Glu Mobile Goes On The Road

Earlier this week, members of the Glu Mobile (GLUU) executive team hit the road, and made two investor presentations. The first one came on May 21st, and was spearheaded by Chief Financial Officer Eric Ludwig at the Stifel Nicolaus Internet, Media & Telecom Conference. The second show was one day later at the B. Riley & Company Investor Conference, with Glu Vice President of Finance Greg Cannon as the master of ceremonies. This article will amalgamate both speeches to shed some light on topics that may enable investors to get a better grip on Glu Mobile's overall strategy, plus clarify some misconceptions about the company.

Gambling

During the past six months, Glu's shares temporarily spiked from an announcement of a move into mobile gambling with United Kingdom partner Probability PLC, and then the legalization of on-line gambling in some states in America such as Nevada and New Jersey. Day traders thought they were riding with lady luck, but the goose in share price didn't last too long. This is primarily because this relationship with Probability will not be a material contribution in 2013. Both Mr. Cannon and Mr. Ludwig emphasized this during their presentations.

Glu management believes they are just scratching the surface of what could become a meaningful revenue stream for the company. Here are some paraphrased quotes from the two presenters.

Greg Cannon:

Obviously long term you will want to be in the U.S., but with the legislation in Nevada and New Jersey, it is still too early to tell where Glu fits in. Do we want to go after our own license? Do we want to just work with a partner? So we will evaluate and use the knowledge and experience for gaming with working with Probability to determine that long term strategy.

Eric Ludwig:

We're definitely the early stages, and that’s the reason why we’ve not given any number for guidance to this in our numbers today. The UK market is still a very small revenue generating market for real-money gambling with the big prices in the states. But we think long-term, this is a great market, and has a great opportunity in the United States. Then there’s a lot of different ways to attack it, either with or without getting licenses, doing real money gambling on skill-based level and sweepstakes.

I don't know about you, but when I hear the word sweepstakes, I think of the Irish Sweepstakes, like the lottery. I'm not sure if this is what they are alluding to, but perhaps it's an extension of the mobile slot games they are providing for gamblers throughout the UK. With Probability, they are launching a White Label social casino with Zinga, Blackjack and Roulette. However, it must be emphasized, this won't be adding anything significant to the top line for awhile.

Monetization

Glu Mobile now has forty million active users playing their games on a monthly basis. Ninety percent of these consumers are on smartphones and tablets. Glu made a clean break from feature phones, and have now transitioned to primarily the iOS (AAPL) and Android (GOOG) operating systems. However, as well as Glu has executed in core game play, production values and consumer reach, they've come up short where monetization is concerned. This is why they're on the hot seat, not as a gaming entity, but as a publicly traded company.

I think management showed backbone by being up front with this, and highlighted it as the number one priority for the company as they transition from a player vs. environment organization, to a player vs. player production house. Eric Ludwig acknowledged that with the previous player vs. environment platform, the company didn't have any home run games using a baseball analogy. Just a lot of doubles and triples, or at least this is how I interpreted it. This is why the company is focusing on more social interactivity.

Games-as-a-service, Social Gaming 2.0, Player vs. Player, whatever you want to call it, this is where you're going to get the blockbuster games. They made a big step in the right direction by purchasing GameSpy last year, but now they have to produce. Although Glu Mobile has been in business for twelve years, it's still a turnaround story on Wall Street, no matter how high their production values are. They've got nowhere to run, but there are now low expectations for the company where last year, it was just the opposite.

You don't have to be a bean counter to know that monetization matters. If Glu doesn't start to increase revenues, it could be a death trap, just like Rite Aid (RAD). Rite Aid is the third largest drug store chain in the United States, yet their stock hasn't gotten over $3 for ten years now. I'm not suggesting this will be the fate for Glu, but pointing out that just because a stock is inexpensive, doesn't guarantee instantaneous results.

Third-Party Publishing

A new venture for Glu Mobile is their third-party publishing division. This may be exactly the right medicine to get the stock in gear because it will increase revenues for the company in 2013. Glu is a successful developer, so they know how to get a game to the international market. What they are doing now is partnering with small gaming companies in China, Japan and Korea that have achieved success in their native markets, and are bringing those games to the Western World by localizing the languages to English, Russian or Portuguese.

