that we had for the soft launch, because we didn’t have all the materials and training in place.

So, I think what we will do is as we get the launches scaled throughout their stores and get a couple of months’ worth of data, I will come back to you guys, either in the next call or sometime before that and share some of your attach rates anecdotally in terms of what we are seeing, but I can tell you that in the soft launch period, the results that we got in the stores that we tested in were better than expected.

Mark Murphy – Piper Jaffray

Okay, that’s great to hear. Thank you very much gentlemen for taking a whole big string of questions from me and congrats on revenue upside here.

Omar Khan

Thanks Mark.

Operator

Your next question comes from the line of Mike Walkley of Canaccord-Genuity.

Mike Walkley – Canaccord-Genuity

Hi, thank you. Suhai, just a couple of housekeeping questions from me. A lot of questions have been asked, just on the tax rate, you said it will be, did I hear you right, 10% for the rest of the year or can you clarify that? And also can you give us a share count at the end of the quarter so we know what share count model for the next year.

Suhai Ji

I think for the tax rate, this quarter as I mentioned earlier, the effective tax rate was above 5.8%. I think again to be conservative for the remainder of two quarters, we think that fuel is going to be below 10% for the remainder of this year.

And also for the share count, as you can see from our income statement, our diluted and weighted average number of shares for the second quarter is 50.1 million shares. I think towards the end of the year, it’s harder to tell, because it depends on how many auctions, employees, exercise and sell and also whether there is additional auctions that would be issued in the second half of this year.

But I don’t think the increase will be that significant. I guess we will be probably between 51 million or 52 million by the end of the year.

Mike Walkley – Canaccord-Genuity

Okay, thank you. A question on the Chinese smart phone market. Our checks have started showing big shift in affordable smart phones from some of the more local, not as well-known brand outside of China. Is this changing your attach rate all with Android in terms of maybe some of these newer brands. You don’t have a pre-installment relationship or given that MediaTek and Qualcomm brands that you have relationships with. Are you still seeing pre-installments on some of these local brands, anything in volume?

Will Yiwei Jiang

Yes, Mike. In fact (inaudible) has been working quite closely with a part on MediaTek. They are reference designs. In fact, we find on many opportune to, hence the OEMs do about Qualcomm and MediaTek solutions. We actually do have pre-installation agreements with many of the security providers in addition to the one and only such as Motorola, Sony Ericsson (inaudible). So, really, we actually do have installation agreements already in place and they do contribute quite a bit of our user acquisition channels in China. So, in fact, we believe our vendor approach have successfully shielded us from any shift or impact from market share.

Mike Walkley – Canaccord-Genuity

Okay, thank you. And Suhai, just going back to comments about the conversion rate from the cumulative users to paying users. I know you have some international opportunities with Omar that are ramping that don’t have payments in place. Do you have a longer-term target where you see that conversion rate kind of stay in this 3.5% to 4% range, or do you have a higher rate you think in future years as you turn on payments in international markets?

Suhai Ji

Yes, I think using, we actually monitor more closely for the conversion rates from active to paying, because that’s more comparable major than from registers to paying, because those two are a bit different more like a balance sheet item, the other is more like income statement item. So, from active to paying, I think China will be a good metric reference point, because in China, we have a very mature set of payment channels, and as you can see, the conversion rate in China from active to paying is about between 12% and 13%. And that will receive right now is only at about 80%. It is lower, it’s only because we have a large active base outside of China, but only payment channels in limited number of countries.

And in fact, we think overseas, consumers’ willingness to pay is actually greater than that of China. So, it depends on the additional payment channels that we will implement in those countries. And we think overseas conversion ratio eventually it’s actually going to be higher than China, and that will also bring up the overall blended conversion rate from active to paying users.

Omar Khan

Another factor, Mike, on that one specifically is the fact that a lot of the new channels that we are bringing onboard and the products that we are launching, I went over a bunch of the products that we launched in the second quarter, our premium-only products and premium-only channels, so that also affects the conversion ratio, especially in the markets outside of China, and in a positive way.

So, when you are buying that retailer, you are buying the price product etcetera, it’s a premium-only sales. So, that’s another positive effect on that conversion ratio.

Mike Walkley – Canaccord-Genuity

Okay, thanks. The product blending at CTA, it was a good example of some momentum in your products development. Just one last question for you, Omar, you talked about inflection points in 2013 on your growing pipeline, as we are tracking your business, can you kind of rank order which regions do you think coming to the model faster than others, just given the momentum you have in your pipeline?

Omar Khan

Yes, Mike, I would say in the near term, what we are really focused on is operationalizing the deals that we have already won. So, making sure that we have put the right support infrastructure and channel support in place for TDMobility as an example, on the enterprise sales for TCC in a wireless, and what I see in the near term from a business development perspective is the fact that North America, Latin America, and Western Europe to a certain extent will also start to contribute to that inflection point in 2013.

