NQ's Earnings Matter Less Than the Auditor Report

NQ Mobile's  (NYSE: NQ  )  earnings report will be closely watched when it is released on March 13. The first line of the Muddy Waters report, which resulted in the loss of 76% of the company's market cap, stated that 72% of NQ's revenue was fictitious. These numbers show two things: A short seller, who has had success in the past, thinks the company is almost a complete fraud, and a lot of people believed him. Many people will be looking closely at the earnings report for signs of confirmation one way or the other.

Results look good, if they are real
NQ's year-over-year revenue growth has been over 100% in each of the last four quarters, but if the revenue is fraudulent, the numbers are meaningless. They do have to close the books some time, and we may be coming to a resolution. On the third-quarter earnings call, the company stated that it hired Deloitte and Touche to act as a special investigator into the matter. With the closing of the books, the company can use this platform to discuss the results. It's unlikely that Deloitte would risk its reputation, and confirmation of the absence of fraud should be provided by the time the 20-F is filed, if not on the call.

If you see smoke, is there fire?
The level of detail in the Muddy Waters report is troubling. The 81 page report, filled with claims based on investigative field research, made a lot of damning statements, but none have been substantiated.

Don't read too much into the Morgan and BOA investments
Since the end of the year, NQ shares have recovered most of their gains as investors, Morgan Stanley and Bank of America have taken large positions in the company and deals were signed with Sprint and Samsung. However, the typical "smart money" technology hedge funds are missing from the top holders list. Do hedge fund managers know something we don't, or are they just waiting on the sidelines until there is a clean auditor's report?

Somebody (other than you) needs to risk something
What is missing, now, is a third-party vote of confidence. Morgan Stanley and Bank of America could have been supporting the stock to sell out of it quietly, before earnings. There is no mention of a revenue commitment between Sprint or Samsung and NQ, so these could just be more fluff than substance, with the opportunity for NQ to convert customers on the back end. Somebody reputable needs to step in and take on some of this risk. Like Warren Buffett risking his capital by making an investment in Goldman Sachs in September of 2008, an auditor needs to risk its reputation with a clean report.

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Comments from our Foolish Readers

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  • Report this Comment On March 13, 2014, at 1:27 PM, GreatWork wrote:

    Clearly you've done your homework....anyone who pulls the Earnings Report date from the the TENTATIVE, EXPECTED earnings from a brokerage, must really know how to dig for information.....hope this isn't your day job.

  • Report this Comment On March 13, 2014, at 3:02 PM, dpelleratgmail wrote:

    Thanks for pointing out that it was a tentative date. It was my mistake and I appreciate you pointing it out.

    The company has until the end of April to file its 20-F since it's not likely that the report will come after the close, that seems like the next date to look at.

  • Report this Comment On March 13, 2014, at 3:30 PM, artako wrote:

    However, the typical "smart money" technology hedge funds are missing from the top holders list. Do hedge fund managers know something we don't, or are they just waiting on the sidelines until there is a clean auditor's report?

    do your home work well!!! You know how many hedge funds have taken stakes since the MW report is out??? I could count 6-7 just by the way.

  • Report this Comment On March 13, 2014, at 4:10 PM, dpelleratgmail wrote:

    artako Which funds do you consider smart money and what's the criteria?

  • Report this Comment On March 13, 2014, at 4:35 PM, morrowa77 wrote:

    Personally, I like to follow "dumb money". Geez, you work for the fool, so I know to take your advice with a grain of salt. Pure talking head garbage article.

    Investors:

    Oberweis, Altimer, Toro (sp??). Need I say more? I am sure their returns beat yours last year. Check it out.

    I suggest you read "The Reformed Brokers" blog post from 2/5/2012. It will enlighten you. And, yes you are still in your bunker........

  • Report this Comment On March 13, 2014, at 5:33 PM, dpelleratgmail wrote:

    morrowa77 Altimeter is focused on online travel. Thats a far cry from handset security, it also holds 5 mil shares of groupon.

    Here's an article for you on Toro: http://www.valuewalk.com/2013/11/nq-mobile-bet-by-toro-is-hi...

    I dont know anybody at Toro but this didn't sound good.

    As far the reformed broker post goes, thanks for the direction. It was a really good read. In fact, I've included the link for you because it seems that you didnt look at it carefully enough before quoting it. Josh was referring to "Chief Strategists" which I am not.

    I'm a bottoms up stockpicker. I've been doing it for 15 years and have had some element of success. I've found questionable accounting practices (see link below).

    http://blogs.barrons.com/techtraderdaily/2009/09/29/palm-is-...

