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.

Friday, May 11, 2012

Connecting The Dots With Synchronoss Technologies

In early March I wrote an article featuring Synchronoss Technologies (SNCR), and although I liked the company, cautioned investors that the stock price was slightly inflated based on P/E valuation. I also mentioned that 50% of earnings came from AT&T (T) which could impact the share price if business slowed with Ma Bell. I should have taken my own advice because in early April when the stock dropped 10%, I bought some shares at $29, only to take a black eye a month later when the equity dropped to $20 after their Q1 2012 conference call.

If you're a conspiracy theorist and believe the market is rigged, then the recent price/action of Synchronoss will buttress your thinking. There is no way this stock should have dropped 33% in one day except for the proliferation of sell signals in high-frequency trading programs. They kick in at certain levels and portfolio managers may put a tombstone on their positions once a certain loss is obtained. Selling begets more selling.

I did not emerge unscathed and to say I wasn't disappointed would bring out the grifter in me. Although Q1 results were at or above the company's guidance, there is a problem with AT&T in Q2 because of some weakness in the new channel that will come to fruition in the latter half of the year. This is not a make or break moment for Synchronoss, just a speed bump.

The question is: Who do you believe? Wells Fargo (WFC) who downgraded the stock from outperform to market perform, or, Wedbush who maintains its outperform rating on Synchronoss with a 12 month price target of $40. Wedbush believes that although AT&T is expected to grow at a slower pace, the slack will be made up with expanded relationships with Verizon (VZ) and Vodafone (VOD). I'm in the Wedbush camp. Let's examine the conference call and see what you think.

There is nowhere in the transcript that suggests Synchronoss will not meet their numbers this year. In fact, it's just the opposite. Here's what CEO Stephen Waldis had to say about 2012: "We're maintaining our full year revenue and profitability guidance assuming a higher mix of revenue from our portfolio of customers outside of AT&T. We believe today's announcements improve our long-term position and provide us with increased confidence and the long-term scalability of our business model.".

What put the stock in the intensive care unit is that with their engineering wizardry they became a victim of their own success. Synchronoss and AT&T are implementing advanced voice technology capabilities with Synchronoss' newly acquired SpeechCycle. SpeechCycle's natural language speech recognition technology has been tested with customers Charter Communications (CHTR) and Cablevision (CVC), and they plan to deploy the technology with AT&T in 2012.

This sounds like great news and, according to CEO Waldis, it is. It enhances the AT&T customer experience by enabling self-service in a much quicker manner than dealing with a company representative. Although this automation process means new opportunities for customer care and support services, there will be a transition period. This may weigh on revenues in the near-term if new initiatives with Verizon and Vodafone don't gain traction as quickly as the company is anticipating.

One new initiative the company is taking is the expansion of their ConvergenceNow Plus+ cloud platform capabilities. Mr. Waldis believes the addition of SpeechCycle expands their technology stack, and it dovetails nicely with ConvergenceNow Plus+ which has already been battle tested in the Netherlands. ConvergenceNow Plus+ sounds like a confusing topic, however, Synchronoss has posted an easy to understand demo on their Web site.

In a nutshell, as consumers' digital identities migrate from the PC to their mobile devices, there are often issues of personal information slipping between the cracks as you upgrade from one mobile device to another. This is often problematic if you transfer data between carriers. ConvergenceNow Plus+ allows you to transfer contacts, pictures, videos, call logs, text messages, files, games and applications all on a cloud platform. You basically transmit your data to a cloud server in stores, using self-service kiosks, on the device or using Web portals, then sync it to your new mobile device once you have made your purchase.

To provide the infrastructure that enables this strategy is a newly formed partnership with Terremark. Terremerk blankets the globe with their managed hosting, colocation, data storage and cloud computing services. They house data centers in North America, Latin America, Europe and the Asia-Pacific region. Think Rackspace Hosting (RAX).

What makes Terremark interesting is that they are wholly owned subsidiary of Verizon. This is where the lines get blurred because not only has Synchronoss signed a five year contract with Verizon Wireless, but Vodafone owns 45% of Verizon Wireless. Vodafone is the world's second-largest mobile telecommunications company measured by both subscribers and 2011 revenues, and had 439 million subscribers as of December 2011. Think of the synergies and cross-selling opportunities for Synchronoss.

Let's hear what CEO Waldis has to say about this potential bonanza: "With the standardized infrastructure and architecture being in place between Verizon and Vodafone, we believe there will be compelling business reasons for Vodafone to engage with Synchronoss and a growing number of operating companies and geographic locations. Although there are no guarantees, we believe the value proposition associated with our shared services cloud environment will become increasingly more powerful over time.".