So, the deals that we have got in the pipeline there at advanced stages of business development that we can announce and launch heading into the end of this year, beginning of next year, in those regions specifically, I would say U.S., Latin American countries such as Brazil and Mexico obviously where this smart phone penetration is high, as well as markets in Western Europe like the UK, Germany and among others would probably be the region that have the most contribution potential in 2013 to our business in the near term. Does that answer your question, Mike?

Mike Walkley – Canaccord-Genuity

Yes, sure, it does. Great. I will pass on to the next question, but thanks for taking my questions and look forward to seeing you next week.

Omar Khan

Okay, thanks Mike.

Operator

(Operator Instructions) Your next question comes from the line of Fred Ziegel of Topeka Capital Markets.

Fred Ziegel – Topeka Capital Markets

Good afternoon everybody. A couple of questions. One, where exactly are we in terms of Tech Data, TDMobility rolling out to its channel partners? And then I have got one follow-on question.

Omar Khan

Okay. I can cover that one, Fred. This is Omar. Thanks for the question. We are actually in the stages of engaging the resellers or the value-added resellers, so we are working in conjunction with TDMobility. They have got 65,000 VARs between North America and Western Europe. So, we are in process of engaging the larger VARs in terms of both training and product availability. So, in the Q3 time frame we should see VAR starting to launch and targeting their enterprise sales connection. The feedback that we are getting in from TDMobility, as well as some of the larger VARs is the buyers on the enterprise side that they have historically been telling too from a security solution perspective on the PC side are the same buyers that they are targeting for mobile, so they feel that it should be to a certain extent a shorter selling cycle than if they had to go Greenfield and start establish new connection at their enterprise partners. So we should start to see TDMobility bring on VARs and start to target enterprise customers during the third quarter.

Fred Ziegel – Topeka Capital Markets

Is the rollout more by geography, or is it more of a global push?

Omar Khan

What’s focused North America, in the US and the Western Europe, I would say we will prioritize the US from a launch perspective and we will prioritize the larger VARs where we can get a higher ROI in terms of training. Obviously, we have got a limited resource which is the reason we are continuing to invest and so from an ROI perspective we are going to target the larger VARs that have the broadest reach first and then start to work our way down at that list. Does that make sense?

Fred Ziegel – Topeka Capital Markets

Yes. Okay. On a different topic, there is certainly been a lot more discussion of late around Apple and iOS and some of the security problems they have been encountering, do you get any sense that they are thinking about opening iOS to third party security vendors like yourselves?

Omar Khan

I am not sure it’s necessary about the platform itself opening up, but I can share with you sort of how I think about it and how we think about development for iOS. It’s a significant development platform for us. So if you were to look at the opportunities for iOS privacy and customer data protection, identity protection, it’s still an opportunity which is way we just launched a beta version of NQ Mobile Vault for iOS just about last week or the week before last and we are starting to get user downloads and feedback to make sure that when we have commercially launched that product in official format that it’s ready to go and scale as we promote it. The other aspect is that, I think as the app development environment in general starts to migrate from native development to hybrid development, meaning as HMTL 5 becomes a development platform for applications and you see more hybrid applications that use native development environments as well as HTML 5 development environment, there is an opportunity to provide security in that environment. So, an iOS is among the platform that should go through that transition in addition to Androids. So, I think as that transition happens over the next few years there can be opportunities to provide additional security components for iOS in addition to the privacy solutions that we will be providing.

Fred Ziegel – Topeka Capital Markets

But that sound like it’s still a little wise off way you think about it.

Omar Khan

Yes, I would say that. As that app eCos system or the app development platform migration occurs, that opportunity presents itself. In the mean time the opportunities on iOS from a productivity standpoint from a privacy perspective as well as other applications in our space still to us oppose a significant business opportunity, which is why we are continuing to develop and roll out our products as well as the family suite of services that we can continue. We announce family guardian for Androids, that also presented an opportunity on iOS as well, so we’ve got a pretty broad set of products that go beyond core security malware and antivirus into productivity solutions, utility solutions, family solutions and enterprise solutions. Some subset of those also present to us an opportunity on top of iOS, in the near term

Fred Ziegel – Topeka Capital Markets

Alright, good, thanks.

Operator

And now I would like to turn the call back over to Mattan Lurie for closing remarks.

Mattan Lurie

Thank you operator. If there are no further questions at present, we would like to conclude by thanking everyone for joining us on the call. We welcome you to reach out to us directly by emailing investors@nq.com, should you have any questions or requests for additional information and encourage you to visit our Investor Relations website at ir.nq.com where you can find numerous resources and materials including the recording of this and previous earnings webcasts. This concludes NQ Mobiles’ earnings call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!