Synchronoss Technologies Takes Dead Aim At Apple, Amazon, and Google With NewBay Acquisition

Synchronoss Technologies (SNCR) does a lot of the heavy lifting for your mobile devices, but remains anonymous. They have long been "the company behind the company" where it comes to smartphone and tablet synchronization. Although they will achieve significant growth with their current offerings because of the proliferation of handheld computers domestically, they are looking for a bigger piece of the action.

Last week, Synchronoss officially entered a border war with Apple (AAPL), Amazon (AMZN), and Google (GOOG) with their purchase of NewBay from Research In Motion (RIMM) for a discounted $55.5 million dollars. RIM initially bought NewBay for $100 Million a little over a year ago to buttress international cloud services for their Blackberry mobile phones, but the company has since fallen on hard times.

It was a straightforward business proposition, and showed good horse sense for Synchronoss to pay cold cash for a company that is more than a tuck-in technology, but part of their overall strategic growth plan for the next five years. Synchronoss is not waging this war alone, they are partnering with telecom carrier heavyweights spanning the globe.

Until the acquisition, Synchronoss was a minor player in the fray with domestic telecom carrier Verizon Wireless (VZ) rolling out the Synchronoss ConvergenceNow Plus+ cloud platform. AT&T (T) is also testing the service. It must be noted that AT&T and Verizon Wireless are major contributors to the Synchronoss revenue stream. For more information about the Synchronoss bread and butter technologies, refer to a previous article.

Now, with NewBay on board, Synchronoss will be doing business with established European clients Vodafone (VOD), Orange, Swisscom, and T-Mobile; additional U.S. customer US Cellular; plus Asia/Pacific partners LG Electronics and Telstra. It's a small world after all.

To shed some light on the expanding Synchronoss family, the company announcement states:

NewBay is a leader in cloud services, enabling mobile operators and service providers to deliver content experiences across connected devices such as smartphones, tablets, PC’s and TV’s.

Tiernan Ray of Barron's adds to the conversation:

NewBay is what analysts call a “white label” cloud computing services provider, which can be branded by phone companies to give cloud services to customers.

Synchronoss now crosses swords with a who's who of Silicon Valley. It puts the company in a position to compete against Apple's iCloud, Amazon's Cloud Drive, and Google's cloud initiative.

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. 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.

Although the mobile device manufacturers drew first blood in regards to data back-up in the cloud, it is my belief that the carriers with partners like Synchronoss are formidable opponents. The telecom giants want a bigger piece of the pie in the very lucrative, high growth smartphone and tablet market. They're already getting their money's worth from expensive voice and data plans, but are also being gouged by the likes of Apple with subsidized smartphones.

They carriers have already crossed the line, so the battle is on.

Immersion Corporation: Paving The Way In Force Feedback Technologies

Some descriptions in this post were paraphrased from the most recent Immersion Corporation 10-K.

On December 17th, Seeking Alpha's Market Currents posted a note that IBM's (IBM) R&D Laboratory expects haptic technology to play a big role in our digital devices within the next five years. Haptic technologies allow people to use their sense of touch more fully when operating a digital device. Video game players may be familiar with the technology when they feel a gun recoil, an engine rev, or the crack of a bat meeting a ball.

Small cap Immersion Corporation (IMMR) is big in the sector. Because of my preference for investing in mobile pure plays, Immersion's 1,200 patents, and their position as kingpin in force feedback, the remainder of this article will focus on the smaller organization.

Whether you call it haptic, force feedback, touch feedback, or tactile feedback, the technology is here to stay. Gamepads, joysticks, mobile phones, rotary controls and touchscreens are all beginning to incorporate the science into their products. Haptic effects can be used in alerts, e-mail, games, messages, ringtones, touchscreen interactions, and other user interface features to add information or identification, signal status or message arrival.

Immersion is the company that licenses haptic technologies to manufacturers who use them in products sold under their own brand names. Two examples are Microsoft's (MSFT) Xbox and the SONY (SNE) Playstation. However, it's mobile communications where Immersion Corporation will potentially make the most money. Their licensees in this space currently include Nokia (NOK), Samsung, and LG Electronics. Immersion Corporation is an Android and Windows 8 play. Apple (AAPL) is not part of the equation, although they use haptics in iPhones.

Immersion was founded in 1993, and went public in 1999. Their gee-wiz technology has been around for awhile, but hasn't done much for shareholder value. In 2001, it crossed the tape as high as $60, but has since been cut down to size as investors ran for the exits. It currently sells near multi-year lows at $6.50. In fact, only a month ago it was on death's doorstep selling at $4.15, but was thrown a stock-saving lifeline when it won a patent litigation with Google. The stock rose 50% almost immediately.

It must be noted that the patent litigation with Google only covers Google's Motorola brand of smartphones, not the entire Android universe. Although a battle worth fighting for, the war isn't over where patent infringement is concerned. In fact, it's a big problem for Immersion. Many device manufacturers that include Immersion's technology in their products have cut some corners, and haven't ponied up the money that is owed the company.

I think this a huge sticking point for them, and why the stock has been left unresponsive and unconscious for the past few years although it's been invigorated recently. Vic Viegas is the CEO of Immersion and he addressed the issue during the Q3 conference call:

We believe there have been close to 400 million basic haptic phones that are unlicensed that have been shipped, and it's those phones that we expect to monetize and turn into revenue. But I would say that the more important aspect of our ITC (International Trade Commission) action and the enforcement of our basic haptics is to establish the value of this IP, and generate the ongoing revenue from continued sales of these basic haptics products.

That reference to the International Trade Commission is the border war with Google's Motorola brand which has been already been won by Immersion Corporation. However, I believe the important point in the quote is that there are 400 million haptic enabled phones which may or may not be beneficial to Immersion's top and bottom lines. Forty-four percent of Immersion's revenues stem from the mobile division, and until they can collect on a regular basis, they may continue to take a financial beating. Litigation is an expensive process.

Paul Norris is CFO and right-hand man to Mr. Viegas. He discusses some of the ramifications of the intensive legal proceedings:

It’s always tricky to predict legal expense with a lot of precision given that much of the expense can be a function of the other parties who are participating in the litigation.

Although these legal actions can be a detriment to the company, they can also be a positive in that investors like small business' with deep patent war chests. The recent victory over Google could keep propelling the stock higher. Larger organizations like patent rich companies too, when looking to buttress their own portfolios in the form of a buy-out.

Another thing I like about the company is that it is primarily owned by institutions, 78%, and gets little to no coverage by analysts. Once the sell side community comes back into the fold, the stock may spike higher as initial analyst coverage and upgrades ensue. They say you only get one chance to make a first impression, but the company may be ready for a second act.

Immersion's business is seasonal, with much of the sales being done in the 4th quarter when many smartphones and game consoles are sold. There's also not much of a short float on the equity, only 5.6%, so the street thinks it's fairly valued. Traders may find this a nice entry point. However, I'm more long term in my approach, and my belief is that the company is expensive when we break down the numbers.

Immersion Corporation is projected to break even with earnings the 4th quarter of 2012, but are slated to lose money for the year. According to Yahoo Finance, for the full year 2013, the company is only expected to make $.16/share. That's a P/E Ratio of 40 for the full year with revenues increasing by 24%. That's not an apples to apples comparison, but they are growing incrementally, just like the technology. If revenues were increasing at 50% annually, I'd say that would be a different story.

This could be a well-timed investment if you are looking for a short term trade. Immersion may have the right formula for success as they attempt to re-create the magic that pushed their stock price to $60. However, with the fiscal cliff looming, a Beta of 1.7, a lofty P/E Ratio, and no guarantee of further patent wins, I think this stock can drift back down to the $4 range sometime in the next two quarters.

Nuance Communications: The Epicenter Of An Evolution

On December 6th, Nuance Communications (NUAN) held their Analyst/Investor Day Presentation, and shed a lot of light on their prolific catalogue of products for 2013 and beyond. Artificial intelligence. Voice biometrics. Collaborative filtering. Speech recognition. Predictive models. Tech-savvy terminology like this is peppered throughout the transcript. Although Nuance has established a beachhead in voice recognition technologies, CEO Paul Ricci and his cohorts believe there is a paradigm shift currently underway. This was the crux of the presentation.

Just like investing, speech recognition is less than a perfect science. It's a complex and multidimensional business. Nuance is arguably the top company in the sector. If we peel back the layers to examine the behind-the-scenes processing of Apple's (AAPL) voice generated Siri platform, you'll find Nuance Communications at work. It's undetermined whether iPhone aficionados have completely bought into the technology, but in increments, the science is improving with the advent of intelligent systems. I utilize their Dragon Dictation application on my iPhone, and for lack of a better expression, it works.

Nuance is engaged in three primary markets: mobile & consumer, enterprise self-service, and healthcare. Although I'll be touching on the medical and corporate call center aspects of Nuance's business, the primary thrust of this article will focus on the mobile and consumer division. This is because although all three segments are thriving, it's the mobile and consumer space that is growing the fastest, and may elevate the company to elite status.

