From Hero to Zero, Can This Stock Reclaim its Mojo?

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s been close to three months since I initiated an outperform CAPS call on Glu Mobile (NASDAQ: GLUU), and an appreciation of close to 19% since then is what makes me satisfied. At that time, shares were trading at massively beaten down levels after Glu had lost its wheels. However, it looked like an opportunity and it’s safe to say that it indeed was.

But, shares of Glu tripped once again after the company reported first-quarter results last week, declining around 6.6%. Glu Mobile actually beat estimates, but I won’t be reading too much into it since the company itself had called for a lower guidance and estimates were lowered accordingly over time. But what needs to be noted is that Glu is no more growing as it used to in its halcyon days.

From bad to worse

In fact, the company’s revenue declined in the previous quarter, which is a first that I've seen since I started covering it. Non-GAAP revenue slumped 12% to $19 million, while smartphone revenue, which used to be an eye-catching feature in Glu’s reports, is no more growing. Moreover, the bottom line went deeper into the red as Glu reported an adjusted loss of $2.3 million, or $0.03 per share, from a loss of $0.5 million, or $0.01 a share, in the year-ago period.

If this doesn’t paint a very rosy picture, then the outlook will make things worse. It expects non-GAAP revenue between $16.5 million and $17.5 million, behind the consensus estimate (Yahoo! Finance) of $18.9 million. This would translate into a revenue decline of almost 30% from the prior year period. A miss on the bottom line is expected as well, with Glu expecting a loss of $0.06 to $0.07 per share, again behind the consensus estimate for a loss of $0.05 a share.

Losing focus?

In this way, a company which I’d expected to benefit from the growth of mobile gaming is on the decline. But what led to this, given mobile gaming is still growing and is expected to continue growing? Well, in my opinion, poor management seems to have taken Glu down. There was no way that Glu would’ve been left behind in the mobile gaming race as it was one of the pioneers in the segment.

I loved the company’s games myself, but when I downloaded Gun Bros on my Android device a few weeks back, it didn’t work well and I had to ultimately delete it. It seems like the company is distracted and trying to change course. For instance, the release of a new Apple (NASDAQ: AAPL) iPhone used to boost Glu’s revenue as it released its games after the new device was launched. This was witnessed after the launch of the iPhone 4S when Glu’s revenue had spiked, but the iPhone 5 didn’t bring such joy for Glu.

Apple’s iPhone 5 became the best-selling smartphone in the world in the fourth-quarter last year, followed by the iPhone 4S, and beating the likes of Galaxy S3. This should’ve been a winning situation for Glu, as it had expected to bring in two-third of its revenue from Apple’s store. However, I don’t exactly know what led Glu to delay half of its games last year during the crucial holiday period. The company cited that its president of studios was undertaking a “strategic review” of the games.

Well, was it the right time for such a review? Or did the company failed to execute and develop new games? When you know that Apple’s iPhone is one of the best-selling devices and the quarter in which it is released is the best time to rake in solid revenue, I believe that Glu’s management should have been more prudent with their “review.”

As far as execution is concerned, while going through Glu’s earnings call it became clear that the company is struggling. The company struggled with low retention (which you can expect if their games aren’t working seamlessly) and its newly released titles “performed at the low end of our expectations due to team execution issues” according to its CEO.

Glu once again delayed two of its titles from Q2 to Q3, and I hope it doesn’t delay them further. The company is making moves in all sorts of areas and it looks as if it has lost track of its mobile gaming business. It is concentrating on real money gambling through its partnership with Probability, and it recently expanded its portfolio of such games. Though it doesn’t see much out of real-money gambling in the short-term, Glu expects this business to be a strong revenue generator in the long run.

A few moves

In addition, Glu is looking to move to a Games as a Service (GaaS) model, which is certainly a positive. However, Glu would need to make good enough games that will lead players to loosen their wallets for premium content. For instance, even I have paid for content in games as they were worth it, but will I pay up for a sluggish game that doesn’t work well -- not at all.

Though Glu witnessed record average revenue per daily active user (ARPDAU) in the quarter, which was more than triple of its ARPDAU in 2012. However, the sticking point was low gamer retention which kept Glu’s GaaS games from breaking into the top 50 in the U.S. However, the company is making a lot of monetization moves, and is focusing on player versus player (PvP) games as they are leading to better retention and revenue.

Also, Glu’s third-party publishing initiatives are gathering steam and the company is looking to launch six titles in this category this year. Glu has shuffled its personnel accordingly and expects third-party publishing to be a major revenue driver going forward, accounting for half of its business next year.

What next

Glu expects a better second half this year which would lead to significant growth. However, even then, its full year forecast of $84 million to $88.5 million in revenue is behind analyst estimates at mid point. It needs to focus on its smartphone revenue and avoid a repeat of the fiasco last year. The next version of the iPhone can be launched at any time, given the number of rumors and release dates across the web, and Glu needs to be ready.

Overall, it looks like the company is indeed trying hard at monetizing its games, but it shouldn’t have done so at the cost of growth. Analysts don’t expect the company to grow this year; rather they expect a 63% (Yahoo! Finance) decline. However, if Glu’s initiatives indeed work, then the company could return to growth next year and analysts’ expectation of a mammoth growth of 154% could turn out to be true.

Keeping these points in mind, if you have a position in Glu Mobile, then it would make sense to monitor it closely and if you don’t, then do keep it on you watchlist as proper execution of its strategies could lead to growth in the long run. 

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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