NQ Profit Beats Estimates as CEOs Plan Stock Purchase
NQ Mobile Inc. (NQ), the Chinese mobile-services provider that Muddy Waters LLC accused of inflating revenue, posted profit that beat estimates as sales of game software rose and said that management will buy $3 million worth of shares.
Net income more than doubled to $17.4 million in the third quarter, from $8.13 million a year earlier, NQ Mobile said in a statement yesterday. That beat the $16.2 million average of five estimates compiled by Bloomberg. NQ Mobile also said that its senior management, including co-Chief Executive Officer Omar Khan, will purchase shares with personal funds in the next six months. NQ Mobile fell 6 percent to $13.45 in New York as of 5:52 pm after closing at $14.31.
NQ Mobile has plunged about 40 percent since Oct. 24 when Muddy Waters, the research firm founded by short seller Carson Block, initiated coverage of the company with a strong sell rating, saying it inflated sales and misrepresented cash balances. NQ Mobile, which has headquarters in Beijing and Dallas, has denied the allegations and on Nov. 6 said it completed the transfer of $103 million in cash to an account at Standard Chartered Bank to demonstrate its reserves.
“Strong earnings, strong revenue, strong outlook, management buying stock,” Tim Ghriskey, chief investment officer at Solaris Group LLC, which manages over $1.5 billion in Bedford Hills, New York, said by phone. “You could see quite a short squeeze in the shares in a situation like this, but clearly it is volatile.”
Sales in the third quarter rose 110 percent to $54.2 million, NQ Mobile said. That compares with an average $50.98 million estimate of five analysts in the Bloomberg survey. NQ Mobile forecast revenue for the fourth quarter of as much as $63 million, more than the mean $61.2 million estimate of five analysts compiled by Bloomberg. That would bring sales for 2013 to as much as $192 million, the company said, the most on record.
“The reality is that NQ is showing tremendous momentum in all of its strategically important areas,” Adam Bhaijee, a portfolio manager at Toro Investment Partners LP in San Francisco, said in an e-mail. His firm owns 5 percent of NQ shares, according to a Nov. 8 regulatory filing. “We think management purchasing $3 million of shares for a second time since the company’s IPO is an even stronger signal.”
NQ Mobile’s management completed the last purchase plan for $2 million of American depositary shares on Dec. 6, 2012, the company said in a statement. The stock fell 14 percent during the purchase period, while rallying 130 percent since then.
Block said he won’t make any comment until after the conference call, according to an e-mail to Bloomberg News. The company is scheduled to host an earnings call with analysts at 8 p.m. New York time.
NQ Mobile’s 30-day volatility jumped to a record 256.17 yesterday from 60.29 on Sept. 26, according to data compiled by Bloomberg. The shares rallied 30 percent in the last three days to trade 43 percent below a record of $24.92 reached on Oct. 18.
Average monthly active user accounts increased to 133 million during the quarter, from 84.5 million a year earlier, the company said. The average monthly premium user accounts, which generate sales either through direct payment or indirect payment from third parties, rose to 14.8 million in the quarter, the company said.
Piper Jaffray Cos., the investment bank that was the lead manager of NQ Mobile’s initial public offering in May 2011, suspended the equivalent of a buy rating on the stock on Nov. 5. The bank said it needed to more deeply investigate “various allegations against the company made by third parties.”
The first sentence of the 81-page report by Muddy Waters declared: “NQ Mobile is a massive fraud.” At least 72 percent of NQ’s purported 2012 China security revenue is fictitious, the report said. The report also alleged that Tianjin Yidatong Technology Development Co., NQ Mobile’s largest trade debtor, is controlled by NQ Mobile and not an independent company.
Yidatong’s owner Xu Rong said in an interview the Muddy Waters report is not accurate, and that her company has no relationship with NQ Mobile besides a contract to process online payments from mobile subscribers.
The Muddy Waters report also criticized NQ’s delays in collecting payments from customers, evidenced in a measure called days sales outstanding, or DSO. According to Muddy Waters, the company’s DSO measure was 198 days at the second quarter’s end, based on NQ’s revenue for the 12 months to June 30.
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