NQ: NQ Mobile Analysis and Research Report

2018-09-10 - by Asif , Contributing Analyst - 79 views

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History and Development of the Company

The company commenced operations in October 2005, when its founders incorporated Beijing Technology in China. Beijing Technology is primarily engaged in the research and development of products and services related to mobile security, privacy and productivity. In March 2007, its founders incorporated NetQin Mobile Inc., the offshore holding company for its operations in China, in the Cayman Islands. The company changed the name of NetQin Mobile Inc. to NQ Mobile Inc. in April 2012.

In May 2007, the company established its wholly owned subsidiary, NQ Beijing, in China. In April 2010, the company established NQ HK in Hong Kong, NQ HK became the directly wholly owned subsidiary of NQ Mobile Inc. and the immediate holding company of NQ Beijing, and currently conducts part of its business activities and operations outside of China.

In May 2011, the company completed an initial public offering of 7,750,000 ADSs, each representing five Class A common shares. On May 5, 2011, the company listed its ADSs on the New York Stock Exchange under the symbol NQ.

In February 2012, Beijing Technology established QingYun (Tianjin) Financial Management Co., Ltd. (Tianjin QingYun) as its wholly owned subsidiary. Tianjin QingYun primarily engages in financial management services. As of the date of this annual report, the company invested, through Tianjin QingYun, as a limited partner in five PRC limited liability partnerships to primarily make venture investments in China's mobile internet industry.

From 2012 to 2016, the company established several subsidiaries and consolidated affiliated entities to support its expansion, including NQ (Beijing) Co., Ltd. (NQ Tongzhou) in January 2013, Beijing NQ Mobile Co., Ltd. (NQ Yizhuang) in September 2014, NQ Technology (Guizhou) Co., Ltd. (NQ Guizhou) in December 2015, Showself (Beijing) Technology Co., Ltd. (Showself (Beijing)) in July 2015, Xinjiang NQ Mobile Venture Capital Investment Co., Ltd. (Xinjiang NQ) in February 2016. During the same period, the company also acquired companies including NationSky through Beijing Technology (Nation Sky), Beijing Fanyue Information Technology Co., Ltd. (Fanyue), Beijing Tianya Co., Ltd. (Tianya), Best Partners Ltd. (Best Partners), Beijing Trustek Technology Co., Ltd. (Beijing Trustek), Beijing Showself Technology Co., Ltd. (Beijing Showself), Linkmotion Holdings Ltd. (Linkmotion), Shanghai Launcher Software Technology Co., Ltd. (Launcher ) and Glory Team Ltd. (Glory). Beijing Showself was reorganized as a wholly owned subsidiary of Showself (Beijing ) in June 2016. The company disposed NationSky in 2015, as well as FL Mobile and Showself (Beijing) in 2017.

In October 2013, the company issued an aggregate principal amount of US$172.5 million 4.00% convertible senior notes due in 2018. Use of proceeds from the sale of the notes is for general corporate purposes, including working capital needs and potential acquisitions of complementary businesses. In October 2016, the company repurchased all of the outstanding 4.00% convertible senior notes due 2018 upon exercise of the put option by holders of the notes.

In October 2016, the company issued an aggregate principal amount of US$220 million of convertible notes to Zhongzhi Hi-Tech Overseas Investment Ltd., or Zhongzhi Hi-Tech, through a private placement. The convertible notes bear interest at a rate of 8.0% per annum from the issuance date and mature in October 2018. The convertible notes are convertible, at the holder’s option, into its ADSs, at a conversion price of US$6.00 per ADS, which represents a 51.5% conversion premium over the closing trading price of US$3.96 per ADS on September 26, 2016.

FL Mobile and Showself (Beijing) Divestment

During 2010 and 2012, the company acquired 100% of the equity interests in FL Mobile. Following subsequent reorganization in 2014, FL Mobile became one of its consolidated affiliated entities and controlled by it through contractual arrangements. See Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Contractual Arrangements—Contractual Agreements with FL Mobile.

