Company Update (NYSE:NQ): NQ Mobile Inc (ADR) Reports Unaudited Financial Results For the Third Quarter of 2015


NQ Mobile Inc (ADR) (NYSE:NQ), a leading global provider of mobile internet services, today announced its unaudited financial results for the quarter ended September 30th, 2015.

Highlights for Third Quarter 2015

  • Quarterly Net Revenues were $87.9 million in the third quarter of 2015, an 8.3% increase year-over-year from $81.2 million in the same period in 2014. The difference in net revenue performance relative to previously issued guidance was primarily due to lower hardware sales in the Company’s enterprise mobility segment.
  • Income from Operations in the third quarter of 2015 was $0.2 million, compared with an operating loss of$18.3 million in the same period in 2014.
  • Net Loss attributable to NQ Mobile was $2.5 million, or a loss of $0.03 per ADS, in the third quarter of 2015, an 85.4% improvement compared with a net loss of $17.0 million, or a loss of $0.19 per ADS, in the same period in 2014.
  • Non-GAAP Net Income attributable to NQ Mobile was $0.9 million, or $0.01 per ADS in the third quarter of 2015, compared with Non-GAAP net income of $6.4 million, or $0.07 per ADS, in the same period in 2014.

Operating Metrics as of September 30, 2015

As a reminder, beginning in the third quarter of 2014, the Company began presenting the operating metrics of average monthly active user accounts (“MAUs”) as redefined to include many emerging businesses previously not included in the Company’s user account metrics. The MAUs presented herein include the user accounts in all the related business segments. As such, the MAUs presented herein should only be compared to operating metrics in the third quarter of 2014 and in subsequent periods and should not be compared to operating metrics in earlier historical periods due to divergent definitions. The MAUs for the period presented herein and going forward are expected to be better aligned with the key underlying trends of a mobile internet platform company focused on driving mobile consumer traffic and engagement that can be monetized. The MAU statistics do not include the users addressed by the installation of the Company’s advertising SDK into third-party applications. These indirect users generate impressions and search traffic that the Company can monetize outside of the user accounts generated directly by the Company’s own portfolio of products and applications.

Average Monthly Active User Accounts as of September 30, 2015: 198.8 million.

“Our strict focus on cost controls and budgets continue to pay off in our results,” said Mr. Zemin Xu, Chief Executive Officer of NQ Mobile. “Although the hardware sales within our enterprise mobility segment performed below expectations, we are pleased to see progress in our entertainment and consumer businesses and see results from our efforts in the monetization of our traffic.”

“The business divestitures we previously announced are moving forward and accordingly, we continue to work on unlocking the value in these businesses,” said Mr. Roland Wu, Chief Financial Officer of NQ Mobile. “We look forward to unlocking value and focusing on our businesses going forward.”

Third Quarter 2015 Results

Revenues

Net revenues in the third quarter of 2015 increased 8.3% year-over-year to $87.9 million from $81.2 million in the same period in 2014.

Mobile value added service revenues increased 25.4% year-over-year to $31.5 million from $25.1 million in the same period in 2014. The increase in mobile value added service revenues was primarily attributable to the growth in mobile gaming revenues and live mobile social video platform revenues. The increase in mobile gaming revenues was primarily the result of the continuing expansion of FL Mobile’s business in both domestic and overseas markets, which grew over 40.0% compared with the same period in 2014. The significant increase in live mobile social video platform revenues was driven by the rapid growth of the business of Showself, which was up over 600% compared to the same period in 2014. The strong growth in NQ Mobile’s live mobile social video platform and mobile gaming revenues was offset by a decrease in consumer mobile security revenues which was mainly due to the fact that the Company has been moving its focus away from premium mobile security services and focusing more on mobile applications and services.

Advertising revenues decreased 21.6% year-over-year to $16.0 million from $20.4 million in the same period in 2014. The decrease was primarily attributable to slower smartphone sales and shipments.