Right off the bat, CEO Ricci states that Nuance has a privileged position across most of the leading smartphone platforms in the world. The company is very excited to have cemented a series of agreements with Samsung (SSNLF), and they are going to extrapolate that smartphone leadership position to other connected devices. Most notably televisions, desktops, laptops, tablets, and automobiles. Mr. Ricci expounds on this:

We're going through a paradigm shift. And that paradigm shift is towards more intelligent systems; virtual assistance; interactive systems that incorporate speech, natural language processing; some amount of knowledge domain and reasoning, and that paradigm shift is moving. It was first articulated in the smartphone market is moving to incorporate platforms and products across the mobile consumer and electronics industry.

This computer science is called "Deep Belief Networking", where neural networks are applied to speech recognition and other pattern-recognition problems. In essence, algorithms are utilized to synthesize all of the user inputs on a communications device. Previously, it was cost prohibitive, and the technology just wasn't there. You needed a mainframe to crunch the numbers. However, with cloud computing becoming the norm, as opposed to an outlier, the technology is moving forward. Nuance is putting a full-court press on the science to maximize user experience on multiple devices.

Vlad Sejnoha is one of Mr. Ricci's go-to guys and explains the process:

We try to be efficient about the use of resources to optimize the user experience by tapping into the cloud transparently to the user. So our natural language understanding framework is flexibly distributable across the cloud in multiple devices. This is very important because increasingly, our users expect a continuity of experience across devices. Whether they're interacting with applications on their phone, in the car or increasingly on their TV.

What's happening is that as more and more of your devices are connected to the cloud, the sample size of what your inputs are become much larger, and enables not only the end user, but multiple users to improve the process. This includes not only speech recognition capabilities, but other input procedures like manual data input on the keyboard. Mr. Sejnoha goes on to say:

So among the many input modalities we support is tracing on the keyboard, we call it Swiping, where we use predictive algorithms that map the gestures onto character sequences and also perform autocomplete. As every user uses Swipe, the information goes up into the cloud where it's aggregated and mined and we discover new terms, new language patterns and immediately update the language model for that user.

This is not a half-baked idea. However, we all know that human behavior is not very logical, and although Nuance Communications is making improvements to previous input technologies, instantaneous gratification may not be in the cards for awhile. You still may be frustrated with some of Siri's capabilities. It's a slow motion process. Let's examine the company's three business segments individually to determine what is in store for 2013.

Mobile and Consumer

Mike Thompson is the General Manager of the mobile division. Here are some bullet points as to what the company's strong assets are for their most visible division for the next few years.

• Nuance is at the epicenter of an evolution. Almost all sophisticated mobile devices today are shipping with some kind of capabilities in the areas where Nuance participates. And the outlook for that is only increasing.
• The Mobile and Consumer Division is built on the Dragon family. It's the company's most mature market.
• On desktop, the original Dragon NaturallySpeaking has been historically an aftermarket product. That's changing dramatically. The desktop, laptop, Ultrabook space has converged with mobile phones and tablets. The entire Dragon desktop portfolio is being optimized and driven towards an OEM business. This is a major shift. It'll include embedded technologies and connected technologies.
• We launched Dragon TV in January of this year. We have now shipped 750,000 voice-enabled smart televisions. The best televisions at Costco (COST) or any other retail store, you go to the high end ones, like Samsung Smart TV, those have voice recognition; LG, they have voice recognition. That market is going to continue to grow.
• This is a picture of the cloud. Dragon cloud traffic was zero in 2009, when we launched our first Dragon dictation downloadable application. We have grown to, and done five billion cloud-based transactions since Q1 2010. And we expect that this number will, based on the curve, actually grow even faster.
• We are the only company in the world with the diversity of the following things: we process traffic from IOS, Android (GOOG), RIM (RIMM), Symbian, many, many different flavors of Android.

The mobile and consumer division has growth between 25% and 30% each year for the past four years. It's important to note that back in 2009, they had no connectivity revenue at all.

Enterprise

Robert Weideman is in charge of the enterprise area of operations. Think call centers, or, automated customer service solutions. As Mr. Weideman noted: "You don't want to frustrate customers with speech recognition that doesn't know what you're saying. You also don't want a robotic voice talking back to you.". I thought it was interesting that 60% of all phone calls to contact centers emanated from mobile devices.

Because of global partners like Avaya, Cisco (CSCO), Huawei and Genesys, Nuance is able expand their language portfolios on a worldwide basis. Natural Language Understanding and voice biometrics help the company maintain a lead in international automated customer service. Last year the division achieved 12% revenue growth. Seven percent of that growth was organic.

Health Care

Nuance has established an indisputable market-leading franchise in front-end speech and capture. With physicians, this dovetails into adapting Dragon Medical to take advantage of government subsidies from the HITECH Act. The HITECH Act is part of the US Government Stimulus Plan where almost $30 billion has been slotted to reimburse physicians and hospitals for adopting electronic health records (EHR) in their practices. With a current minuscule market penetration of 10%, the US Government's goal is to equip 90% of doctors with electronic health records by 2019.

Janet Dillone heads the medical division of Nuance. She reports that 2012 had very strong double-digit organic growth, a top-line of $670 million, and a three year CAGR of 20%. This was helped by strong relationships with Cerner (CERN), the largest healthcare IT company in the world, and Epic, one of the fastest growing healthcare IT companies globally.

Conclusion

This was a dense and meaty report. Far too much information to be effectively covered in a few short paragraphs. Nuance's public profile has recently been elevated with the inclusion of Siri in the newer iPhones. It initially goosed the stock, but it has since come down to more reasonable valuations.

Tim Cook, Steve Jobs hand-picked successor at Apple recently nixed Google's (GOOG) mapping application, so continued relationships with Apple are not guaranteed. However, my take is that because of the public outrage from jettisoning the Google app, Apple will probably stick with the technology leaders going forward for native applications. Nuance certainly fits that bill.

I think the planets are aligned for Nuance to make a multi-year run. Just utilizing regression analysis, Nuance looks primed to continue its slow and steady ascent on the stock charts. The going rate for the equity is $22, very close to its 52 week low of $19. The 52 week high was $31. Crunching the numbers courtesy of Yahoo Finance, we can see that its projected 5 year CAGR is 16.5%, and the current P/E is 11.5. On a PEG Ratio metric, that is a bargain.

Velti's Q3: Why The Doomsday Scenario?

Like just about everybody else these days, investors tend to live in the moment. This is probably due to the 24/7 Twitter world we live in, but if you take a step back, you may be less inclined to suffer from investing myopia. Case in point: Velti (VELT).

After reporting Q3 financial results, the security sold off considerably because although Velti met revenue expectations, they were six cents short on earnings. This equates to a loss of three cents a share as opposed to earning three cents. Many large companies beat on earnings, and come up short on sales. For small companies, it's just the opposite. Despite that fact, Velti got crushed, down about 35% to $4.50 the day after the presentation. In addition, the equity has sunk approximately 60% from $10 since the major indexes started correcting in mid September.

According the the Q3 conference call transcript, Velti gave Wall Street what they've been asking for: a solid business plan for lowering DSOs (day sales outstanding). Elevated DSOs caused the shares to sell off last quarter, only to rebound when the company announced they signed a huge yet-to-be-named brand as a client. DSOs for Q3 were 242 days, very high by conventional standards, but an improvement over Q2.

To combat this problem, CEO Alexandros Moukas announced a divestiture of assets in the Balkan countries, select North African and Middle Eastern geographies, and his ancestral homeland of Greece. DSOs in these areas were approximately 450 days, and have heavy capital requirements. The slate will be swept clean in 2013, and DSOs are projected to be under 180 days by the end of the year.

If we examine guidance for Q4, and full year 2012, I believe you are getting a bargain at $3.85/share. CFO Wilson Cheung articulated:

Starting with the fourth quarter, we estimate total revenue adjusted for the impact of our asset divestiture and reduced internal developed software capitalization will be in the range of $97.1 million to $113.1 million, and adjusted EBITDA of $50.8 million to $59.8 million.

From a full year perspective, we estimate total revenue adjusted for the impact of our asset divestiture and reduced internal software development capitalization will be in the range of $270 million to $286 million, and adjusted EBITDA of $68.3 million and $77.3 million.

With 65 million shares outstanding, this gives us a market cap of $250 million. As just stated by Mr. Cheung, revenues are projected to be around $278 million, which equates to a price/sales of under one. This is for a company that is growing revenues at approximately 62% this year, and is projected to be 35% in 2013.

Earnings for Velti are back-end loaded for the fourth quarter. The company will be on the plus side for not only Q4, but 2012, too. Yahoo Finance earnings estimates for the current year are $.60, with $.64 projected for the last quarter of this year. That's a full year P/E Ratio of 6.5. Very reasonable, if not a blue light special. The big problem here is that throughout the year, earnings are very lumpy. Not what pleases the average investor, or Wall Street. However, this is the business billing cycle for the advertising industry.

So why would Velti be selling at a reduced price? A few things:

• Macro Environment: The S&P 500 is down over 10% since early September, taking a majority of equities down with it (Velti is not a member of the index). Issues like the Fiscal Cliff are putting a lot of pressure on the markets, and stocks in general.
• Small Caps Are Out Of Favor: The "risk off" trade is in vogue right now. Dividend paying stocks are the flavor of the month. When the Fiscal Cliff issue is resolved, or compromise from both parties appears to be happening, then the "risk on" companies will surge to the forefront.
• Wireless Stocks Are Out of Favor: When you see a quality company like Apple (AAPL) down 25% in two months, you can infer the wireless sub-sector is the fall guy. The fever has been broken on the companies having anything to do with smartphones and tablets. Velti is a major player in mobile marketing and advertising.
• High Frequency Trading: Selling begets more selling. Fundamentals have very little impact on the trading bots that constitute 70% of all the action on the exchanges. Once a stock gets in motion to the upside, or to the downside, there is a herd mentality, especially with the cyborgs.