In August 2015, the company entered into a framework agreement (the FL Framework Agreement) with Beijing Jinxin Rongda Investment Management Co. Ltd. (Beijing Jinxin), a subsidiary of Tsinghua Holdings Co., Ltd., to begin the divestment of the FL Mobile business (FL Mobile Divestment). In connection with the FL Mobile Divestment, FL Mobile was reorganized as a subsidiary of Xinjiang NQ in March 2016.

NQ Mobile has discussed the FL Mobile Divestment with several potential purchasers since 2015, including Gansu Huangtai Wine-Marketing Industry Co., Ltd. and Shenzhen Prince New Materials Co., Ltd., both listed on the Shenzhen Stock Exchange, and private equity investment fund. These three transactions, however, did not come to fruition due to various reasons, including ongoing changes in the capital market conditions and uncertainty surrounding relevant policies in China.

On the other hand, the company sold (i) 16.34% equity interests in FL Mobile to Dr. Vincent Wenyong Shi, its chairman and chief operating officer pursuant to a termination and share purchase agreement in March 2016, (ii) total of 20.66% of equity interests in FL Mobile to several affiliates of Beijing Jinxin in May 2016 and August 2016, and (iii) the remaining 63% equity interests in FL Mobile to an affiliate private equity investment fund of Tsinghua Tongfang in March 2017. The total purchase price of the sales of its interests in FL Mobile pursuant to the above three transactions was RMB4 billion. In connection with the transaction with the above, the company also sold all its interests in Showself (Beijing), the operator of its live social video business, to the same affiliate fund of Tsinghua Tongfang for a consideration of RMB800 million.

NQ Mobile has transferred its equity interests in FL Mobile and Showself (Beijing) to these purchasers pursuant to its contracts with them, and are in the process to collect remaining purchase price and close the whole FL Mobile and Showself (Beijing) Divestment. For risks associated with the collection of full purchase price, see Item 3.D. Risk Factors—Risks Related to The company's Business and Industry—NQ Mobile has not received all considerations for the sale of FL Mobile and Showself (Beijing). Uncertainties exist as to whether the counterparties will perform pursuant to the contracts, and the company may have to incur expenses to enforce the payment or revert the transactions.In addition to purchasing FL Mobile and Showself (Beijing), the affiliate private equity fund of Tsinghua Tongfang also has the option to purchase US$100 million worth of Class A Common shares of its Company at a price of US$1.05 per share, or US$5.25 per ADS within 3 months after the date of the full payment pursuant to the agreements to purchase FL Mobile.

Contractual Arrangements

PRC laws and regulations currently limit foreign ownership of companies that provide value-added telecommunications services. To comply with these restrictions, the company conduct its operations in China primarily through contractual arrangements between its wholly owned PRC subsidiary NQ Beijing and its consolidated affiliated entity Beijing Technology. Beijing Technology and its subsidiaries hold the qualifications, licenses and permits necessary to conduct its operations in China.

NQ Beijing has entered into a series of contractual agreements with Beijing Technology and its shareholders, which enable it to:

  • exercise effective control over its consolidated affiliated entities;
  • eceive substantially all of the economic benefits of its consolidated affiliated entities in consideration for the technical and consulting services provided by and the intellectual property rights licensed by its wholly owned subsidiaries; and
  • hold an exclusive option to purchase all of the equity interests in its consolidated affiliated entities when and to the extent permitted under PRC laws, regulations and legal proceedings.

As a result of these contractual arrangements, NQ Mobile is considered the primary beneficiary of its consolidated affiliated entities and have consolidated their financial results in its consolidated financial statements in accordance with U.S. GAAP.