Enterprise mobility revenues increased by 13.0% year-over-year to $39.1 million from $34.6 million in the same period in 2014. The increase was primarily due to improved software sales, which increased by over 100.0% when compared with the same quarter in 2014. On the other hand, hardware sales declined slightly when compared with the same quarter in 2014. The decline in hardware sales was the primary factor in the overall revenue shortfall relative to the Company’s previously issued guidance for the third quarter.

Other revenues increased 25.8% year-over-year to $1.4 million from $1.1 million in the same period in 2014. Other revenues are generated primarily by providing technical contract services to third parties and fluctuate as such business is driven by individual projects.

Cost of Revenues

Cost of revenues in the third quarter of 2015 increased 14.6% year-over-year to $67.2 million from $58.7 million in the same period in 2014. The year-over-year increase was primarily due to higher revenue sharing cost, incurred mainly for the Company’s mobile game business and live mobile social video platform business, which was in line with the increase in corresponding revenues from these businesses. Such an increase was also partly offset by the decrease in advertising related costs as well as cost of products sold.

Gross Profit and Gross Margin

Gross profit in the third quarter of 2015 decreased 8.0% to $20.7 million from $22.5 million in the same period in 2014. Gross margin, or gross profit as a percentage of net revenues, was 23.6% in the third quarter of 2015, compared with 27.8% in the same period in 2014. Excluding the impact from hardware sales of the enterprise mobility business and associated costs, gross margin was 35.0% in the third quarter of 2015, down from 43.2% in the same period in 2014.

Operating Expenses

Total operating expenses in the third quarter of 2015 decreased 49.7% year-over-year to $20.5 million from $40.9 million in the same period in 2014. Non-GAAP operating expenses, which exclude share-based compensation, the expenses incurred for the handling of short seller allegations and the amortization of intangible assets arising from acquisitions, decreased by 2.6 % year-over-year to $21.2 million from $21.8 million in the same period in 2014.

Selling and marketing expenses in the third quarter of 2015 decreased 15.4% year-over-year to $6.6 million from$7.8 million in the same period in 2014. Non-GAAP selling and marketing expenses, which exclude share-based compensation, decreased 12.4% year-over-year to $6.4 million from $7.3 million in the same period in 2014. The year-over-year decrease in selling and marketing expenses mainly resulted from the decrease in spending on the promotional channels for mobile games in the third quarter, as well as reduced expenditures on mobile security.

General and administrative expenses in the third quarter of 2015 decreased 75.8% year-over-year to $6.5 millionfrom $27.0 million in the same period in 2014. Non-GAAP general and administrative expenses, which exclude share-based compensation, the expenses incurred for the handling of short seller allegations and amortization of intangible assets arising from acquisitions, decreased 9.6% year-over-year to $7.7 million from $8.5 million in the same period in 2014. The year-over-year decrease in general and administrative expenses under GAAP was mainly from a significant $16.7 million decrease in compensation expenses, as well as a large decrease in legal and professional fees.

Research and development expenses in the third quarter of 2015 increased 21.2% year-over-year to $7.4 millionfrom $6.1 million in the same period in 2014. Non-GAAP research and development expenses, which exclude share-based compensation and amortization of intangible assets arising from acquisitions, increased 19.6% to $7.1 millionfrom $5.9 million in the same period in 2014. The year-over-year increase in research and development expenses was primarily due to the increase in the expenditures on software development, mainly including staff costs, as a result of business expansion.

Share-based compensation expenses

Share-based compensation expenses, which were allocated to related operating cost and expenses line items, declined to negative $1.5 million in the third quarter of 2015, a decrease of 109.4% from $15.7 million in the corresponding period in 2014. The significant decrease in share-based compensation expenses was primarily due to adjustments on performance-based share options related to employees and less equity incentives issued to the Company’s acquirees.

Income/Loss from Operations and Operating Margin

Income from operations in the third quarter of 2015 was $0.2 million, compared with an operating loss of $18.3 million in the same period in 2014.

