Saturday, May 4, 2013

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.