Investors got religion over wireless stocks last year, and I continue to believe they will be leaders, as opposed to laggards once the fiscal cliff issue is behind us. I'm betting they will defy gravity, and have placed substantial bets on the sector with equities like Velti. Besides making headway on the fiscal cliff, there two other catalysts that may propel the company forward in the next few months.

Number one is Apple. Apple is like a glowing ember in a dry forest, just ready to ignite the tinder that surrounds it. The same holds true with Google (GOOG) and the Android operating system. If either one of these companies reports business is coming apart at the seams for their handheld products, it may generate a halo effect for stocks that depend on the sale of wireless devices.

The second catalyst would be a confirmation of just who this new client is, that supposedly signed the biggest mobile advertising contract ever with Velti. Twenty-seven million dollars for a two year deal. Velti is holding an analyst meeting at the end of January, and stated they would like to make an announcement there, if not sooner via press release. You can rack your brain guessing who this may be, but it could be anybody.

You won't find stocks like Velti covered in Investors Business Daily because it sells for under $10. Stocks sell for under $10 for a reason: they are dangerous. As an investor, you should be aware of this, and use judgement and caution. I'm more than eager to march in Velti's parade because I believe in the company, and the wireless sector. Even after a really rough day on Thursday, Velti was down again on Friday, so the final capitulation may not be in.

Synchronoss Technologies Tempers Near Term Outlook Because Of Hurricane Sandy

A lot has happened to Synchronoss Technologies (SNCR) since my previous article. Most notably, Hurricane Sandy. According to the November 5th conference call transcript, not only did they adjust their view for next quarter, Q4, but they are not giving guidance for 2013 for the time being. This is because major clients like AT&T (T) and Verizon (VZ) are allocating resources to the clean-up, and restoration of power in the Northeast United States. This is priority one, and well should be.

As altruistic as the majority of us are, we are still dealing with Wall Street, and the projected price of equities. Synchronoss is no exception, and took a hit even after they reported a very good Q3. The security was trading near $23 thirty days ago, but has since slammed on the brakes, and now crosses the tape at $18. Although it provides an important service to smartphone owners, and has a huge potential in cloud infrastructure for Tier 1 carriers, it's selling for less than 50% of the 52 week high.

Before I get into 2013, let's examine some bullet points condensed from CFO Larry Irving in the prepared statements concerning Q4.

• It is our expectation that AT&T will be down slightly both on a sequential and a year-over-year basis in the fourth quarter (it should be noted that Ma Bell constitutes about 50% of revenues).
• We do not believe it is prudent to expect that Synchronoss will achieve the upper end of the guidance range we established prior to the hurricane. Due to this uncertainty, we are providing a wider range than in previous calls.
• This translates into a full-year results as follows. Total non-GAAP revenues in the range of $269.3 million to $273.3 million, representing growth of 17% to 19%. We are now targeting non-GAAP EPS of $1.05 to $1.08.

At first glance, you can see why Synchronoss sold off. However, when doing basic arithmetic on the full year projections, we get a stock that is not selling for a bargain, but at a reasonable valuation: P/E of 18, growth at 18%, and PEG rate of one.

The reasons I believe the stock is under pressure, besides the reduced Q4 guidance, is threefold:

1. The mobile technology sector in which it resides is currently out of favor, which instills negative investor psychology. Just look at valuations of Apple (AAPL) and Google (GOOG).
2. Because of Hurricane Sandy, Wall Street's perception of an additional delay in 2013's cloud infrastructure initiatives by AT&T and Verizon. This is above and beyond the diminished expectations for Q4.
3. The upcoming battle between the carriers (where Synchronoss has an alliance), and the mobile smartphone/tablet companies like Apple, Google and Amazon (AMZN) for the privilege of backing up your smartphone data. Think pictures, videos, music, and text, just like Apple's iCloud.

Regarding the mobile sector being out of favor, I believe it is just a question of time before investors rotate back into stocks like Apple and Google, and the securities that support their portable products. Smartphones and tablets aren't going away soon. The flavor of the last two quarters has been dividend paying, "risk off" equities. My impression is that will soon fade, especially when the fiscal cliff is behind us.

Service Providers like AT&T and Verizon may very well delay cloud infrastructure developments, but it won't be for very long. AT&T already moved ahead with their initial cloud deployment with Synchronoss. At Verizon, Synchronoss made tremendous progress in building out the infrastructure necessary to support the rollout of the consolidated cloud services next year. Another key cloud buildup is over the Atlantic where Vodafone (VOD) and Telefonica of Spain are partners with Synchronoss.

Concerning the turf war between the service providers and the mobile device companies for the right to back up your wireless data, that is an area that could be very lucrative for Synchronoss. CEO Steve Waldis articulates that the basic synchronization, backup, and securing content that they currently excel in is like table stakes. What will really take revenues and earnings to hypergrowth, is by commanding a large market share in the storing of all smartphone and tablet data. This is what the carriers are working on with the company.

According to Mr. Waldis:

During 2012 we have seen the initial adoption of comprehensive cloud platforms, and the fleshing out of carrier cloud strategies. As we look towards 2013, we see carriers moving into production with cloud platforms, fine-tuning their go-to-market strategies, and then ramping adoption. Then in 2014 we begin to realize the full potential of the cloud growth as all the platforms and marketing programs and devices are in place, and at full scale for the entire year.

This will come to fruition if the carriers have their way. However, Apple, Google and Amazon are already there, albeit on a much smaller scale. To the best of my knowledge, what differentiates the carriers from the device makers in their storage strategies, is that carriers will be device agnostic. For instance, if you utilize iCloud, that's just for Apple products. The Tier 1 service providers are operating system neutral, and want to take full advantage of consumers who utilize their "family plans".

In The Art Of War, Sun Tzu said: "The best strategy in war is to win without a fight.". If only it were that easy. This brewing storm between the carriers and smartphone manufacturers is not to be taken lightly. Picking the winners will ultimately lead investors to a bigger bankroll. My bet is on Synchronoss Technologies and the carriers. However, this is not to shortchange Google or Apple, I just think their focus is too narrow. At least Apple's is.

Fusion-IO: It's Not Just About Big Data, But About Fast Data

If you opened up a time capsule going back to my last article on Fusion-IO (FIO), you might surmise that not too much happened regarding share price. After all, the stock currently crosses the tape at roughly $25, and that's where it stood three months ago after announcing a killer quarter (it was their last quarter in fiscal year 2012). That may make sense since revenues were up only 11% sequentially in their most recent report with a lot of expectations for the security.

However, the stock was not stagnant. Just the opposite. It was in perpetual motion. Because of a showstopper Q4, and top notch technology, the Wall Street press has treated this company like royalty. The result was a moving target that topped the charts at $32, only to come back down to what I continue to believe is an inflated level at $25. Although I like the company, especially with a hired gun like Steve Wozniak as Chief Scientist, I still maintain this is a risky equity. Let's examine the 2013 Q1 conference call, and see what you think.

First and foremost, two customers, Apple (AAPL) and Facebook (FB), represent approximately 56% of revenues. Hewlett-Packard (HP) accounts for an additional 14% of sales, which brings us a total of 70% on the top line for just three companies. That is not diversification, although these are premium clients to have on the ledger. Many of Fusion-IO's enterprise end-users fulfill their products through OEM Hewlett-Packard. "Hyperscale accounts" like Apple and Facebook are handled by the in-house marketing staff.

Another item I consider somewhat dicey is that earnings from Q1 2013 were substantially lower than a year earlier. As presented in the press release: "Net income for the fiscal first quarter of 2013 was $3.9 million, or $0.04 per diluted share, compared to net income of $7.2 million, or $0.07 per diluted share, in the fiscal first quarter of 2012.". This may have accounted for the sell-off after the conference call.

Going forward to next quarter, revenue is expected to be flat sequentially. Stock pundits like Jim Cramer use the expression "under promise, over deliver" when describing the low balling tactic some CEO's use to goose an equity's value, but I don't think this is the case for Fusion-IO. Too many times during the conference call, company executives used expressions like:

• A macro environment that by all accounts appears to be growing more tepid.
• Visibility is more difficult in this kind of an environment. And so our customers provide a little less tail, long tail if you will, as to what their deployment schedules are.
• The macro environment is a little more attentive than it was six months ago. And our customers do in essence provide a little bit less visibility in the market. So while we know we're not immune to whatever the macro environment is up to, our solutions are more compelling in a tightening market scenario.

An additional tidbit that makes me wary about near term valuation of Fusion-IO is that revenues are back-end loaded. Full year sales growth for the company is expected to be in the range of 45 to 50%. We've already established that first and second quarters are practically flat, which means they'll really pour it on in Q4. I think that's great for the company, and the market is a forward looking mechanism, but a lot can happen in 3-6 months. What I'm suggesting is that the stock could go lower, not just on macro business conditions, but for company specific reasons.