Glu has long track records with Apple, Google, Facebook (FB) and Amazon (AMZN) to get these third-party games to the right distribution channels. They're anticipating launching at least six third-party publishing titles in 2013. Two early in the third quarter, and the balance late in the third quarter, or the fourth quarter. In the long-run the third party publishing division would have the same EBITDA margin as what their internal studios will have.

Greg Cannon commented about the margin profile where it concerns the third-party games:

Obviously in the near term the gross margin will be impacted because we’re having to pay a rev share back to those partners initially. We have brought down our full year guidance to 88% on the gross margin basis to allow for those rev shares, but ultimately by reducing the R&D investment on the third party publishing, you still get to it the similar long term EBITDA margin.

It should be noted that Glu ended the first quarter with $21 million in cash, DSO [days sales outstanding] less than 60 days and no debt on the books. However, they are guiding lower to $14 million in cash by the end of the year without having to tap the capital or equity market.

Conclusion

Gambling, monetization and third-party publishing were the brunt of both presentations. Management also spoke briefly about the Quad Screen Future where they will be bringing Glu Mobile games to Apple laptops and HDTV's in addition to smartphones and tablets. You will be able to scale Glu games to all of these consumer products. Even now, you can do this to some extent. However, that is a reach into the future, and I'm more concerned about the next twelve months.

Bottom line is that the company restructured in November after a very promising Summer of 2012. What a difference a few months makes. If you want a turnaround equity with a lot of potential, Glu Mobile is the place to be. However, even though they are the poster child of pure-play mobile gaming, it's a risky investment, like all turnaround stocks.

Nuance Communications Gets A Wake-Up Call From Carl Icahn

In investing circles, some things need little introduction. Take Nuance Communications (NUAN). Nuance is synonymous with voice recognition, and their technology is held in high regard worldwide. Mainstream investors became aware of the company a few years ago when their science was the backbone of Apple's (AAPL) Siri platform on the iPhone. When anything Apple was in vogue, Nuance shot up to $31, but has since fallen on hard times, and crosses the tape at $19.

In a nutshell, Nuance is in a transition period. From desktop to mobile computing, and from just plain old software to software as a service, or a subscription based model. Q1 was terrible. Q2 was like a sequel to a horror movie. In Q2's prepared remarks issued by the company, next quarter's revenue will be $480-$495 million and earnings per share are projected to be $0.30-$0.34. This is below a consensus of $554 million in revenues and EPS of $0.49. Full year guidance also missed. Some of the blame was on poor execution in the sales department.

For the second time in three months, the stock dropped from the mid $20's, to the high teens, and some investors took notice. Most notably, billionaire financier Carl Icahn who previously had accumulated a 9.3% stake in the company. After the conference call, it was disclosed he increased his holdings to 10.7%. Like Nuance, Mr. Icahn needs no introduction to those that follow the market. Whether it's televised battles with Bill Ackman over Herbalife (HLF), or the killing Mr. Icahn made on Netflix (NFLX), Mr. Icahn is a financial celebrity.

One thing that is consistent with Icahn is that he's not in this for the consolation prize. He puts himself in a position to win. Many investors believe the atmosphere is poisoned for Nuance. It's a lost cause. I feel this is short sighted, and with the "passive" investment Icahn took in Nuance, he's giving the company a stay of execution. After all, the pressure Icahn can put on a company is the stuff of legend, even though he has not stated what his involvement will be with the speech recognition entity.

Even with the increased holdings for Icahn, if we do get an overall market correction, Nuance shares may go lower, but they seem to be forming a base in the current market melt-up. I prefer to bottom fish in good solid companies that hit speed bumps. This is why I took a position in Nuance at $19. However, the company may be stuck in neutral for the next few months, especially if comments during the conference call are any indication.