    Most importantly I know enough to say that "I dont know" if NQ Mobile is real or not and I have done ALOT of work on it. So rather than shooting my mouth off and trying to take a side in this article, I tried to present a balanced piece.

    and as for that reformed broker bit, I assure you I am not in a bunker.

  • Report this Comment On March 13, 2014, at 5:36 PM, dpelleratgmail wrote:

    Sorry, the profanity filter caused some problems. The reformed broker link can be found on this site: http://www.thereformedbroker.com/best-of/

    Ctrl+F "2/5/2012"

  • Report this Comment On March 14, 2014, at 1:21 AM, tradestar2012 wrote:

    Do you consider Muddy Waters an authority on mobile technology companies? I consider Toro to be an expert on Chinese technology and mobile companies. I do not believe the same can be said of Muddy Waters.

  • Report this Comment On March 14, 2014, at 3:32 AM, artako wrote:

    @dpelleratgmail - do i need to elaborate on this anymore? morrowa77 and tradestar2012 already answered to your question.

    you know what i see in your article? "one-sidedness" your reactions / luck of objectivity stand really out.

  • Report this Comment On March 14, 2014, at 4:07 AM, dpelleratgmail wrote:

    tradestar2012, I'm not offering an opinion on MW or on Toro. Toro's investment memo on the company seems to be publicly available (see link below). People should decide for themselves whether Toro has enough insight to dispel claims of fraud or not.

    http://shareholdersunite.com/mybb/showthread.php?tid=2854

  • Report this Comment On March 14, 2014, at 4:13 AM, harkvasa wrote:

    All published reports from NQ officials have been positive. Also, more funds and investment houses have been buying NQ shares.

    I am comfortable with NQ and it is my belief that NQ will go past $30 per share in the next 6 to 9 months.

  • Report this Comment On March 14, 2014, at 9:51 AM, tradestar2012 wrote:

    the first 2/3 of your article is fairly unbiased. I found your last statement erroneous. Multiple funds with significantly more experience than Muddy Waters (ie the ones you listed + Atlantis Investment Management and others) have stayed with NQ or even added to their positions. If anything, the street has spoken and Carson Block is much much more likely wrong than right.

  • Report this Comment On March 16, 2014, at 3:46 AM, mlx wrote:

    Not sure why we should not have faith in BOA, and Morgan Stanley? That's a bold statement.

    Fact is Carson Block made a lot of money by exploiting "fear" of fraud without a lot of direct evidence against. He has been wrong on a number of calls including Qihu,OLAM, AMT.

    David, you picked Apple and Teradata to outperform market in 2013--how did that turn out?

    Not a lot of risk in casting doubt, and a lot of upside. Also they have won numerous awards with their products. Samsung and Sprint also wrong?

  • Report this Comment On April 14, 2014, at 8:55 AM, HuiyiChen wrote:

    NQ is the number one mobile security provider in China with mobile gaming business and distribution deals with Baidu, Tencent, China Mobile, and Perfect World.

    The company was accused by a noted short-seller of inflating revenue and profit, which is a common foul in the Chinese market, among not-so-well-regulated Chinese companies. When one runs a business in China, one knows it is impossible to survive if one has a sparkling clean book keeping. It is not right but it is the way things are.

    Regardless whether the company cooks its books, NQ Mobile is a significant player in its domestic market. Tencent is providing a platform for mainland Chinese to trade stocks online, the demand for mobile security will likely grow. Albeit Chinese government's recent ban on Tencent's credit card business (Tencent gives better interest rates than the Bank of China which the Chinese treasury holds no less than 14% stake), in medium term future when the banking system is healthier and Bank of China finally up to healthy competition, Tencent most likely will issue credit cards, and that is even greater demand for mobile security. And Alibaba would join the market, like it does with the taxi app- now both Tencent and Alibaba provide a way for Chinese to pay taxicabs on mobile phones. That is a market of 1.4 billion people looking to shop and do banking on their mobile phones. The market is huge.

  • Report this Comment On June 04, 2014, at 8:54 PM, labeo wrote:

    The Investigation Team did not find any evidence that the Company had engaged in the fraudulent conduct alleged by Muddy Waters.

    Hey David Eller, don't spread bad news about the NQ company. Think what you information in this article is worth now. It is just obsolete.

    As financial analytic, you are supposed to analyze information before publishing it on fool.com. And you seems to be just another correspondent who has no clue .

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