So what's all the hubbub about the company? Their technology. It is projected to decimate the competition. Their two big clients, Facebook and Apple, are the upper crust of Silicon Valley, and primarily use leading edge technologies to remain ahead of the pack. Like the title of this post suggests, Fusion's software is faster than their rivals, and considerably more cost effective.

They produce an open system that runs on a majority of servers in the data center. With Fusion-IO's ioTurbine, Direct Cache and ION data accelerator software products, they are able to improve the capabilities of storage platforms including HP's 3PAR, Cisco's (CSCO) Blade Server, IBM's (IBM) D series, Dell's (DELL) Compellent and NetApp's (NTAP) ONTAP. In fact, during the second half of the year, recent marketing partnerships with both Cisco and NetApp will further expand Fusion's global footprint.

No stock gets a free pass, and Fusion-IO is certainly not an exception. Just look at what happened to the security after this past quarter when everything seemed copacetic. If we examine some of the measurables as provided by Seeking Alpha, we can see that the short float is 30.4%, forward p/e ratio is 222, price/sales is 5.5, and price/book is 5. That to me is a dangerous stock.

Although a legit company, it is no longer a favorite of the momentum crowd, which may put additional pressure on the equity because of negative investor psychology. Investor psychology can go both ways. My impression is that if you are a patient investor, you may be able to purchase this stock at a more advantageous price.

Glu Mobile Presses Restart After Disappointing Q4 Guidance

Don't kid yourself. Glu Mobile's (GLUU) lowered Q4 guidance is very bad news for the company in the short term, and may weigh heavily on the stock price for a few quarters. This is because Glu and the majority of mobile gaming organizations launch most of their titles near the end of the year. It's the holiday effect. All that Christmas and Hanukkah money for a certain male demographic goes to buying new smartphones, and the gaming apps that go with them.

Although the dice are running cold for Glu, and the stock has sold off to historical proportions ($5.90 52 week high to roughly a 52 week low of $2.50 where it currently trades), I am still long the stock. They remain a growth company in the growth sector of mobile content creation. Smartphones and tablets aren't going away soon, and Glu still remains one of the only gaming pure plays on these devices.

If you are a day trader looking for the big kill, my advice is to seek another security. If you have a longer time horizon, this may be a good entry point for you. However, before you put some money to work, let's look at the Q3 conference call to see what went wrong.

The man in charge of Glu Mobile is CEO Niccolo de Massi. He, along with consiglieri and CFO Eric Ludwig made no attempt of hiding the fact that they were overwhelmed by the degradation of their existing product catalogue. This degradation occurred because gamers tastes have migrated from the solitary arcade style games, to the player vs. player (PVP), or mobile social games.

Glu Mobile honchos saw this change coming over a year ago, and as a result, purchased mobile social gaming company GameSpy in Q2. What management didn't anticipate was that the player vs. player phenomenon would not only be an immediate must for many participants, but a seachange for the entire industry. It's a revolution, not an evolution. Although new titles launches in Q3 were well received by consumers and critics, they exhibited weak average revenue per daily active user. Because of this, Glu's management has altered their battle plan.

A big switch in an effort to monetize, they hired Electronic Arts (EA) and Zynga (ZNGA) veteran Matt Riccetti as President of Studios. Glu has a large global syndicate of operations, and Mr. Riccetti's job will be to oversee production values with an eye on profitability. As the CEO de Masi stated:

We are determined to prevent the reoccurrence of our weak Q3 new title performance. In order to do so and maximize Glu’s long-term growth, I have made the decision to delay five of our Q4 title launches. The delay is to enable our new President of Studios to review and refine the monetization system to his satisfaction. As such by year-end, we anticipate launching only two more titles. The run rate existing Q3 from new title launches has significantly, adversely impacted our prior Q4 expectation.

That quote just about says it all. However, this is not an affront to Glu's executive team. To be fair, it must be noted that Mr. de Masi has a done a tremendous job turning the organization around in three short years. The stock was selling for twenty-three cents in 2009. In addition, Mr. Ludwig has been with Glu Mobile since 2005 under the previous regime. He knows where all the bodies are buried, and has been instrumental in keeping the engine oiled.

When we look at the numbers, the press release for Q3 doesn't look that bad. The disappointing metric is that revenues are projected to be flat going into Q4, and this was the quarter de Masi and his cohorts expected the company to become profitable. CFO Ludwig reports this in the prepared statement section of the conference call:

We are adjusting our full year 2012 revenue and profitable guidance to reflect our updated Q4 expectations. We currently expect total non-GAAP revenues to be in the range of 86.4 million to 87.4 million, which includes 73.6 million to 74.6 million in non-GAAP smartphone revenues. We now expect the adjusted EBITDA loss of approximately 3.5 million to 4.4 million for the full year 2012.

He goes on to say they are not providing any update to 2013 at this point.

John Maynard Keynes once said: "When the facts change, I change my mind". Well, I've changed my mind on Glu Mobile. Although I'm still long the stock, and utilize it as a trade from time to time with the wild gyrations in equity value, I'm not so sure they won't be scooped up by a larger entity. I originally thought they could make it as a stand alone organization. I'm just not that sure now. In whatever unfolds during the next year, I'm confident that management will do what is necessary to increase shareholder value.

Acme Packet Elevates Their Game

The death knell for Acme Packet (APKT) appears to be a bit premature as Wall Street boosted the stock price since their Q3 Conference Call on October 25th. The equity has been punished this year from anemic worldwide enterprise sales, and weak North American Tier 1 carrier spending, which pressured the top and bottom lines. However, the company seems to be well positioned to take advantage of three major growth drivers for their business: enterprise, interconnect, and wireless.

Although they have maintained their global leadership position in SBC's (session border controllers), Acme Packet may have gained the upper hand by recently introducing the Net-Net 6300. Net-Net 6300 is a plug-and-play quad core CPU and memory module that supports one million subscribers, and is capable of handling 200,000 calls at a time. Practically all interconnects among Tier 1 carriers use decades old legacy technology. The Net-Net 6300 is destroying the past as carriers switch to SIP trunking, an area where Acme Packet excels.

To paraphrase point-man and CEO Andrew Ory about the new product:

It improves our capabilities to meet the needs of our customers in three areas: for high-capacity network interconnect between service providers, for large-scale subscriber access environment, such as VoLTE, and for large-scale contact center and enterprises.

There is a near-universal agreement among telecom equipment providers that the North American Tier 1 service provider market continues to be CapEx challenged, and CEO Ory acknowledged this during his presentation. However, European carriers remain a bright spot for Acme Packet. Some of their strongest and most strategic relationships are from the Tier 1 service providers in Europe; large telecommunications carriers like Telefonica Germany.

When we break down the numbers geographically, 49% of revenues come from the United States and Canada, with 51% from the rest of the world. That 51% of sales also includes the Asia/Pacific region, plus South America. So just because Europe is alive and kicking, it doesn't necessarily translate into a banner quarter. For instance, during the third quarter, sales were split 27% to enterprises and 73% to service carriers. Just doing back of the envelope calculations of the revenue breakdown, you can infer it was a tough three months for Acme Packet.

Although they serve over 1,850 customers in 109 countries (this includes 89 of the top 100 service providers, and 18 of the top cable operators globally), they still came up short where earnings are concerned. The Q3 bottom line breaks down to: "GAAP net loss for the third quarter of 2012 was $5.5 million, or $(0.08) per share, compared to GAAP net income of $7.9 million, or $0.11 per share, in the third quarter of 2011 and GAAP net loss of $0.1 million, or $(0.00) per share, in the second quarter of 2012.". Not good.

In fact, if we look at their econometrics provided by Yahoo Finance, we can see that revenues and earnings are only projected to grow 10% in 2013. In addition, earnings growth is expected to be 12.5% a year for the next five years when we view the consensus. This is a far cry from the blistering growth the company experienced from 2006-2011 when it grew at 26% on average. I believe this is one of the reasons Acme Packet disappoints Wall Street. Expectations were ratcheted way too high, and the equity got very far ahead of itself. The security traded at $83 a little over a year ago when everything seemed copacetic. How times have changed.

The reason I like Acme Packet as an investment is that they are replacing outmoded telecommunications systems. Not necessarily annihilating legacy infrastructure, but slowly making the change to LTE (long term evolution) networks.

As Senior Vice President James Hourihan stated:

There's no doubt that all service providers' mobile subscribers, at some point in time, will move on to LTE networks. Why? Because they are going to go out of business trying to run 2 or 3 mobile networks. They need to re-farm spectrum. So it's not a question of effort, it's only a question of when.

The when is a big question, especially since the company is betting the farm on LTE, or more specifically, VoLTE. Mr. Ory agrees with industry analysts that 2014 is when you are going to see subscriber growth rates accelerate. Because the implementation of this technology is time consuming, purchase-based opportunities ought to materialize in 2013. Next year they will probably be back on track, and get back to the positive side of the ledger.