In playing Devil's Advocate as a shareholder in Nuance, let's look at some of the less that stellar statements that management published just three short weeks ago that caused the sell-off:

• Concerning the Healthcare Division: "Although recent acquisitions contributed to revenue growth, in some cases the contribution was below our expectations.".
• In the Mobile & Consumer segment: "We experienced delays in revenues due to consolidation in the smartphone market, our increased focus on pricing and delayed royalty reports.".
• In Enterprise: "We have recently under-performed in our enterprise on-premise license business and we expect that business to continue to face challenges.".
• For the overall company: "In the second half of FY 13, we expect a continuation of the current market trends, and we expect that improvement in sales execution and acquisition performance issues will take some period of time.".

Management believes that it will take until 2014 to show a resumption of organic growth. That Fiscal Year 2014 organic growth will be in the mid to upper-single digit range. So we're not talking about hyper-growth for at least two years, if at all. To increase shareholder value, the company has authorized the repurchase of up to $500 million of its outstanding shares subject to market conditions. A share buy-back is standard operating procedure for companies that have fallen out of favor.

However, you usually do a buy-back when the company is selling for a discounted price. With a current P/E Ratio of 40, this is still an expensive stock. This makes me wonder what Mr. Icahn has paid for his stake. If it's over $19, he may not exercise patience for very long. The annual Nuance Communications' shareholder meeting next January could prove very interesting.

In late April, The Wall Street Journal speculated that Nuance had hired Goldman Sachs (GS) for advice concerning Mr. Icahn. According to the article:

"Activist shareholders such as Mr. Icahn have become a major force for change in corporate America in recent years, frequently taking big stakes and pushing for improvement at underperforming companies. They have become so ubiquitous, bankers say, that in many cases companies make strategic changes preemptively when they fear they are an activist target.".

In the Q&A session during the most recent conference call, Daniel Ives from FBR Capital Markets directly asked Nuance CEO Paul Ricci: "Can you confirm you've hired a financial adviser in terms of working with your strategic alternatives?". Mr. Ricci dodged the question, and stated: "I can say that Nuance is very well advised and we work with many firms.". There was no follow up question, nor specific mention of Goldman Sachs.

The Bottom Line

With the possibility of being under the thumb of Icahn, coupled with residing in the upper echelon of technology, the Nuance breakup value could be more than a sum of its parts if current management can't get back to its previous growth trajectory. I've always liked this company, however, that doesn't necessarily translate into a rising stock price. I believe with the Icahn stake, the handwriting is on the wall for Nuance. In a year from now, shares could be considerably higher, from change within the organization, or pressure from outside the company.

Riding High In April, Shot Down In May: Nuance Communications and Ruckus Wireless

I've covered Nuance Communications (NUAN) and Ruckus Wirleless (RKUS) in previous posts. My last focus article on Nuance Communications concentrated on their Analyst/Investor Day presentation back in December of 2012. For Ruckus Wireless, I wrote about their inaugural conference call three short months ago. I liked both company's prospects, but they traded too high for my investing style at the time of the writing. Circumstances changed when both companies recently reported quarters that didn't live up to Wall Street expectations. As shares fell, I put my money where my mouth is, and took stakes in both companies.

Ruckus Wireless

Although Ruckus Wireless has been around for over ten years, it's only been a public company for six months. It closed today at $13.40/share, and the WiFi plumbing provider is basically back to square one to when the underwriters valued the stock between $13-$15 for its IPO late last year. Although it closed under the IPO price after the first day of trading, the stock shot up to $26.50 its first few months on the market. Two months ago when Ruckus was trading at $24, I put a $16 limit order on it, then waited.

Be careful what you wish for. After missing Q1 earnings estimates, and guiding down for Q2 (a traditionally strong quarter for the company), the stock crashed through my initial offering, and I was stuck with shares at $15. Picked up more at $13.40, so my average cost is somewhere in the low $14 range. I'm not sure if this is like trying to catch a falling knife, but there's another Wall Street adage about bulls make money, bears make money, and pigs get slaughtered. I thought $14 was a good price for Ruckus Wireless, and I still do. You can't get all your holdings at 52 week lows.