Although he specifically states there are no guarantees, I think there is a very good probability that they will make and exceed their numbers for 2012. Synchronoss is still the world's leading provider of transaction management, cloud enabling and mobility management for connected devices. The damage may have been done to the share/price, but let's examine the measurables to see what you think. You may be getting a bargain at its current quote.

According to Yahoo Finance, out of the eleven analysts that cover the stock, the average earnings estimate for 2012 is $1.10/share. For 2013, it jumps to $1.30. It currently crosses the tape at $21, which would give us P/E Ratios of 19 for this year and 16 for next. When you consider Synchronoss is projected to grow at 23% annually for the next five years, you've got a reasonably priced security if you use a P/E Ratio metric.

I realize this stock was a lightning rod for short sellers earlier this week, and it appears the company shot themselves in the foot, but I don't see any concrete evidence of that if you take a look at the company on a yearly perspective. They need to make a clean break from the latest conference call, but once that is out of the way, they may be a major player in the new paradigm shift to handheld wireless devices.

Wednesday, May 9, 2012

My Eureka Moment With Acme Packet

Last week Acme Packet (APKT) reported its adjusted earnings met, and that revenues surpassed Wall Street's expectations. The stock rose 10% in after hours trading only to be doused the next day. I've been accumulating shares of Acme Packet between $25 - $27, and thought they'd thrown a bone my way when they crossed the tape at $31 right after the conference call. However, the stock has continued the hover in the $26 range for the past week.

I consider this an outstanding buying opportunity of Acme Packet for a multitude of reasons. It's no secret I'm gung-ho on the wireless broadband sector. Last month I wrote about the company's inroads in Voice Over LTE, and I'll briefly update you about that, but some of this posting will discuss Acme's recent purchase of IPTEGO which puts them front and center in the Deep Packet Inspection arena.

What hit me right between the eyes when reading the press release about the acquisition was the company description: "IPTEGO's Palladion software optimizes next-generation IP communications networks, enabling customers to rapidly troubleshoot customer experience issues down to the individual session level, proactively identify and isolate communications network faults and events, and detect and prevent fraudulent activities in the network.".

It sounded familiar to the business description of Allot Communications (ALLT), a red hot wireless pure play I've been following ever since I blogged about it in early March. Nowhere in the missive, or in the latest conference call did Acme's management mention Deep Packet Inspection. Industry insiders probably took it for granted, but as a layman, I didn't have a clue. However, when surfing to the IPTEGO Web site, I came across a document that specifically states: "Palladion goes beyond the deep packet inspection solutions typically found in today's VoIP networks...". That iced the cake.

Here are some of the takeaways from the conference call that maintained my enthusiasm for this multifaceted telecom infrastructure play. The orator is CEO Andrew Ory. Some of the paraphrased quotes come from the presentation, and some are from the Q&A session:

  • "We expect to deliver sequential growth in each of the remaining quarters in 2012. We are reaffirming our earlier business outlook of approximately 10% revenue growth in 2012. It is our intention to improve visibility in the back half of the year."
  • "For the better part of 10 years, our customers have been primarily wireline and cable service providers. Now in our second decade, we are expanding our focus and investing in the strongest drivers of future market growth, specifically enterprise and wireless."
  • "We continue to see evidence of our expanding market share. According to a recent report issued by Infonetics Research, our share of the service provider SBC market remained strong at 57% in 2011. A similar study of the enterprise market indicated that our share of that market had expanded to 34% in 2011, making us the leader in that market as well."
  • "The combination of our session delivery network solutions with IPTEGO’s real-time intelligence engine will enable customers to move beyond individual element management, and give them real-time network-wide visibility and analytics into their multi-vendor IP communication network."
  • We plan to sell the IPTEGO Palladion software suite alongside our current product portfolio, and will offer it to service providers and enterprise customers through existing IPTEGO and Acme Packet channel partners, as well as through direct sales."
  • "SIP trunking is strategic to Acme Packet because SIP trunking is what leads the way, and enables the transformation for the enterprises to communicate, change the way they communicate. And this is why IPTEGO is so important to us."
Most of the bullet points are self explanatory except for the last paragraph on SIP trunking. According to Wikipedia: "SIP trunking is a Voice over Internet Protocol (VoIP), and streaming media service based on the Session Initiation Protocol (SIP) by which Internet telephony service providers (ITSPs) deliver telephone services and unified communications to customers.". As stated in the conference call, "SIP trunking should be one of the main growth drivers for Acme Packet this year.".