Here are some bullet points provided by company executives from the Q&A session that shed some light on Acme's relationship with VoLTE:

• From an LTE purchase point of view, or a VoLTE purchase point of view, there are very, very few carriers in the world that are actually doing this for now. And one example would be MetroPCS (PCS). And they purchased for several quarters, before they finally had the infrastructure ready to start rolling out that kind of service.
• I don't know whether it's the top 25, the top 50 or the top 100, but these are the service providers that will dominate the spending environment and the subscriber management, of services over the next 5 to 10 years. And our goal is to win as many of those providers as we can, to diversify away from the reliance on 1 or 2, or even a region.
• When people think of VoLTE, and our role in VoLTE, we don't make the application servers. What we do is we secure the application servers and we extend their reach to every single access network, and we provide security at the access network as well as at the peering network.
• Our strategy is very simple, which is to provide the most comprehensive solution and provide the greatest capacity to meet their needs most cost effectively. So oftentimes, when we end up competing, why we win isn't because our element is better than someone else's element. It's usually because our approach is that of a disruptor.

As a countermeasure to the dwindling stock price, Acme Packet repurchased 1.6 million shares for approximately $29 million in Q3. This computes to an average of $18/share. Right about where it now trades. In my personal account, I've been dollar cost averaging shares for six months now, with my cost basis at $22/share. I'm underwater, but my original premise was that I'd double or triple my money in 3-5 years, and I believe I will still do so. 4G LTE is not going to go away, and Acme Packet has the end-to-end technology to make it happen in a secure fashion.

From Bulletin Board To NASDAQ: Who May Be Next In Mobile Apps

Apple's (AAPL) App Store now hosts 700,000 apps with 250,000 dedicated to the iPad. On Google's (GOOG) Android Marketplace, it's 530,000 mobile apps and counting. Most pundits agree that there have been one billion smartphones sold since the launch of the iPhone, and that figure is expected to swell to between four and six billion by 2016 depending on who your source is. Throw in the proliferation of tablets, and you've got an ever expanding universe of mobile applications. The mobile app market is projected to reach 25 billion dollars by 2015.

One company many investors are getting familiar with in mobile content creation is Glu Mobile (GLUU). It's gotten quite a bit of coverage on Seeking Alpha, as well as on CNBC with endorsements on their Fast Money program by John Najerian, and influential tech analyst Dan Niles during regular broadcast hours. Glu Mobile trades in the $3-$4 range, but was as high as $5.90 earlier this year. Its consensus one year target price is $6.78 according to Yahoo Finance.

If you are new to the mobile application space, or to Glu Mobile itself, you may not be aware that the company was far from the up and comer that it currently is. Just three years ago it was a washed-up equity selling for twenty-three cents a share. If you'd had the stomach to buy Glu during those dark days of 2009, you'd have yourself a fifteen bagger.

I've spent a considerable amount of time researching publicly traded mobile app content creation companies that are trying to court the attention of investors. Stocks that have some similarities to Glu Mobile when it began its turnaround campaign in 2009. To the best of my knowledge, there are only two: MEDL Mobile (MEDL.OB), and Bitzio (BTZO.PK). One is an over the counter bulletin board (OTCBB) stock, the other trades on the Pink Sheets. Including Glu, these are the only stocks publicly traded that are mobile app pure plays.

MEDL Mobile:

MEDL Mobile derives its revenues from four platforms: 1) the development of customized apps, 2) the incubation of apps from a library of more than 75,000 concept submissions, 3) the sale of advertising and sponsorship opportunities via mobile advertising networks, and 4) the acquisition of apps. On the surface, this sounds like a diversified organization, but according to its most recent 10-K, 93% of MEDL's total sales are derived from the custom development of mobile applications.

The mobile application landscape is littered with programming and design studios, so there is not a significant moat around this company. However, they have an impressive client list with large entities such as Taco Bell (YUM), Monster.com (MWW), Medtronic (MDT), Verizon (VZ) and About.com. It's nice to have a stable of top selling apps, and it's nice to have a roster of impressive clients, but the only way MEDL Mobile can differentiate itself from privately held companies is with its proprietary "Mobile Brain".

Here is the MEDL's description of this technology:

"Mobile Brain" provides a system and method for characterizing and quantifying a person's interests using a computing algorithm to assign certain lifestyle characteristics and a numerical value to the importance of a particular lifestyle trait. The Mobile Brain evaluates the usage history of every mobile app by each individual user to evaluate the user's interests. The engine then uses the data to develop a dynamic digital portrait of the user in order to recommend other applications.

Although algorithms work exceptionally well for most high frequency trading firms, and a company like Google with its search technology, things haven't fared so well for MEDL Mobile. They were short on revenue expectations this Summer, and stock has been in a race to the bottom of the charts. They are in great need of proper financial lubrication, as the stock has dropped from $1.15/share, to approximately $.20. Right about where Glu Mobile was crossing the tape in 2009. They're up against it.

Bitzio:

I had a long talk with Bitzio CEO Peter Henricsson last week. Spent about forty minutes on the phone with him, and think they may have potential just like Glu did three years ago. In fact, the two companies have similar stories in some respects. Glu Mobile was in a turnaround situation in 2010 when CEO Niccolo de Masi came on board, and began a new vision for the organization. That vision was to go strictly to smartphones, create a quality brand, and implement the freemium distribution model. So far, the strategy has paid off handsomely for Glu.

For the past year, Mr. Henricsson was working behind the scenes at Bitzio in regards to strategy, and during the Summer, adjusted the company business model. After investing a considerable personal sum in the corporation, he took over the helm. His background is in the mobile infrastructure space, so he has executive experience. The battle plan is to acquire licenses to existing fan bases, make quality apps for them, then monetize the apps. Bitzio will initially utilize a freemium model which will make money from additional add-ons to the applications, just like Glu does.

The first organization that Bitzio has partnered with is the NFL Players Association. They are set to release a trivia game where NFL fans compete against each other. This is a similar sounding story to other mobile games, but the NFL has 180 million rabid fans. Not all fans use smartphones, or play trivia games, but this is Bitzio's targeted marketing strategy. It is a joint venture, and the licensing rights are free in the partnership. Financially, it's a 70/30 split, where Bitzio gets 70% of the revenues, and the NFL Players Association get 30% - after the Apple and Google app stores take their cuts.

Mr. Henricsson explained to me that they have considerable business contacts, not just technology relationships, and are hitting the bricks to partner with additional athletic organizations. He didn't give any specifics, but you can infer that NASCAR, Major League Baseball, The National Basketball Association, English Premier League Soccer and sports like Cricket may be in the works. New licensing partnerships may be announced in the next few months.

Another part of Bitzio's business plan is to take advantage of the cult of personality that pervades our society, and make applications for entertainment stars with large fan-bases. For instance, recording artists rely less and less on audio sales, and make a considerable amount of money in merchandising. Bitzio custom made apps will connect stars to their rabid fans. Bitzio recently announced a partnership with ROAR, a Los Angeles based talent agency that also has a stake in the company.

Because Bitzio's existing apps have been downloaded 45 million times, they have a proven track record in development and design. Recent acquisitions of app development studios Knucklehead and ACT Software, as well as animation studio Motion Picture Corporation, gives them the talent and studios to produce everything in-house. Maybe fortunes are changing.

Conclusion:

Both Bitzio and MEDL Mobile trade for under twenty-five cents. If you are thinking of economizing, and purchasing a small stake for a quick killing, buyer beware. There's a reason they trade for a quarter. Twenty-five cents can fall to twelve cents. You may think you're not losing much, but that's 50%. They are small, unproven business' that happen to reside in an explosive growth sector. This doesn't mean they will succeed.

Investing in stocks for under $1 is out of my comfort zone, but you may feel differently. They both have a toehold in the mobile app space, but they're always on the fringe of going private, going bankrupt, or going nowhere. They could also be scooped up by a larger entity, and you'd make money in a heartbeat.

Both stocks have extremely low volumes which makes it difficult to get in and out of positions if you are a day-trader. Always use limit orders with any stock, but especially these two, or any bulletin board security. If I had to pick between the two, I'd invest in Bitzio. My personal preference is to stick with a proven winner like Glu Mobile. If either Bitzio or MEDL Mobile start to execute, I'd rather buy them for a buck than pennies on the dollar. .

Glu Mobile: The Only Game In Town

It's no secret we're experiencing a seachange in personal computing as people migrate from PC's to tablets and smartphones. By no means is the personal computer dead, but growth has diminished to a trickle, and that's being generous. Technology bellwethers Hewlett-Packard (HPQ) and Dell (DELL) have experienced tremendous pricing pressure on their shares as a result.

The question remains, where do you want to invest to take advantage of the proliferation of handheld devices? The most obvious answer is either Apple (AAPL), or, Google (GOOG) with the iOS and Android operating systems. However, they are large cap equities, and although their runs may not be over, they have become very large organizations where market capitalization is concerned.

My preference is to take advantage of the smaller content providers, the companies that supply the applications for the new wave. Enter Glu Mobile (GLUU), one of the leading game application developers for portable devices. In fact, you'd be hard pressed to find any other publicly traded pure play on the major stock exchanges. I had the opportunity to interview Eric Ludwig, mobile industry veteran and CFO for Glu Mobile. The interview was coordinated by Glu's Communications Director Jason Enriquez.

Here is the paraphrased conversation I had with Mr. Ludwig:

Question: Earlier this year, you released a game in several different languages. Is this going to be a continuing strategy for Glu Mobile with additional titles? How does this work in regards to the development team? Do you have to reprogram the entire game, or just the audio? How does this help your bottom line from an R&D perspective?