The company's principal executive office and headquarter in Beijing is located at No. 4 Building, 11 Heping Li East Street, Dongcheng District, Beijing, 100013, the People’s Republic of China. The company's telephone number at this address is +86 (10) 8565-5555. The company's registered office in the Cayman Islands is located at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands. The company's agent for service of process in the United States is Law Debenture Corporate Services Inc., 400 Madison Avenue, 4th Floor, New York, New York 10017.

Business Overview

NQ Mobile is a leading global provider of mobile internet services. NQ Mobile has been a pioneer in the consumer mobile security industry since 2005 and have since built a portfolio of offerings including mobile advertising platforms, mobile entertainment applications and platforms, mobile security and productivity applications as well as other mobile applications. The company currently offer a variety of products and services to consumers and enterprises. NQ Mobile is a mobile first, mobile only company.

The company's vision is to become the most trusted mobile internet platform globally. The company began its business by offering consumers mobile security services to address the fundamental and rapidly growing needs of smart device users. Building upon the success of its mobile security offerings, the company expanded its product and service offerings to provide mobile privacy and productivity, and started to offer additional mobile value added services, such as mobile entertainment applications and platforms and other mobile applications. The company also started to offer a full set of enterprise mobility solutions. Additionally, the company began offering its products and services to its channel partners to provide these products and services to their own users. The company also enhanced its ability to monetize its mobile users through advertising and technology licensing. The company's products and services cater to the ever-expanding needs of consumers and enterprises in their usage of mobile devices, and the company believe NQ Mobile is well positioned to capture market opportunities presented by the rapidly evolving mobile industry that extends beyond smartphones to include cars and vehicles in addition to other mediums.

The company offer products and services in the following main categories:

  • Mobile value added services: Revenues generated from the mobile value added services are derived from the wide range of products and services that the company offer to mobile users directly or through numerous channel partners. The majority of its mobile value added services revenues are derived from mobile entertainment applications and platforms, as well as its mobile security and productivity applications. Before disposing FL Mobile, the company also generated revenues from mobile game publishing in the mobile value added services segment. The company's mobile entertainment applications and platforms include Desktop and Music Radar, which generated revenues mainly by premium content where users pay to download and advertisements. Showself live social video was also one part of the mobile entertainment applications and platforms before the disposal of Showself (Beijing). The company's live mobile social video platform comprises the majority of its mobile entertainment revenues. Additionally, the company generate subscription revenues through a Freemium business model from products including NQ Mobile Security Applications, Vault and Family Guardian.
  • Advertising: The company generate advertising revenues mainly on a cost per action, or CPA, basis in the form of third-party application referrals through its advertising network platform and offline channels. The company also offer banner advertising to advertisers through its various applications that charge on a cost per time, or CPT, basis. In addition to these online and offline ad network revenue sources, the company also generate advertising revenues directly within its set of applications including its mobile security and productivity applications and other mobile applications such as healthcare-related search among others. The company also began consolidating the Launcher business in the first quarter of 2016 which added to the overall advertising growth in the year.
  • Enterprise mobility: The company offer enterprise mobility solutions and services, which in the future will include not only system management, application development, business intelligence and maintenance services for smartphones, but also for smart cars. The smart car-related platform will become a major focus of its business in the future.

Prior to disposing of FL Mobile and Showself (Beijing), the company also operated mobile game publishing and live social video businesses. The mobile game publishing revenues are generated through sales of in-game virtual items from numerous mobile games that are either developed or operated by FL Mobile as well as collecting licensing fees for self-developed games. The company's live mobile social video platform, operated by Showself (Beijing), facilitates real-time video shows from thousands of hosts that perform on its platform, and enables mobile users (audiences) to interact and socialize with these hosts from their mobile devices. The live mobile social video business mainly derives revenues from sales of virtual currency which can be used to purchase virtual presents to show hosts.

The company provide a wide range of mobile security related services to address fundamental user requirements, which have allowed it to build a large user base while enhancing user engagement and loyalty. The company's large user base provides it with significant monetization opportunities, such as up-selling its premium consumer mobile security and other mobile internet services, cross-selling third-party mobile internet applications on its platform as well as advertising.