Non-GAAP income from operations, which excludes share-based compensation, the expenses incurred for the handling of short seller allegations and amortization of intangible assets arising from acquisitions, was $1.3 millionin the third quarter of 2015, compared with an income of $2.6 million in the same period in 2014. Non-GAAP operating margin, or non-GAAP income from operations as a percentage of net revenues, was 1.4% in the third quarter of 2015, compared with 3.2% in the same quarter in 2014. The decrease in non-GAAP operating margin was mainly due to the decline in gross margin, which was affected by the mix of businesses.

Foreign Exchange Gain/Loss, Interest Expenses and Other Income

Foreign exchange loss was $1.6 million in the third quarter of 2015, compared with a loss of $0.03 million in the same quarter of the previous year, which was affected by a fluctuation in foreign exchange rates. Interest expenses were $1.3 million in the third quarter of 2015, compared with $1.5 million in the same quarter of the previous year. Interest expenses were primarily derived from interest expense related to convertible debt, offset by the interest income from certain term deposits.

Income Tax

Income tax expense was $2.3 million in the third quarter of 2015, compared with an income tax expense of $0.9 million in the same period in 2014.

Net Loss/Income

Net Loss attributable to NQ Mobile was $2.5 million in the third quarter of 2015, compared with net loss of $17.0 million in the same period in 2014. Non-GAAP net income attributable to NQ Mobile, which excludes share-based compensation, the expenses incurred for the handling of short seller allegations, interest expenses related to convertible debt, amortization of intangible assets arising from acquisition and impairment loss arising from acquisitions, was $0.9 million in the third quarter of 2015, compared with net income of $6.4 million in the same period in 2014.

Cash and Cash Equivalents, Term Deposits and Restricted Cash

Cash and cash equivalents, term deposits and restricted cash together amounted to $203.4 million as of September 30, 2015.

Cash Flow

Net Cash used in operations in the third quarter of 2015 was $14.9 million.

Other Significant Events

Binding agreement to sell Beijing Tianya

In a press release issued on November 18, 2015, the Company announced that it entered into a legally binding agreement to sell 100% of the equity interest in Beijing Tianya Co., Ltd. (“Beijing Tianya”), which operates NQ Mobile’s mobile health applications related business, to Tack Fiori International Group Limited for an aggregate consideration of US $40 million, or the RMB equivalent, in cash.

NationSky Divestment

The contemplated sale of the Company’s NationSky business (the “NationSky Divestment”), as previously announced on August 26, 2015, is moving forward with the cooperation of all parties involved. However, the timing of the originally disclosed payment schedule has been modified. The Company has received part of the overall purchase price and all parties are working together to complete this transaction as soon as practicable.

NQ Mobile Share Repurchase

As previously announced, on December 23, 2014, the Board authorized the Company to repurchase up to $80 millionof its shares on the open market, in privately negotiated transactions, in block trades and/or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulation, over the next 12 months. To date, NQ Mobile has repurchased $12.6 million worth of shares on the open market, or a total ofapproximately 2.9 million ADSs. As of November 30, 2015, $67.4 million remains available for further repurchases under the $80 million authorized share repurchase program.

Business Outlook

The Company believes it is more prudent to temporarily suspend the practice of providing revenue guidance, in part due to the previously announced ongoing divestitures of certain business segments. The Company will resume providing revenue guidance when it is appropriate. (Original Source)

Shares of NQ Mobile closed today at $4.22, up $0.25 or 6.30%. NQ has a 1-year high of $7.32 and a 1-year low of $2.72. The stock’s 50-day moving average is $3.86 and its 200-day moving average is $4.02.

On the ratings front, Rosenblatt Securities analyst Jun Zhang reiterated a Buy rating on NQ, with a price target of $13, in a report issued on November 19. The current price target represents a potential upside of 208.8% from where the stock is currently trading. According to TipRanks.com, Zhang has a total average return of -14.6%, a 36.4% success rate, and is ranked #3322 out of 3649 analysts.

NQ Mobile Inc through its subsidiaries, is engaged in the provision of mobile Internet services in the People’s Republic of China and overseas market. Its service portfolio includes mobile security and privacy protection, mobile games and advertising.