Eric Ludwig: We've been localizing from the earliest part of this year in numerous languages. It's not really audio. Most of the localization is textual based. The way we develop our games is we have our language files and look-up files, so it's relatively easy for us to add multi-languages for our games. So in that respect, the incremental work for us to get five or six or seven languages within our games is a diminuimus amount of extra work.

Obviously, having localized content is a benefit for countries where both English speakers, and foreign speakers that have English as their main language. This is countries like Japan, Germany, China, France, Spain, and Korea. They'll be served up the English version of the game, but if they have their settings set up to a language that we support, then they'll be served up the game in the local language.

Question: How do you determine which games to distribute internationally?

Eric Ludwig: Little Kingdom was our first foray in Q2, and now all of our titles on a prospective basis are being localized to some level in several languages. We're doing anywhere from four to eight languages per title. In some cases, it may be one or two languages that launch, and then the version 1.1 will be updated.

Question: I know you have development studios all over the globe. How do you determine if you are going to develop a game for a country like China, how do you determine what the tastes are for that particular county?

Eric Ludwig: We've been in mobile for eleven years, and it's been clear to us that the opportunity costs, the ROI, really is not there to do a country specific title. You won't see us doing a Chinese only title for China. Our title roadmap, even though we have studios in many countries such as China, India, Canada, Brazil, Russia, and the United States - even though we have those locations, we develop titles that can ship globally.

Our primary distribution channels are global app stores, Apple App Store, Google Play App Store, Amazon App Store (AMZN). These are distribution channels that we can publish one time, and can be distributed across the globe.

Question: It is well documented that China is going to be a much larger mobile market than the United States. How does China, or even India fit into Glu Mobile's plans?

Eric Ludwig: In our studio in China, we have two to three development teams that are creating games that are heavily influenced by the Chinese gaming market. We just recently announced and launched Eternity Warriors II which was developed in our China studio. It has a very similar game play experience as Asian games.

China is a big opportunity for us. We've been in China over five years, and we have over 100 people in Beijing developing and supporting games for the Chinese office. If you look at the Chinese Apple App Store on pretty much any given day, we'll have three to have five of the top 100 grossing games on there.

Question: You recently acquired GameSpy Technology to buttress the Glu Mobile social gaming and multi-player experience. How do you foresee this new addition in helping the Glu Mobile brand as you move forward in not only the domestic, but the international markets as well?

Eric Ludwig: We're very excited about GameSpy. It's a business we picked up for virtually for free. We paid 2.8 million in shares for it. It came with $900,000 in cash. It came with $1.3 million in accounts receivable that we will collect. It came with $500,000 of net book value assets which were 500 servers and a data center. So we essentially got it for free. Very pleased with that, and a business that is very core to our strategy. Glu has historically been closer to a single player freemium gaming company with some experiences in multi-player and experiences social gaming, but they weren't at our core, social gaming and async or sync PVP (player vs. player).

GameSpy has been around for twelve years. They've been supporting console and handheld games to do sync and async, player vs. player, co-op and competition mode, voice chatting, text chatting, and leader boards. We think they going to be a fantastic opportunity for us to integrate them into our roadmap at the end of this year, and next year, as we add more PVP and social mechanics into our games.

Question: Is there much of a language barrier in multi-player games, or is it all visual and a gamer in Hong Kong will do battle with somebody in San Francisco or London?

Eric Ludwig: One of our fist steps into multi-player would be a game like Indestructible which we launched about two weeks ago, high graphics, 3D, fully real time multi-player where four people are in an environment playing together. That game has no texting or chatting during the game. It's all real time multi-player. It's all visual in that regards. The instructions within the game itself, if you are Chinese you will be seeing them in Chinese, and if you an English speaking player, you will be seeing them in English. It's unknown to the other players which language you prefer. It's all visual.

Question: The new iPhone 5 has a much larger screen than earlier versions. Does this effect the way you develop games, such as having to increase the aspect ratio, or does the utilization of vector graphics mean it's one size fits all?

Eric Ludwig: For the last two year all the games we've shipped since we've started our freemium model, everything we do is developed for the largest devices, the iPad. More recently when the iPad came out with retina display on the large sized screen we supported that at launch as well. The fact the iPhone has gone to a larger screen with retina display is no extra work for us. We just shrink down the retina display build from the iPad to fit the iPhone retina display, so there is no incremental work for us. They are optimized for the larger screens with the retina display.

Question: There's been an explosive uptake in tablets the past year and looks like it's going to keep growing. How do tablets figure into your overall growth story?

Eric Ludwig: We're a two screen company today, the phone and the tablet. What's great about both of them is that they are two separate and unique markets. There are 5 billion phones out in the market today, and only one billion of them are considered smartphones. Most people replace their phones every two to three years, so we are seeing a large upgrade cycle from one billion to multi-billion devices forthcoming.

In addition to that, tablets are companions to phones, they're replacements for laptops and PC's, not cannibalizing phones. They are just in the first inning of growth, and that's the second screen for us. Since tablets came out two plus years ago, we were there at the launch. Our games are optimized for these devices. For Glu Mobile, our focus is on very high end graphical content, which we think is becoming more and more important. Because of that, our games look phenomenal on the bigger devices.

Question: Does NFC (near field communications) capabilities in some smartphones pose an opportunity in your overall plan? How so?

Eric Ludwig: We were a launch partner with Google, as we are with most things Google, on their Google Beam technology which we announced last February at the Mobile World Conference in Barcelona. Yes, we know how to, and will support NFC. However, in mobile until there is large user adoption, we are not going to be bleeding edge. Doing an unimplemented, no user base adoption is not in our immediate plans. We really need to have large user bases before we go all in to adopting a new technology.

Question: Both Apple and Google have their sights on the home with speculated Android and iOS televisions. From what I understand, they would let you use applications on flat screen HDTVs. How would the advent of say an Apple TV effect your overall game plan?

Eric Ludwig: Today, if you have an Apple TV with a 60 inch screen, given that all of our games are developed for the iPad in retina display, you can play all games from the tablet on the 60 inch television. Remember, an iPad with retina display has more pixels than the 60 inch television. So already all of our content looks fantastic on that TV. Once they figure out what the gaming controller for the Apple TV and Google TV will be, and the delivery mechanism will be, you can certainly expect Glu to be a third screen company.

What's great about Glu's content versus some of our other public social/mobile gaming competitors is that there are some games that are asynchronous, player vs. player as in some farming games, and some other games that are attuned to you playing by yourself with your friends in a remote location. With our content, even our single player games, and especially our multi-player games, they are very well situated and created to have say three buddies sitting on a couch with your tablets in a living room. Our games are created for a same room multi-player environment.

Question: What do you think the gaming environment will be like in two years from a Glu Mobile perspective?

Eric Ludwig: It's no secret that there is going to be a battle for the living room like there is a battle for the smartphone and tablet today. What's great is that we are deep partners with Apple and Google. As they take their brands, storefronts and technologies to other opportunities, we'll certainly be there to support it.

Two years is a long time in mobile. Mobile nowadays is advancing at the speed of Moore's Law, where hardware is doubling every 18 months in the terms of computing power. A very important theme that Glu has been talking about for over a year now is that the networks are not evolving that fast.

We've been very vocal over the last year that HTML5 was not going to be the panacea of gaming. We did not put a lot of investment there. When Mark Zuckerberg and Facebook (FB) come out and say they spent too much time on HTML5, and over invested there, I think it validates our way of thinking.

We certainly see us buying GameSpy as having us focus on social connectivity. Glu has already pushed the envelope as far as we probably need to in the short term on high end graphics visuals. Whereas most of the social mobile gaming competitors we have are primarily in 2D.

To where I see the opportunity for Glu is to maintain our visual prowess, but focus on monetization, focus on social virality leveraging the games by technology. We already have scale on development teams, and we have scale on 3D graphics where we think the market is going. That will set us up for success.

Conclusion: Warren Buffett once said: "I'd rather have a good company at a fair price than a fair company at a good price.". At $4/share, I believe you're getting a fair price on a good company in Glu Mobile. It's trading right in the middle of its 52 week range of roughly $2-$6. Although Glu isn't profitable right now, you're paying for future growth. Average analyst estimates for 2013 is $.18/share. Sales growth is expected to be 35% next year, and this is in a market that is ready to take off. If you want to bet on the future of mobile gaming, this may be your best bet.

I Fought The Law (And The Law Won)

"Just because you have the monkey off your back, doesn't mean the circus has left town." - George Carlin

Experienced investors will tell you: "Don't fight the FED". I fought the FED for over two and a half years and paid the price. After the market crash of 2008-2009, I got short the market with leveraged ETFs because I truly thought we would revisit the lows during the dark days of four years ago. Things didn't work out as planned.

I took my best shot, and also took a bath with an expensive investing lesson: historically speaking, stocks go up two out of three days. To say I don't regret my decision of sticking with my short positions would be a false statement. What's done is done. I'm on to other endeavors. Most specifically, I'm trying to take advantage of the nascent wireless broadband revolution by investing in anything that is involved with smartphones and tablets: applications, facilitators and infrastructure plays.

In the six months since I began putting my money in long positions, I'm slightly underwater. No beef on my part. Although the market has seen gains since early March when I began to dollar-cost-average with concentrated portfolio selections, the stocks in my possession have rotated out of favor for the likes of risk-off, or dividend paying securities. This may soon change if technology stocks come back in vogue for the third and fourth quarters as they historically do. What I would like to do now is offer a summary of my buys and sells the past six months and see where I stand.