The company's cloud-based platform enables it to compile and update a database of information based on the usage and actions of its users. By knowing its users, NQ Mobile is able to deliver the most applicable mobile internet services and advertisements, further enhancing its engagement, up-selling and cross-selling capabilities. This allows it to simultaneously deliver strengthened security products and services from its continuously increasing cloud-based repository of security threats, and also provide other relevant mobile internet services and advertisements through its powerful database of user information. This continual strengthening of its security services as well as development of additional mobile internet services based on its understanding of users enhance its platform for the purpose of attracting new users, resulting in a virtuous cycle that the company believe allows it to continually acquire, engage, and monetize its use base. NQ Mobile has also opened this platform up and are now attracting other partners, including wireless carriers, third-party application developers and original equipment manufacturers, to utilize its technologies, products, services and solutions to engage and monetize their own mobile users as well.

The company offer its products and services under its own brands and also as white label solutions that can be tailored to the specific requirements and offered under the brands of its channel partners. The company also offer technology solutions and software development kit (SDK) platforms that enable its channel partners to expand their own business objectives, while the company share in the revenues and results. In summary, the company sell products directly to customers, through channel partners to customers, and also generate revenues by helping channel partners sell their own branded products and services that are powered by its solutions and technology. Additionally, NQ Mobile is now monetizing the traffic on its platform that is associated with its users who are interacting with its products and services directly and with its channel partners in the form of advertising, third party application referrals and offer wall/pay wall.

Products and Services

The company began its business by offering mobile security products for consumers and subsequently expanded its portfolio to include a variety of products and services for consumers, enterprises, developers and advertisers. The products and services the company currently offer are divided into three main categories: enterprise mobility products and services, advertising services and mobile value added services.

Enterprise mobility Products and Services

Trustek primarily provides the enterprise mobility solutions and services related to mobile devices, including system management, application development, business intelligence and maintenance services and does maintain ownership of this business.

As employees and knowledge workers increasingly use bring-your-own-device (BYOD) smart mobile devices for both business and personal use, managing work productivity and keeping corporate owned information and sensitive employee data protected have become significant concerns for businesses and employees. The company deliver a comprehensive suite of mobility solutions to its clients by architecting mobility strategies, sourcing suitable devices, optimizing and deploying devices and applications, and maintaining ongoing customer support during working hours.

NQ Mobile has also begun to provide integrated software and hardware platforms related to the smart car industry through its LinkMotion business which the company acquired a controlling stake in 2015. The company expect this to become a major portion of its Enterprise mobility segment in the future. The company expect to maintain its focus to provide trusted intelligent mobile experiences for mobile users, but instead of focusing on Smartphone users, the company expect to change the focus to smart cars users.

Advertising

The advertising segment consists of revenues the company generate from the traffic generated by third party application developers who utilize its online and offline advertising networks as well as through direct advertising within its own traffic derived from its portfolio of applications and users. A significant portion of its advertising revenues in 2016 came from its online and offline advertising networks which were the result of its acquisitions of Wanpu Century and Fanyue in 2013, both of Wanpu Century and Fanyue were subsidiaries of FL Mobile, and were divested together with FL Mobile in March 2017.

In addition to the advertising revenues generated through these advertising networks, the company also generate advertising revenues from the portfolio of other mobile applications and channels, including Launcher, which is a business the company began consolidating in the first quarter of 2016. Launcher is a customizable and downloadable feature set that can enhance and change the way the smartphone’s home screen, lock-screen and app layout functions for the individual user.

The company charge its advertisers a pre-determined rate on a CPA basis, and its revenues generated from advertising services depend on the numbers of active users’ clicks and downloads. The company generate advertising revenues from mobile game developers and other mobile application developers for utility, music, reading, e-commerce and travel. Through health care applications operated by its subsidiary Beijing Tianya Co., Ltd., or Tianya, the company also generate advertising revenues from health care related industries.