The problem with the quarter and tepid guidance is a delay of orders from telecom carriers in China and North America. Lazard Capital's downgrade from a Buy to a Neutral rating didn't help either. According to the analyst at Lazard, it may take a few quarters for Ruckus to get back on their growth trajectory. I'm willing to wait. Q3 tends to be strong for Ruckus, and although this is six months away, I prefer to load up on good companies while they are experiencing some growing pains. I'd like to buy all stocks when they are at rock bottom, but it just doesn't work out that way most of the time.

Nuance Communications

Where Ruckus cratered 25% the day after their conference call, Nuance communications did almost the same, dropping 20%, from $23 to $19 right after their lackluster earnings presentation. Not only did they miss on the top and bottom lines, but they also had poor guidance for 2013. They are in transitional mode, from desktop to mobile, and also by the overall industry shift to on-demand, or cloud based services. I purchased shares at $19, and the equity hasn't budged even though Wedbush Securities rated the stock an Outperform yesterday.

Nuance has long been a favorite of mine for their futuristic voice recognition technologies. Just last week the company announced that they are providing a voice biometrics solution to securely and automatically confirm the identity of Barclays Wealth & Investment Management customers – using the sound of their voice. These are the type of companies I like to purchase, but it doesn't necessarily translate into a good investment unless the company can execute. In comes Carl Icahn.

In early April, Carl Icahn took a "passive" 9.3% stake in Nuance. After the conference call, it was made public that Mr. Icahn increased his stake to 10.7%. Carl Icahn has a reputation for making money, whether it be from good old fashioned "passive" investing, or putting pressure on the boards of companies he invests in. I am not sure what his intentions are with Nuance, but he may take an active role in the company's direction. This could be by taking it private, selling off some of Nuance's under performing divisions like imaging, or selling the company to a larger organization.

The fact that Mr. Icahn has taken a position in Nuance was not inconsequential when I decided to buy shares. I believe he may goose the share price in the short term if any headlines hit cyberspace spelling out his intentions. The stock trades near multi year lows. I thought is was a good bet despite my belief we are due for an overall market correction.

Conclusion

While the market has been roaring, both Nuance Communications and Ruckus Wireless have been snoring. My investing goals in technology companies is to try and double my money in three years. With my purchase price of $14.40 for Ruckus, and a 25% plus earnings growth rate once it regains traction, I think my chances are good it to hit $29 by 2016. However, just like my investment with Acme Packet (recently bought by Oracle), which was also dependent upon Telecom Carriers, you may have to languish for a quarter or two until spending picks up.

For Nuance, I think there may be pressure on the executive team to do something sooner than later. Besides Mr. Icahn's 10.7%, 14.6% of the company is owned by private equity firm Warburg Pincus LLC (as of March 14th). Although Warburg Pincus has been reducing their stake, those are two powerful entities that have a lot to say about the future of the company. Even if no actions are taken by Mr. Icahn, I still think I can double my money in 3 years. That would be a price of $38/share. Not an unreasonable goal if the market continues its climb.

Synchronoss Technologies: Expanding From Personal Cloud To Enterprise Cloud

AT&T (T), Verizon (VZ), Vodaphone (VOD) and Telefonica of Spain. What do these Tier 1 mobile operators have in common? They're all rolling out, or will introduce the Synchronoss Technologies (SNCR) personal cloud platform in calendar year 2013. Operators are seeing a churn rate that is anywhere from 25 to 50 basis points lower when their subscribers are connected to the Synchronoss personal cloud. With millions of mobile subscribers and counting, that adds up to a lot of money.

Here is a synopsis of some of the progress Synchronoss is making to backup and store consumer digital files with their partnerships in telecom:

• They have successfully launched their personal cloud platform at Verizon, and are now focused on adding devices, additional data classes and functionality over the course of the year. This is being rolled out under the name Verizon Cloud.
• They continue to pick up momentum at Vodafone. Due in part to last year's NewBay acquisition, they remain on track to rolling the full production with the 14 major properties of Vodafone by the end of 2013.
• During the first quarter, they launched their personal cloud platform with Telefonica in their home market of Spain, and are looking to expand into other opportunities later this year.
• They deployed their initial version of some cloud transactions with AT&T, and Synchronoss software will begin to be shipped on some new devices at AT&T this quarter.