Facebook (FB): I think today's Barron's cover story, "Facebook Is Worth $15", says it all. A lot of smart people priced the Facebook IPO at $38, only to see its world turned upside down a few months later. It crossed the tape at $18 two weeks ago. The brain trusts on Wall Street can't be that wrong. I picked up the social media giant at $19.15, and will keep a close eye on it because I really don't use the service although a billion people are really lapping it up. Facebook has rallied nicely the last two weeks to $23. If they can figure out how to monetize their mobile application, it can double in two years.

Sequans (SQNS): I took a sizable stake in Sequans last March with an average cost of roughly $2.50. The producer of 4G LTE semiconductors lost a considerable revenue stream when a significant customer stopped manufacturing WiMAX phones. Since new initiatives in 4G LTE won't come to fruition for a few more quarters, I decided to sell my shares when the equities price dropped to $1.80.

I usually hold securities for a long time horizon, but with the price dropping so much on a percentage basis, and the fact Sequans is not making money at this juncture, I have decided to keep them on my watch list. If an opportunity presents itself after the first of the year, I would be inclined to purchase more shares. They have many solid relationships in Indonesia and China.

Glu Mobile (GLUU): Glu Mobile's business plan fits perfectly into my investing philosophy for the smartphone/tablet space: platform agnostic, internationally positioned content provider. I've maintained a long position in Glu from the get go, but have also been trading the equity when it gets to be too large of a position in the portfolio. I've used the profits to add to other stocks on the menu that have been under pressure.

I'm not a gamer, so it's difficult for me to get excited about Glu's stable of freemium mobile games. However, this is a well managed organization, and is in turnaround mode. There's a lot of buzz on the street about this company, so investor psychology may play a big role in propelling this stock higher around New Year's. I sold half my position when it rose 40% in three months, then added more shares when it sold off, so I'm basically back to my original allotment. My average cost is $4.80.

Acme Packet (APKT): Acme Packet is the global leader in Session Border Controllers (SBC), but its share price has been decimated from weak European and North American telecom operator demand. Originally, I purchased the bulk of my shares at $25, then bought more when the price dipped to $18. On a trailing twelve month basis, the stock is sill expensive at around $19. In fact, going forward into 2013, it's still not a bargain.

However, I like the management of Acme Packet, they've got a spic and span balance sheet, and great prospects going into 2014 and beyond. They are a major player in VoLTE (voice over long term evolution) which is the future of telecom. I plan on accumulating more shares during 2013 if the price is still depressed.

CEVA (CEVA): CEVA is the global leader in DSP (digital signal processing) semiconductors. They basically licence their technology to other chip manufacturers like Broadcom (BRCM). I was surprised they didn't participate in the halo effect after the launch of Apple's (AAPL) iPhone 5. According to their latest conference call, they expect a significant reduction in inventory going into 2013, which may goose the stock in the 4th quarter.

I bought in at $22, and added additional shares at $15 where is currently crosses the tape. It's selling at its 52 week low. Its high was $34.50. They have a significant part of their portfolio in 4G LTE technologies. I added to my position when I sold Sequans, and my average cost is $18.50.

Velti (VELT): Velti resides in a sector that is a place of potential combustion: mobile marketing and advertising. They've got a tremendous amount of competition with the likes of Google (GOOG), Apple, Millennial Media (MM), and a slew of smaller firms. Everybody is at each other's throats. It's survival-of-the-fittest. However, Velti is the only international pure-play in the sector which is why I'm banking on it.

I've overloaded the portfolio with shares of Velti because I believe it has the greatest potential for price appreciation in their sector. It's cheap on a valuation basis with a P/E of 13, and a growth rate of 30%. If it can reach a PEG Ratio of one, the stock could triple in the next year, if not sooner. I originally bought my shares at $12, then added a significant portion at $6.50. As of this writing, I'm treading water with this investment.

Synchronoss Technologies (SNCR): The secret weapon for this company is that they are invisible to the millions of smartphone owners who check their e-mail, sync on the fly, and upgrade to newer mobile devices among a slew of other things. You've got to be able to take a punch in the fickle world of Wall Street, and that's exactly what's happened to Synchronoss this year. The stock was trading near $40, only to be knocked down to $18 because of concerns that they rely too heavily on AT&T (T).

Well, they do a significant amount of business with Ma Bell, but that may be in their favor with the recent release of the iPhone 5. AT&T is Apple's largest carrier and customers are upgrading in droves if early reports are any indication. Synchronoss is also branching out by doing business with Vodafone (VOD) and Verizon (VZ). The stock now trades near $25, right about my average cost per share. I expect big things from this company in the next few years.

SUMMARY

Like all investors, I am expecting my stock selections to increase in value during the next 3-5 years. That's my usual holding period. However, sometimes an equity gets so far ahead of itself that it's time to take some profits. Primarily, I prefer to keep a stock for over a year to take advantage of capital gains laws, but sometimes you just have to sell like I did with some of my Glu Mobile shares earlier this year.

I'm not so sure buy and hold investing is as dead as many pundits are predicting, especially as we enter a new phase of technology development, the buildup of Web 2.0, otherwise known as the wireless broadband revolution. If the market doesn't crash again, we may very well be in another era like the PC proliferation in the 1980s. My decision to invest in a concentrated portfolio isn't what financial planners recommend, but I believe it's my best way to take advantage of the explosive growth in smartphones and tablets we are experiencing.

Demystifying Some Aspects Of Acme Packet's Business

Acme Packet (APKT) is the undefeated world champion in session border controllers (SBC) which act as traffic lights for the Internet's backbone. If you're not a computer scientist or an electrical engineer, investing in the technology sector can be a confusing endeavor; not only for retail investors but for experienced buy side analysts, as well. I've been writing about Acme Packet for a year and a half now with the help of research reports, conference call transcripts and on-line trade journals, but still, some questions about their technology remain unanswered.

Most specifically, two relationships they have with Broadsoft (BSFT) and privately held Aicent are a bit cloudy to me. I took the opportunity to contact the company, and they were very helpful in filling in the blanks. Julia Dunlea (in media relations) coordinated this effort, and Kevin Mitchell, Acme Packet's Solutions Marketing Director fielded all of my inquiries. Before I begin, just some background on the interview process. I submitted all of my questions via e-mail in the form of a questionnaire. They were promptly returned and I am reporting the Q&A session verbatim.

Ted Stamas: I'll start with Broadsoft first. All I know about the company is that it is a cloud company in VoIP. I realize that your two companies offer an integrated platform that allows key operator services over VoLTE. My question is, what are these operator services? Is it services like caller ID and call waiting, or something else?

Kevin Mitchell:Acme Packet and Broadsoft have a lengthy history of working together to deploy VoIP infrastructure so service providers can offer consumer and business hosted IP voice and unified communications. Building on that track record, we announced a joint solution based on Acme Packet’s core IMS platform and BroadSoft’s application server suite. The combined solution, company experience can vastly simplify the transition to all-IP networks, streamlining the overall architecture and result in capital and long term operational cost savings.

The services involved are all voice and interactive communications in the all-IP world of LTE and fixed broadband. Voice, caller IM, messaging, video chat, multimedia collaboration, fixed mobile convergence and more.

BroadSoft sells both software as well as a cloud offering to service providers.

Ted Stamas: How long have you been working with Broadsoft?

Kevin Mitchell: Our companies entered the VoIP world around the same in 2000 and have worked together closely since inception.

Ted Stamas: With this partnership with Broadsoft, who is your competition?

Kevin Mitchell: For the most part, it’s the big, expensive, slow legacy telecom manufacturers that bring over engineered solutions to market.

Ted Stamas: With this particular relationship with Broadsoft, where do you see the overall market going in two to three years?

Kevin Mitchell: All service provider networks are moving to a pure IP environment. IMS is one such flavor of the communications service environment in that all-IP world. Together, Acme Packet and Broadsoft can address all communication network needs.

Ted Stamas: Finally, do you have any idea what share of the market your recent joint venture has? I know you are the worldwide leader in SBC's, but what about in VoLTE?

Kevin Mitchell: Our SBC leadership extends across all aspects and applications of VoIP and IMS and Broadsoft is a global leader in voice application servers. Acme Packet is involved in over 150 IMS projects globally and roughly 30 VoLTE engagements. VoLTE is nascent, but deployment plans are increasing.

Ted Stamas: Now I'll concentrate on the recent Aicent announcement. Again, in layman terms, what does this relationship with Aicent do in regards to technology?

Kevin Mitchell: Aicent is a carrier’s carrier. They connect service providers around the globe to enable end-to-end communications. This includes voice and data roaming and international phone calls. How LTE voice and data sessions will work while roaming is critical to smoothly transitioning mobile communications to the 4G era and satisfying subscriber expectations.

A major issue for LTE roaming is that the underlying technology is IP, a fundamental difference from 3G and relies on specialized signaling called Diameter to enable connection to and use of the network. As communications transition to these IP networks, service providers face new challenges to build reliable roaming architectures that include interoperability, routing, and security. Our solutions solved those problems for Aicent.

Ted Stamas: I noticed in the press release that Aicent does business in China with China Mobile (CHL) and China Unicom (CHU). Is this a potentially new geographic market for Acme Packet?