You can go on and on about the technology Acme Packet supplies to governments and conglomerates, but what's important to remember is that there is an ever-increasing volume of binary data flying through the airwaves these days. There's a wholesale shift in the way that telecommunications is changing. It's like going from the telegraph to the telephone. Acme Packet plays a big part in making that happen.

One of the big knocks on the company and probably why it rubbed investors the wrong way (the stock has dropped from $85 to $25), was their limited geographic range. Previously, they were constricted to do most of their business in Europe and the Untied States. That's all changing. They are in the process of crisscrossing the globe. This is best exemplified by Acme Packet Senior Vice President Seamus Hourihan as he discusses the VoLTE deployment opportunities:

"The first one out of the gate would be MetroPCS (PCS). It will be starting in the second half of this year. There will be a few maybe toward the very end of this year, and then there’s some that are 2013. There’s actually a few that are early 2014. The projects that we’re in are equally distributed between North America, Europe and Asia. Relative to the last call, we added two new projects that we’re engaged with, both of those were in Asia, for example. So that’s the major change in terms of our engagements around voice over LTE since our last call."

Let's cut to the chase and get to the numbers. If you get excited about the thrill of the hunt, this sleeper stock could go from fizzle to sizzle in the next 12 months. Average consensus earnings estimates for 2012 is $.94/share. For 2013, that number jumps to $1.28. That gives us P/E Ratios of 28 for this year and 20 for 2013. This is a bargain going forward, and although the growth rate for next year is expected to be 36%, this may prove conservative.

Sunday, May 6, 2012

Ceva: In The Spotlight For All The Wrong Reasons

The share price of Ceva (CEVA) experienced blunt force trauma last week, dropping a whopping 22% in one trading session. In actuality, it was more like a self-inflicted wound because although they met earnings and revenue expectations in their latest quarter, they guided down for fiscal year 2012 due to a weakness from Nokia (NOK), a customer they do significant business with.

It's no secret that Nokia isn't outmaneuvering the likes of Apple (AAPL) and Google's (GOOG) Android in the smarphone wars, but they are a significant client for Ceva, primarily in the 2G space. The 2G spectrum has gained critical-mass in feature phones where Nokia previously excelled. That's not going to make Nokia a highly sought after security, but 2G is still a cash cow for Ceva. Worldwide, 2G enabled feature phones outnumber smartphones 2:1.

As Ceva CEO Gideon Wertheizer articulated in the latest conference call: "The 2G space carries majority of the baseband volume globally. After one quarter of softness, volumes are getting back to normal levels and we expect to maintain our strong portfolio.".

Besides feature phones, another area that may produce a steady steam of income in the 2G space for Ceva is machine-to-machine. Applications in this wireless sub-sector include: assisting advanced robotics in factory automation, updating electronic billboards, and monitoring smart utility meters. Industrial strength applications for automated communications.

I don't mean to dwell on 2G to the extent I have been, but that is why the stock was punished; it's exposure to Nokia and their decreasing market share. There is some mythology with Ceva's guidance going forward that makes my decision to purchase shares of the company at $22 seem like a self-destructive choice, considering it crosses the tape at $17 now. However, I contend that if you have big picture vision, there is a certain demographic that seems to be hypnotized by their handheld computer screens that will enable Ceva to excel in the semiconductor design arena.

Here are some conference call quotes from CEO Wertheizer that accentuate Ceva's stance on the Nokia situation including both the 2G and 3G spectrums:

  • "In the mobile phone category, Nokia Q1, 2012 results and Q2, 2012 guidance reflect a noticeable volume reduction primarily due to competition from China based OEMs with broader portfolios of feature phones with smartphone functions such as touch devices."
  • "The 2G market is stable. It’s a 1.3 billion, 1.4 billion units a year in the next four years. So, I don’t see us losing share, I don’t see newcomers that can take major share... So it’s 3G and indeed that will take us beyond the level that we’re at in the 2G."
  • "The 3G segment possesses big opportunities for us to gain market share as evidenced by numerous new handsets enabled by our DSPs such as Samsung (SSNLF.PK), HTC (HTCKF.PK) and Huawei."
  • "First of all, the shortfall or the problem that Nokia has in the smartphone, in actuality, we're taking benefit. As we said in the call, we're planning to be in the Nokia smartphone, but when they lose smartphone share, say to Samsung, and they are loosing share in the smartphone to Samsung, we will directly benefit from that."
So what does the information mean?

First, the increased competition from Chinese OEMs in the 2G sector benefits Ceva from their relationships with conglomerates like Huawei. South Korean technology powerhouse Samsung also produces pressure-sensitive handheld devices in all flavors of the wireless spectrum: 2G, 3G and LTE. These are the companies that are taking a big piece of the pie from Nokia, especially in the emerging markets, and these are significant Ceva customers.