Mobile Value Added Services

(a)        Mobile Security, Privacy, Optimization, and Other Applications

The company offer a wide range of products and services in the area of mobile security, privacy, optimization, and personalized cloud, its current product offerings are in the following categories:

Mobile Security: The company's mobile security product NQ Mobile Security protects users’ mobile data from viruses, malware, hackers, and spyware. The company provide virus scanning, internet Firewall, financial / social media account protection, and Anti-Eavesdropping. Through NQ Mobile Easy Finder, the company enable users to remotely locate, track and lock, their lost phones, make phones sound an alarm, send screen messages and wipe phone data to prevent privacy leakage. The company also provide data backup and restore tools in both products. Call Blocker is one of the most effective apps to prevent unwanted calls or texts. It can also detect and stop one-ring phone scams.

Mobile Privacy: The company's mobile privacy product NQ Mobile Vault helps users’ control their pictures, videos, contacts, SMS and call logs private, and hiding them from prying eyes.

Mobile Optimization: The company's mobile Optimization products Android Booster and Super Task Killer intelligently tune users’ smart devices to achieve optimum performance.

The company also provide a cloud security SDK that allows third-party developers to incorporate the function to their own applications and products.

The company's consumer mobile products are offered directly under its various NQ brands as well as white labeled and branded by its various channel partners who sell their own versions of these products.

(b)        Mobile Entertainment Applications and Platforms

The company acquired a controlling equity interest in VLife interactive wallpaper and Doreso Music Radar in first quarter of 2014 and fourth quarter of 2013, respectively, and began consolidating revenues generated by these businesses in its MVAS segment.

VLife interactive wallpaper, which is its personalized interactive and programmable mobile desktop application offers a wide variety of dynamic and themed-wallpaper and desktop applications for millions of mobile users and devices in China and overseas markets.

Doreso Music Radar, which is a leading solution provider of automatic audio content recognition services offers fast and precise audio search with advanced technology of signing and humming song recognition and can also be embedded and integrated with third party music services.

The company monetize these businesses mainly through: i) premium content where users pay to download themed and branded content; and ii) advertising in many formats. However, the monetization of these businesses has remained difficult despite the large number of users.

User Acquisition Channels.

NQ Mobile has established diversified user acquisition channels through strong relationships with key players in the global mobile ecosystem. The company acquire users of its consumer mobile products through pre-installation/pre-load, retail, online channels and viral marketing.

Payment Channels

The company collect net revenues from its consumer mobile products through a variety of payment channels. The company operate globally with various channel partners that each utilizes different payment processing and collecting systems. The company collect payment from its premium users for consumer mobile products through major wireless carriers, mobile payment service providers, prepaid card distributors, and third-party payment processors, including credit card and debit card companies.

Customer Support

For its consumer mobile security business, the company operate a 24/7 global customer service center with trained professional staff for customer inquiries and technical support. The company provide multiple support channels, including telephone, fax, SMS, email, instant messenger and online forums, among others, to answer user inquiries and resolve technical issues promptly. For its enterprise mobility business, Trustek provides customer support through a centralized customer service hotline that operates during working hours.

Research and Development

As of December 31, 2016, its research and development department consisted of 373 engineers and technicians. Supervisors in charge of its research and development department have educational backgrounds from leading universities in China and have significant industry experience before joining it. The company recruit its engineers throughout China and have established various recruiting and training programs with leading universities in China.

The company will also continue to recruit, train, retain and motivate highly trained and qualified research and development staff to maintain its technological advantage. In addition, the company will continue to apply for more patents in order to protect its new, innovative ideas and intellectual property.