Kevin Mitchell: Acme Packet has over 1700 customers in 109 countries. We have long standing customers in China Telecom and China Mobile and many others in the Asia Pacific region. While this is not a new geographic market for Acme Packet, the Aicent relationship broadens the types of customers we serve in that market.

Ted Stamas: Why would investors take notice of this partnership with Aicent? Without getting into specific numbers, is it a potentially lucrative market?

Kevin Mitchell: This is a concrete example of helping service providers accelerate the move to all-IP. This particular solution is a combination of our SBC and a similar product called the Diameter signaling controller that provides security, routing, and interworking for Diameter signaling. Together our solutions are providing essential control functions for the two major signaling protocols that underpin all services in the LTE and IMS.

Ted Stamas: Who is your competition in this sub-sector?

Kevin Mitchell: In the wholesale carrier/roaming hub market, we individually compete with other SBC and DSC vendors, but there is not a single vendor that can provide the combined solution.

Ted Stamas: I've read your last five conference calls, so I've got a good idea where your company is going in regards to wireless. However, how will the smartphone and tablet space benefit or be useful to your business?

Kevin Mitchell: Service providers face an influx of more: devices, connections, sessions and data. To effectively monetize this demand, session delivery networks are critical for service providers to build. We help service providers do that and successfully enable the all-IP evolution.

Conclusion:

Acme Packet's share price has experienced a nice run the past six weeks since my last article. You can find fundamental evaluations there, if you are so inclined. At the time of that writing, the stock traded at $15 and now hovers in the $18 range. Granted, the market has experienced a concurrent run, but this is not the year of Acme Packet.

In fact, it's been a tough year for shareholders. However, to use a timeworn investing expression, "It's not where the stock's been, but where it's going". They've built a better mousetrap, and with solid management, a squeaky-clean balance sheet, and a bird's eye view of the next five to ten years, this stock is one I'm personally betting on. I'm a firm believer of the wireless infrastructure buildup, and Acme Packet doing a significant amount of the behind the scenes heavy lifting.

Again, I'd like to thank everybody at Acme Packet for making this interview possible.

Tweets: One's Too Many, A Hundred's Not Enough

My new toy the past month has been a Twitter account. I find it an invaluable asset in my investing toolbox. You get front-page news the moment it's released on the companies in your portfolio, and on your watch lists. A lot of raw talent went into programming the top grade software that Twitter offers. I can see why some investing pundits think it may eventually dethrone Facebook (FB) as the top dog in social media.

Google (GOOG) just released a study on consumer interactions with multiple screens. Mobile Marketer writer Lauren Johnson analyzed the study, and reported 66 percent of social media access begins on a smartphone. We live in a Facebook and Twitter world now, and when you amalgamate them with your handheld devices, you've got a powerful weapon in order to stay ahead of the barrage of information that comes your way each day.

My belief is that for buying and selling securities, Twitter is more beneficial to long-term investors as opposed to short-term speculators. Short-term traders are at a disadvantage because by the time you execute an order based on a Tweet, some algorithmic robot has already beaten you to the punch. For investors with a longer time horizon, Twitter is just a great way to aggregate and store information. Based on some recent statistics, others feel the same way, too.

Wednesday's eMarketer report states that Twitter will beat Facebook in U.S. mobile advertising revenues this year. Here is a chart from that article:

If you look at the chart carefully, you can see that Facebook is projected to surpass Twitter in advertising next year and beyond. Facebook has been late to monetize their mobile strategy, but are gaining ground fast. It should be noted that eMarketer is a Facebook bull, and only recently decreased their total sales estimates for the company for 2012. However, there is little doubt that marketing and advertising as we know it is changing in the portable digital universe. I think there is room for both social media companies.

According to the report:

The increasing focus on mobile by both Twitter and Facebook, as well as other major digital advertising publishers, will contribute to growth in the overall US mobile advertising market, which eMarketer estimates will reach $2.61 billion this year. By 2016, the US mobile advertising market is expected to near $12 billion.

This 5.5x growth in mobile advertising in four years is something that both Facebook and Twitter want to capitalize on. With GPS chips in handheld devices, a concept called geofencing comes into play. Wikipedia gives us this description:

A geofence is a virtual perimeter for a real-world geographic area. A geofence could be dynamically generated — as in a radius around a store or point location. When the location-aware device of a location-based service (LBS) user enters or exits a geofence, the device receives a generated notification.

In other words, companies that utilize this technique can offer coupons and discounts to shoppers in their general vicinity that would be more prone to buy their goods and services. This is very valuable to advertisers. Rimma Kats of Mobile Marketer recently wrote an article on the subject. Here are some quotes from her interviewees:

• Dave Martin, senior vice president of media at Ignited: “Knowing that someone is within 500 feet of a client’s point of transaction might make them worth 10 times more than someone sitting behind their desk at work or at home watching TV. Mobile is no longer optional.”.
• Chia Chen, senior vice president and mobile practice lead at Digitas: “Over the last 6 months, mobile has become an urgent and strategic priority for many of our clients.".
• Harald Kruse, east mobile lead and senior strategy manager at Razorfish: “Another challenge is bringing advertisers further along the mobile learning curve to communicate their message in the mobile medium. Current research is showing that consumers will respond to advertisements on mobile, but also that they want ads to be more relevant to the time, place and context of when they see it.".

As some of the quotes state, we want it here and now. No more latency in our lives. I made a wrong assumption not too long ago in thinking social media was just a teenage and twentysomething phenomenon. Not so. I'll leave you with a chart for something to think about if you are of the age to be skeptical about Twitter and Facebook.

Enough said.

Facebook: Can 543 Million Mobile Users Be That Wrong?

The big sport these days in the financial blogosphere is to kick dirt on Facebook (FB). In-your-face messianic ranting about including a do-not-resuscitate clause in their corporate charter can get on your nerves. After all, these were the same scribes that considered it a showcase trophy, the cream of social media not too long ago. Although there has been significant damage, to the stock and to the company, I believe this is a superficial wound.

I can understand some of the anger, but can't empathize or sympathize with individual investors that got taken to the cleaners. Investing is a risky game, even for experienced professionals. There were far too many stories of retail investors placing large bets on Facebook, hoping to make a killing, like it was 1999 all over again. Those days are over. I don't want to point a finger, but your money was hijacked by a Wall Street that for lack of a better word, is rigged.

Taking a more cautious approach, and investing from a value perspective is more my style. However, growth at a reasonable price is nice, too. I try to stay away from impulse buys, like recent IPOs, but sometimes from a fortuitous set of circumstances, I'll stake my claim. This is what happened last week when I picked up some shares of Facebook at $19.15. Facebook is not priced at bargain basement levels, but it also doesn't sport back-breaking valuations. For more information about Facebook's econometrics, check out my last posting about the company.

To fund my purchase of Facebook, I once again trimmed back shares of Glu Mobile (GLUU). I'm riding with Glu Mobile for a the long haul, but it's got a big fan base of day traders which inflates the price on occasion. I tend to trade this stock as well as keep a significant amount of shares for investment purposes. Recently, Glu Mobile started rising again, and didn't get too far ahead of itself, but I saw considerable short term appreciation potential in Facebook. I took the opportunity to put the money in the social media giant which could double in a year, if they get their mobile advertising business cooking.

Facebook has over half a billion active members utilizing their mobile application. It's the biggest mobile app worldwide. The problem is how to monetize those users. In a recent article about the lack of mobile advertising, reporter Mark Walsh writes:

One of the memes to emerge from Mary Meeker's influential Internet trends report this spring was that we spend about 10% of our time with mobile, but the medium only commands 1% of U.S. ad dollars. It's since become a rallying cry, in effect, for proponents of higher ad spending in mobile.

You can see that it's not just a Facebook problem. Most companies are trying to understand how best to reach the lucrative demographic of 15 to 35 year olds. Those are the ones that spend 10% of their Internet time with mobile. In my opinion, that percentage is just going to grow as tablets take market share from desktop and laptop computers.

Facebook is a phenomenon in the developed world. For instance, they have very little presence in China, just like Google (GOOG). Let's listen to what Fortune writer Karsten Strauss has to say in a recent post:

China is not afraid to be stubborn about which websites it allows its citizens to access. According to Wikipedia, over 2,600 websites are banned in the nation, including certain Google products, YouTube, Twitter and WordPress...While Facebook is being kept out of Chinese markets, two social networks operating within the “Great Firewall of China” have impressive chunks of market share: Renren (154 million users) and Sina Weibo (300 million users).

I believe Facebook will eventually have to be address this issue in both the desktop and mobile arenas. If they don't, they are ignoring a tremendously potential revenue stream. After all, Facebook's mission is total world dominance, and not generating significant sales from the PRC is going to hurt the top and bottom lines.

Although I'm investing heavily in the mobile sector, I don't use Facebook, or play the freemium games that Glu Mobile produces. It's more of an age appropriate issue. I'm not in the demographic that both these companies covet, but as they lay out their business plans, it's clear to me that their leading positions in mobile could boost my portfolio. Both of these companies have gotten off on the wrong foot since they began trading publicly. Glu Mobile is a turnaround story, and Facebook is the story of 2012. If both of these entities don't have significant upside a year from now, then I'm the dumb money.