Secondly, because of this rapid growth in the emerging markets, Ceva expects to advance from supplying chips to one billion devices currently, to 1.7 billion in three short years. That's a force to be reckoned with.

Thirdly, Ceva will be supplanting Texas Instruments (TXN) in Nokia's 2G and 3G phones in the second half of this year. If Nokia proves critics wrong with their partnership with Microsoft (MSFT), Ceva gains market share. If Nokia Windows enabled smartphones lose ground to the likes of Google and Apple (which I think they will), Ceva still comes out on top because they supply chips to Nokia's competitors. It's a win-win situation. Let's decipher the numbers and see what you think.

In my last article about Ceva, the stock was trading for $22 with a P/E of 22, and a 20% growth rate. At its current valuation of $17, you get more bang for the buck with a P/E of 18 based on consensus earnings estimates on Yahoo Finance. Doing some cost-benefit analysis, you get a more advantageous price now because although earnings per share were shaved 10%, the price is down 25%. That's savings. In my opinion, the damage has been done with the recent sell-off of Ceva. The one year price target has dropped to $28, that would be a considerable gain if that figure comes to fruition.

Wednesday, May 2, 2012

Hurry Up and Wait For Sequans Communications

When I buy a stock, it's usually a multiyear acquisition and Sequans Communications (SQNS) is no exception. Because it's hemorrhaging money, I've had the security on a short leash ever since I began taking positions in it back in early March. Initially, my stake sold for $2.90/share, and I've been dollar/cost averaging my position. My cost/basis is roughly $2.60/share now, and the security currently crosses the tape at $2.16, a haircut of approximately 22%.

Because my investing technique is not standard operating procedure for most mutual fund managers, I have more leeway being an individual investor. Conventional investing wisdom by many money managers suggests investors put stop/loss orders in at a 15% downside, but I often invest in topsy-turvy small-cap companies, and they tend to fluctuate in large ranges: high beta securities. I'll let a stock go down significantly before I sell it if I believe in the company, and I believe in Sequans.

Although the stock is down, this is no shot in the dark. Sequans is one of the new breed of semiconductor companies slated to bring LTE to your handheld computing devices. If you aren't familiar with LTE, it's a form of 4G which is like 3G on amphetamines. My last article on the company was only a month ago, but they reported earnings (or lack there of) last week, and I wanted to give readers a quick update. I prefer to read the conference call transcripts, but they aren't available. As an option, I listened to the Web cast.

My first impression from the conference call is that this stock may be dead money for the next six months. Not only did Sequans lose $.22/share last quarter, they are expecting a loss of $.21/share - $.23/share for Q2. In addition, the one year price target has dropped from $3.23 to $2.77. A predictable perspective would say to sell the stock, but I believe its whole is bigger than the sum of its parts.

Although CEO Georges Karam was very tight lipped about the specifics of what can be expected for Sequans in the near future, he did shed some light on the macro view: "We shipped LTE products in Q1 for use in trials, and in initial deployments in smaller markets such as Brazil and Australia. In addition, we received initial orders for our dual-mode LTE/WiMAX chip. We expect this pattern to continue in Q2 ahead of an expected ramp in LTE revenues in the second half of the year, based on design wins for major LTE markets such as the US, India and China.".

News about Sequans comes in dribs and drabs, but two steps they have recently taken occurred in the United States and China. Last month the company joined Verizon's (VZ) LTE Innovation Program. This collaboration was created to empower LTE innovators and foster the development of new technologies for Verizon’s world-leading 4G LTE network. In China, Sequans announced a partnership with Nationz Technologies to work on a joint venture on dual-mode TD-SCDMA/LTE devices. The projected products offer great value that will facilitate a seamless transition for Chinese consumers into the next generation of wireless.

Another angle I have thought about in my decision to keep purchasing shares of Sequans while the price is down is Apple (AAPL). Apple is the puppeteer in the wireless broadband sector. They pull the strings of halo companies like ARM Holdings (ARMH), Broadcom (BRCM) and Skyworks Solutions (SWKS). So goes Apple, so goes the prospects of these semiconductor companies that reside inside the iPhone and iPad.

The buzz around the upcoming launch of the iPhone5 is that it will be an LTE enabled communication device. Even if Sequans isn't included in the phone, it could still be a propellant for the shares as other operating systems like Android (GOOG) join the fray, especially if Sequans current design wins translate into sales. When a new iPhone hits the market, the first thing companies like TechCrunch do is open the device and see what's inside. If that includes Sequans chips, you could be compensated handsomely.