Consumer mobile security

NQ Mobile’s user base for consumer mobile security has expanded rapidly in recent years. As of December 31, 2010, 2011, and 2012, the company had 71.7 million, 146.7 million, and 283.4 million registered user accounts, respectively. NQ had 23.2 million, 55.1 million, and 119.4 million overseas registered user accounts as of December 31, 2010, and 2011, and 2012, respectively—representing 32.3%, 37.6%, and 42.1% of its total registered user accounts as of the same dates. For the fourth quarter ended December 31, 2010, 2011, and 2012, NQ Mobile had 25.4 million, 52.3 million, and 97.7 million monthly average active user accounts, respectively, and 3.2 million, 5.6 million, and 8.9 million monthly average paying user accounts, respectively.

Why NQ Mobile has captured a dominant share of China’s market

NQ Mobile has captured a dominant market share in China’s mobile security market. An independent study conducted by SinoMR Research during the fourth quarter of 2012 indicated that its market share, in terms of registered user accounts in China, was approximately 60% as of December 31, 2012. The company’s overseas user base has also expanded rapidly. NQ Mobile currently has a significant number of registered and active user accounts in areas such as Asia and Europe, the Middle East, and North America, and plans to continue our overseas expansion. The company’s Freemium subscription model enables it to initially gain as many registered user accounts as it can through the offering of basic services to registered user accounts free of charge, and then turning some of these registered user accounts into paying user accounts by providing fee-generating premium services.

Once registered, NQ’s users are able to communicate directly with its customer service and technical teams through hotlines and instant messages. The company’s cloud-side security knowledge repository grows with user contributions of security knowledge, such as malware and spam samples, each time a user accesses its services. Therefore, the larger the user base NQ has, the more powerful its platform becomes, which presents a significant competitive advantage and entry barrier to potential competitors.

Why NQ Mobile has captured a dominant share of China’s market

Mobile games, Interest-based online community applications, and advertising

As of December 31, 2012, Beijing Feiliu had 67.4 million registered user accounts and 12.5 million monthly active user accounts through its mobile game center, various interest-based community apps, and Feiliu Download. Since Beijing Feiliu commenced operating mobile games, its gaming community has undergone a rapid expansion and the number of game developers Beijing Feiliu cooperated with reached over 100 by the end of 2012. The company believes its rich game portfolio and cross-promotion across different games and services will enable it to continue building the scale of its gaming community.

NQ offers advertisers access to its users through games and on interest-based online community applications on the Beijing Feiliu platforms. The company’s advertisers consist of those from mobile game companies and online/offline merchants. As the company expands its interest-based online communities and further diversifies its user base, NQ plans to collaborate with advertisers from additional industries.

Beijing Feiliu acquires users through advertising on various mobile advertising networks, social recommendations, and online downloads from app stores such as Apple’s App Store. On the iOS platform, Beijing Feiliu relies on Apple’s App Store as its primary payment channel. On the Android platform, Beijing Feiliu cooperates with multiple third-party payment service providers such as Alipay, Shenzhoufu, and Yibao, as well as prepaid cards of China Mobile, China Unicom, and China Telecom.

Why NQ Mobile has captured a dominant share of China’s market

The Market Realist Take

As of June 30, 2013, cumulative registered user accounts totaled 372.2 million—compared with 203.5 million as of June 30, 2012, and 326.6 million as of March 31, 2013. Including 87.3 million registered user accounts for FL Mobile, NQ Mobile had total registered user accounts of 459.5 million as of June 30, 2013. Average monthly active user accounts for the quarter ended June 30, 2013, were 122.2 million—compared with 69.2 million for the corresponding period of 2012 and 111.0 million for the quarter ended March 31, 2013. Including FL Mobile’s 16.1 million average monthly active user accounts, NQ Mobile had total average monthly active user accounts of 138.3 million for the quarter ended June 30, 2013.

The average monthly premium user accounts for the quarter ended June 30, 2013, was 11.3 million. NQ defined “premium user accounts” as any user account that generates revenues either through direct payment or indirect payment from third-party developers and advertisers. This will replace the paying user account metric it used previously as it expands the monetization of its active user accounts. Average monthly premium user accounts shouldn’t be compared with the 7.4 million paying user accounts in the corresponding period of 2012 and 9.2 million paying user accounts for the quarter ended March 31, 2013.

FL Mobile operated and distributed a total of 18 games on iOS and 42 games on Android platforms as of June 30, 2013. In the second quarter of 2013, FL Mobile had nine games ranked among the top 100 grossing applications—of which three ranked among the top 30 on Apple’s iTunes App Store in China. Average daily active users for FL Mobile’s games reached 98,595 in the second quarter of 2013. NationSky had over 20 mobile device management (or MDM) enterprise customers and over 1,250 total enterprise customers as of June 30, 2013.

NQ vies with companies like Qihoo360 (QHOO), Tencent (TCEHY), Baidu (BIDU), and Kingsoft (KSFTF) in the China mobile security space. Qihoo360 leads the Chinese Internet security market and faces competition from Tencent and search engine Baidu, which officially launched its anti-virus products in June. A report from Macquarie Research, which cited research from Sino MR, said that NQ has managed to grab 37.9% market share of mobile security users who installed mobile security software in 2Q13, and follows Qihoo, which had a 38.8% share. The report said that NQ has been trailing behind its competitors in user count mainly because of the freemium model it offers and has less organic traffic compared to its peers, which have high PC traffic.

In May 2013, there was speculation that Baidu and Tencent were in the running to acquire NQ. NQ had previously spoken about receiving interest from strategic and financial investors during its 1Q 2013 conference call but said “it remains focussed on delivering shareholder value by executing on its strategic plan and initiatives.”

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