NQ Pledges Aggressive Expansion as Block Maintains Fraud Claims

NQ Mobile Inc., the Chinese mobile-services provider accused of inflating revenue, said it plans to expand its customer base as it rejected fraud allegations from short-seller Carson Block’s Muddy Waters LLC.

“We will continue to grow our user base aggressively, but it is the growth of the number of those users that can generate revenues that we are even more focused upon,” Co-Chief Executive Officer Omar Khan said on a 90-minute earnings conference call. The company didn’t take questions from Muddy Waters, which posted more than 20 messages on its Twitter account during the call.

NQ Mobile has plunged about 40 percent since Oct. 24 when Muddy Waters 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 transferred $103 million in cash to an account at Standard Chartered Bank to demonstrate its reserves.

“The call was largely non-substantive and seemed to involve delay tactics, such as story telling and almost verbatim reading of the press release, in order to shorten the Q&A period,” Block said in an e-mail after the call. “We entered the question queue immediately, but NQ refused to call on us.”

More Users

NQ is improving its ability to gain revenue from its users, most of whom traditionally opted for free services, through increased advertising and the expansion of mobile games, Khan said on the call. As a result, the number of user accounts that actually paid for services rose to 14.8 million in the third quarter, from 11.3 million in the second quarter, he said. The second quarter was the first time the company had disclosed that figure.

Management, including Khan and co-CEO Henry Lin, will purchase shares with personal funds in the next six months. The company spent $20.1 million on share-based compensation in the three months ended Sept. 30, it said.

NQ yesterday posted earnings that beat analyst estimates, with net income more than doubling to $17.4 million in the third quarter from $8.13 million a year earlier. That beat the $16.2 million average of five estimates compiled by Bloomberg.

The company expects strong international growth in the fourth quarter of this year and the first of 2014, product chief Gavin Kim said on the call.

Sales Increase

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.

“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.”

Shares of NQ Mobile fell 6 percent to $13.45 in New York as of 5:52 pm after closing at $14.31.

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.

Higher Volatility

“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 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.

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.”

‘Massive Fraud’

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.

The days sales outstanding fell to 115 in the third quarter, from 145 in the second quarter, marking the lowest figure since NQ Mobile was listed, Khan said on the call.

— With assistance by Edmond Lococo

Before it's here, it's on the Bloomberg Terminal.