According to CEO Stephen Waldis in the Q1 conference call, "Operators are beginning to capture an immense amount of valuable data related to customer patterns in the cloud, which is helping them create a comprehensive social graph for their customers.". Sounds a lot like Facebook (FB), Apple (AAPL), Google (GOOG), or, Amazon (AMZN), and there's a reason for that. Those companies are the combatants in the race to gather and store your information to servers in cyberspace. Audio, video, text, you name it, they will store it. There's a lot of money on the line, and the carriers want in.

Synchronoss can't get into specifics about how they price their deals with a particular client, but generically across the customer base, they basically get a fee every time an end user is a subscriber to the personal cloud. Many telecom carriers will give a certain amount of data storage away as a teaser, just like Apple does with iCloud, but that doesn't necessarily impact Synchronoss. Synchronoss gets paid for every active user that utilizes the platform, irrespective of whether they go over the complimentary data minimum. Once a mobile subscriber begins to backup their personal files, it's money in the bank for the company.

This initiative is expanding at warp speed for all players in this field, not just the Tier 1 telecom carriers. You, yourself may back up your mobile data files to iCloud, or an Amazon or Google offering. It's like a gold rush for data storage because syncing your files to a portable hard drive seems like the old fashioned way to do business.

Additionally, companies of all sizes require the security and scalability that this type of backup technology has to offer. Initially, Synchronoss planned to deploy an enterprise version of the personal cloud sometime in mid 2014. This has all changed because of urgent requests from their client base. According to Waldis:

We believe the business cloud, our new offering, will represent a significant expansion of our addressable market opportunity. This was initially on our longer-term product roadmap, but one of our major Tier 1 mobile operator customers has asked Synchronoss to accelerate our efforts. We believe the enterprise cloud market, specifically in the small to medium-size enterprise category, represents an opportunity that is large, or, potentially even larger than our personal cloud services opportunity.

Mr. Waldis believes this enterprise deployment will take place in Q4 2013, or, Q1 2014. Wall Street really ate it up, and the stock popped 11% to roughly $30 in one trading session after the presentation. However, that wasn't the only thing investors liked about the quarter. It was a solid performance on the top and bottom lines.

Q1 was highlighted by revenue that was above the high end of their guidance range. Non-GAAP revenues were $79.5 million, representing 22% growth on a year-over-year basis. They also achieved their profit objectives for the first quarter while investing aggressively in the personal cloud platform, leading to a non-GAAP EPS of $0.28, coming at the midpoint of their guidance.

Synchronoss Technologies is not so much a company in transition, but an organization in expansion mode. Activation Services still has the lion's share of revenues at 70%, and although these services grew at 20% year-over-year, it is the personal and enterprise cloud that will propel the business forward for the next 3-5 years. This is not to say that Activation Services won't play a big part of the Synchronoss story, it's just that the brunt of growth will come from backing up data. This is what I believe, and so does Synchronoss management.

According to Yahoo Finance, the trailing twelve month P/E on the company is 54. That's very expensive despite the earnings and revenue beat. However, consensus analyst estimates seem to be conservative with earnings growth projected to be in the 20% range going forward the next few years. The storage and backup business is like a microwave oven, it will heat up in a hurry if the telecom carriers have their way.

Glu Mobile: No Longer The Life Of The Party

It was only a year ago that Glu Mobile (GLUU) tripled in a matter of months going from $1.80 to $5.90 a share. Those days are long gone. After a few mediocre quarters, the stock hovers at roughly $3, and my impression from reading the 2013 Q1 conference call transcript, is that the stock will be stuck in neutral until the second half of the year. However, if Glu's price/action the last few days is any indicator, it may quite well be a market laggard.

The company is experiencing a transitional period in the handheld gaming sector. Gamers are migrating from a Player vs. Environment universe (where you play video games by yourself), to the Player vs. Player arena. This is what is referred to in the industry as Social Gaming 2.0. Glu Mobile is betting heavily that their established brand and high production values in Player vs. Environment games will translate into instant credibility in the multi-player gaming sector.

