Wednesday, May 16, 2012

The Globalization of Glu Mobile

For the past five months, I've been doing extensive research on the wireless broadband industry by reading books, examining market research and studying earnings call transcripts of pure play companies in the sector. One organization I've uncovered and taken a position in is Glu Mobile (GLUU). Glu Mobile designs and produces gaming apps for feature phones as well as next-generation handsets and tablets. If you require a more detailed business description, my previous article will give you a more robust profile.

Many investors look at the market like a tote board at the race track attempting to make a quick kill, but I'm a bit antiquated and like to think I'm buying a piece of the company. I'm glad I have a stake in this one because my impression is their technological foresight may make them a viable alternative to legacy gaming systems in the next few years. After reading Glu Mobile's latest conference call transcript, my take is that they are a first-rate organization and the top brass has their eyes on the prize.

The first thing that struck me when examining the Q1 2012 transcript is that their global-spanning business plan takes into account regional anomalies when targeting rabid diehard gaming fans. Although the wireless World Wide Web knows no borders, global regions have cultural differences. Just like a McDonald's (MCD) in Beijing has a different menu than a franchise in Manhattan, Glu Mobile can tailor their games towards the indigenous cultures in various locations world-wide.

Glu has design studios in both China and India, putting them in the sweet spot on the demand curve. The two global superpowers have many more mobile users than here in the United States. China has more than one billion mobile subscribers and India isn't far behind with over 900 million. China is now the largest smartphone market in the world with 22%, overtaking the U.S. with 16%. As far as games are concerned, the number of Chinese people who play mobile video games is estimated to hit 215 million in 2012, and is expected to reach 360 million in 2014.

CEO Niccolo de Masi gives an example of the internationalization of Glu Mobile in the conference call: "Small Street was our first title that launched in both English and Chinese. It peaked at number 57 top grossing in iOS and the US app store. However, it reached number one top grossing in China. Going forward, we will be actively pursuing more localization at launch wherever we find compelling returns on both cost and opportunity cost.".

Although the large number of subscribers in China sounds like a bonanza for Glu, Mr. de Masi implies that for them to be successful, they must continue to partner with Apple (AAPL) and Google (GOOG): "In China obviously the user base is starting to grow. Of course we’re going to follow Apple and Google where they ship their store. Remember in China you’ve got the phenomenon of jail broken phones, and there’s a more difficult mechanism for frankly obtaining cash from end consumers.".

Jail braking is what hackers do to get free or expanded services. Google and Apple's deep pockets may stem sales shrinkage from those with unauthorized access to premium data and services, plus guarantee payment. Another benefit from partnering with these two technology giants is more obvious: preferential positioning on their respective app stores. Just like eye-level shelf space in the supermarket is coveted, so is being highlighted on digital real-estate like Apple's App Store on iTunes.

During the last nine quarters, Glu Mobile has had almost 100% of their releases featured by both Apple and Google. Featuring lasts for one or two weeks, so it's important to get the word out quickly to gain gamer's mindshare. With this direct-to-consumer distribution channel, it's essentially self-serve and word of mouth advertising to hard-core enthusiasts. A great brand and street cred is important. This may be obtained by producing a quality product. One step they've taken to solidify quality control is to extend live beta testing prior to worldwide releases. The additional refinement period should lead to larger lifetime revenues of each game.

Glu Mobile has street smarts. They're participating in the powerful distribution mechanism known as the Google and Apple ecosystems which are primarily known for running on smartphones and tablets in the wireless space, but will be coming soon to your living room. When Google and Apple television initiatives come to fruition, Glu will be there as gamers use applications on their HDTVs. I'm not sure how the aspect ratios translate as they migrate from smartphone to tablet to television, but the designers at Glu are taking the necessary steps to make this happen.

I believe Glu Mobile's business associates also feel they are doing an outstanding job in product design which is illustrated by their strong working relationships. Not only were they the launch partner for Google in the new Google Play store, but they also partnered with Amazon (AMZN) when they introduced the Kindle Fire.

As CEO de Masi states: "We’re operationally diversified and we have a very clearly focused strategy which is to be in the content segment of the value chain and to partner closely with Apple, Google, Amazon, Microsoft (MSFT). We’re not trying to compete with Apple, Google, Amazon, Microsoft and their stores. We believe we’ve got a really healthy, viable and rapidly growing business over time by being a pure content player.".

Looking at the numbers, we can see that they are losing money, and won't be operating cash flow positive until Q4 of this year. Next year is a different story. The highest analyst estimate for earnings per share in 2013 is $.27, and the lowest projection is for $.05/share. Although the stock crosses the tape at roughly $4.40, you may believe that you are getting Glu Mobile at a rock-bottom price, but my take is that it may come in a bit. There is a short float of 18% on this stock, its price/sales ratio is 4 and price/book ratio is 6; this is not an inexpensive security. Yesterday one of the traders on CNBC recommended the stock over Zynga (ZNGA), and the stock got goosed 15%, only to crash today.

These small cap stocks trade in a broad range, so buyer beware. That said, I own the stock, and just deal with the wide price swings. My current long-term investing strategy is to buy shares of companies in the wireless broadband sector, and just sit on them until they kick in. Stocks tend to sit, then run. If you read the teachings of value investors like Warren Buffett, Philip Fisher or Peter Lynch, they stress that one of the ingredients in buying a company is solid management. After reading their last three conference call transcripts, I'm impressed and think the executives at Glu have found the recipe for success. I'm all in.