Intellectual Property

The company's business success has benefited from its continuous efforts in obtaining and maintaining intellectual property protection, including application and registration of patents, trademarks, copyrights and trade secrets. As of December 31, 2016, the company had 152 patent registrations, applications and exclusive licenses in China and overseas, including but not limited to patents covering anti-virus, anti-spam firewall, anti-phishing, contact management, agenda management and parental controls, mobile game and advertising, enterprise mobile management. Some of these patents have been issued and are currently held by it, while others are still pending. As of December 31, 2016, 21 of its patents applications have been filed with the United States Patent and Trademark Office, or USPTO, and claim the benefits of initial patent applications, eight of which have been approved by USPTO. Some of the intellectual properties its company currently uses are held by individuals, all of whom have entered into assignment or exclusive patent licensing agreements with it. NQ Mobile has also made 442 copyright registrations and 396 trademark registrations and applications in China and overseas, and have applied with USPTO to register the word NQ and related logo as a trademark. In addition, NQ Mobile has 59 registered domain names, including www.NQ.com, its primary operation website, which the company were licensed from a third party (the Licensor) in July 2011. NQ Mobile has been granted an exclusive license for the use of the domain name of www.NQ.com for ten years from July 2011 to June 2021. Unless renewed, upon the expiration or earlier termination of this agreement, the Licensor shall have the right to license the domain name to any other party as the Licensor desires. However, if the Licensor intends to transfer the domain name to another party, NQ Mobile has a right of first refusal. In addition, the Licensor provides it with ten years search engine optimization services from July 2011 to June 2021.

The company regard its copyrights, trademarks, trade secrets and similar intellectual property as its core assets, and rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with its employees, suppliers and others to protect its proprietary rights. All of its research and development personnel have entered into confidentiality and proprietary information agreements or clauses with it. These agreements address intellectual property protection issues and require its employees to assign to it all of the inventions, designs, and technology they develop during their employment with it.

Seasonality

Seasonal fluctuations and industry cyclicality have had minimal effect on its consumer mobile application and services businesses in the past, and the company expect this trend to continue for the foreseeable future. For its enterprise mobility business, the company experience seasonality and fluctuations in its quarterly revenues which reflect the seasonal fluctuations driven by its customers’ procurement cycles for mobile devices and enterprise software. China-based enterprises typically procure IT related services toward the end of the year. As a result, its revenues in the second half of the year are higher than that in the first half. Finally, the advertising business in general has seasonal factors that tend to show more strength in the second half of the year compared to the first half of the year. The company expect to see this type of trend generally in advertising, especially as its own advertising network expands.

The company compete primarily on the basis of user base, services portfolio, technology know-how, research and development capabilities as well as relationships with key players in the mobile ecosystem including the smart car ecosystem, such as wireless carriers, handset manufacturers, chipmakers, distributors and retailers and third-party payment processors. For a discussion of risks relating to competition, The company may face increasing competition, which could reduce its market share and materially and adversely affect its business and results of operations.

The mobile services market in China and globally is competitive, including advertising services. On the mobile services front, the company compete directly with (i) domestic PC/mobile security and application services vendors such as Qihoo 360, Tencent, Cheetah Mobile and Kingsoft (ii) overseas security software providers such as Avast, Symantec, McAfee, AVG, Trend Micro, F-Secure and Kaspersky, and (iii) other emerging companies offering mobile security products, such as Lookout. While NQ Mobile has focused on providing mobile security services since the founding of its company, most of its competitors are traditional PC anti-virus providers who later entered into the mobile security market and now offer a platform of mobile related services, applications and advertising.

For its enterprise mobility businesses, Trustek will compete with among other integrated enterprise mobility service providers, including NationSky, a business the company divested in 2015. For Linkmotion, the company compete against a wide-range of solution providers offering different pieces and components related to smart car development.

As a mobile Internet Platform business, including attracting, engaging, and monetizing mobile users across multiple products, services and applications and focusing on traffic, the company compete in China with many of the largest platform companies including Tencent, Baidu and Qihoo 360. The company also have numerous products, services and applications that compete on a stand-alone basis with other technology companies including, but not limited to Shazam and numerous other advertising platforms and networks.


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