FT Beyondbrics: NQ Mobile, Safeguarding Smartphones

FT Beyondbrics, February 21 2013

In 2005 Henry Lin, a young professor at Beijing University of Posts and Telecommunications, was working with a scientist from mobile maker Nokia when they discovered something unusual. It was malware, on the Symbian platform that powered most of Nokia’s smartphones at the time; the first known instance of malicious software appearing on a smartphone. And to Lin, it was an opportunity.

Lin, his colleague Vincent Shi and five graduate students cobbled together $15,000 from their families and set up NQ Mobile on the premise that mobile phone security was going to become every bit as important as personal computer security. Eight years on, the company is listed on the New York Stock Exchange and has 242m users in 150 countries.

Its growth has been underpinned by the multiplication of threats to smartphones, and by our own relationships with these ubiquitous devices. “In 2011, we discovered about 25,000 new pieces of malware for mobile platforms,” says Omar Khan, who became joint CEO in January 2012. “Last year, it was 65,000-plus.”

And while virus threats to home computers are destructive and well documented, “the mobile device is a much more intimate relationship with its user. It carries your most sensitive data: pictures, contacts, messages, call log, e-mail. Your phone has become your identity.”

NQ Mobile, in its latest reported results, posted net revenues of $25.8 m for the third quarter of 2012, up 127.4 per cent year-on-year. Net profit in the third quarter was $0.3m, down from $4.3m in 3Q 2011, due to acquisition costs and new employee compensation. Full-year 2011 net income was $10.3m.

The company, which has over 400 staff, is expected by analysts to report full-year net revenue of $90-91m for 2012, and for 2013, $150-155m.

More than half of Americans, he says, sleep with their cellphone by their bedside, and 80 per cent would rather leave home without their wallet than their mobile device.

And as we use them to do more – to make bank transfers, to buy and sell shares, and in future, Khan suggests, to assess and transmit personal medical information – then the vulnerability to fraud will increase.

Turning this threat into a business model has required several things. First, research and development, which accounts for around 9 per cent of revenue and involves 250 engineers and – so far – 68 patents.

Secondly, it has required a global footprint; the company says that 85 million of its 242 million registered users are active. But over 80 per cent of those users receive a free service and generate no income, so the third step has been to monetise that vast base, by pitching premium features like device wipe and recovery or anti-eavesdropping for a fee.

Finally, it has involved a great deal of partnership – deals in the last 18 months have included Telefonica, Brightstar, TCC, AWireless and Phones4U. Most recently, the company has opted for outright acquisition: first of NationSky, in order to diversify the business from individual consumers to enterprises, and then Beijing Feiliu Jiutian Technology, a mobile internet platform in China.

“We’ve got a very healthy balance sheet [$130m at the end of the third quarter of 2012, the last disclosed figure] and we continuously look for opportunities to invest in technologies, teams and channels that bolster our IP and our tech,” Khan says. Both the acquisitions were of companies very early in their development.

NQ Mobile represents something of a twist on usual multinational corporate boasts. The world is full of western companies claiming to be heavyweights in emerging markets, but here is a company founded in the most vibrant emerging market of them all – China – which seems to be trying very hard to portray itself as being a developed world business. In November the company hosted an investor day, and its literature includes a section called “Fact or Fiction?” Right at the top is this claim: “NQ Mobile is a Chinese company? FICTION.”

Investors think this may have to do with recent fraud and accounting scandals around Chinese companies listed in North America. “The sceptics and bears on the stock argue it is either a fraud – the contagion effect of US-listed China stocks – or that the big players like McAfee will compete them away,” says Kerry Series, chief investment officer of 8 Investment Partners, a fund manager in Sydney which holds NQ Mobile in one of its portfolios. “We disagree and think they can grow rapidly because they have good products and are building broad distribution through retail phone outlets.”

Still, a clear effort has been made to move away from Chinese roots. Today there are two headquarters, in Beijing and Dallas; Khan, an ex-Samsung Mobile and Motorola executive, is in Dallas, along with a number of other senior management figures.

Khan says this is partly a function of a business mix within which 54 per cent of consumer revenues now come from outside Greater China – “we have naturally grown into a multinational” – but it’s also clear NYSE investors find comfort in the US presence.

“They’ve given us tremendous feedback on our investment in headquarters in the US. You can put an office in the US and check a box, but how real is your commitment? People have been impressed with the investment in people and infrastructure.” Also, curiously, demand for mobile security started off growing faster in emerging markets, particularly India and China, but has since become faster in the US and the UK.

Analysts and investors are showing interest, although coverage of the stock remains limited. Series at 8IP expects the company to earn $30m in the 2012 financial year (to be announced on March 7) and $50m in 2013. “This means they are on 4x ex-cash P/E for FY13, and growing fast.”

Brokerage Oppenheimer has an outperform recommendation on the stock and a price target of $16, from $6.54 today; analyst Andy Yeung tells beyondbrics the company is “in the right place at the right time.”

The next challenge will be to maintain margins while expanding internationally and acquiring businesses that are not yet generating much income. “The goal for us is not to experience margin degradation from acquisitions,” Khan says. “We can maintain healthy margins.”