Glu Mobile has a foothold in the Social Gaming arena with their acquisition of GameSpy last August. However, the gaming field in Smartphones is crowded. According to CEO Niccolo de Massi: "Today, there are one billion plus smartphones, but the Apple (AAPL) store is heading towards a million apps, if not already there, of which 30% to 40% are games.". With the number of new apps increasing, it is important for Glu Mobile to distinguish itself from battle tested rivals like Zynga (ZNGA), plus any upstarts.

A majority of the conference call was two pronged. The first prong is in the initial prepared remarks by the Glu Mobile executive team concentrating on the transition to a "cloud", or, server based business model which was made possible from the purchase of GameSpy. This is a games-as-a-service strategy, which is the Player vs. Player direction Glu Mobile is heading. The company needs to retain and monetize gamers, and management believes the move to the cloud and social gaming will create longer tails on revenue streams.

Last quarter, Glu announced that transitioning to social gaming is what they would be doing the first half of 2013, so no surprises here. To prepare for this, Glu management is streamlining studios, and delaying some launches from Q2 to Q3. This delay is why the stock got hammered the day after the presentation, although they met street consensus for Q1.

The second prong is the new venture into real-time mobile gambling in the United Kingdom from the operating relationship between Glu and Probability. Earlier in the year, Glu's stock price spiked when Nevada legalized online gambling, however the company has a long way to go before it reaps revenue streams here in the United States from mobile slots. CEO de Masi highlights some of the opportunities for Glu:

Last quarter, we were an early mover into the real-money gambling markets on mobile devices, launching Samurai vs. Zombies slots in partnership with Probability PLC. Tomorrow Probability will launch the second Glu IP-branded real-money slot game in the U.K., under the Contract Killer brand. In addition, we've begun collaborating on full casino suites of real-money Blackjack, Roulette, Bingo and Slots, which will leverage Glu IP.

Initially, this sounds exciting as a sales and earnings generator in the near term, but he goes on to caution investors that this will not come to fruition in a meaningful way for some time to come.

We look forward to further launches later in the year, as we deepen the operating relationship between Glu and Probability. Though, expected to be a modest topline impact in 2013, with New Jersey and Nevada now both poised to allow interactive gaming, we see a robust long-term opportunity in the mobile real-money gambling sector.

To emphasize the fact that there will be minimal top line benefits from online gambling in the next few quarters, here is Mr. de Masi again from the Q&A session discussing his expectations for the remainder of this year:

There's no doubt that there is an exciting opportunity here with significant populations in the U.S. liberalized to allow some form of interactive gambling. Right now, it's poker only in Nevada, and it is a number of games in New Jersey. However, there is a requirement right now to partner or have a physical presence such as a physical casino.

We have a revenue opportunity in the U.K., and with our partnership we have a revenue opportunity possibly in another European geography or more. But it is an arrangement whereby we are doing very little actual work, and we're mostly getting paid effectively royalties from the use of our IP.

My impression is that unless they get acquired by one of the major casino operators like Las Vegas Sands (LVS), or, MGM Resorts (MGM), that this move into mobile gaming is a few years down the line before we see any significant results. Headlines can always goose a stock in the short term, but in the long run, it's the earnings that count, or revenue growth if you are in a younger company. It must be noted that although they have a cash balance of $21.2 million and no debt, they are still losing money. This is a turnaround, speculative play, but one with significant potential.

I've owned Glu Mobile and have been writing about the company for well over a year now with mixed results as far as my personal profits are concerned. I lightened up on my position near the 52 week high, and accumulated more shares as the price declined. Am slightly underwater with my current holdings. I would not be adding more shares at this juncture because I've allocated enough cash to this promising company. I believe in the mobile gaming sector, and I believe in Glu Mobile. However, we are in a raging bull market, and Glu Mobile has been one of the ones left behind.

After careful thought and consideration, I am going to give this stock another year to prove itself. Sales are back end loaded for the Christmas season, and by the time we ring in 2014, we will know if their transition to social gaming is gaining a foothold. Any news or profits from the online gambling initiative will be gravy. I still believe that this equity is a multiple bagger from its 52 week low if they play their cards right. However, a bull market is a bull market, and it's better to be riding with the winners.