I have been following Glu Mobile (GLUU) since 2011, when the company was still shifting its focus from simple feature phone games to more complex smartphone games. In late 2011 the stock was trading a little over $3.00 a share and the move into the rapidly-expanding smartphone gaming market seemed promising. In early 2012 the stock jumped into the $4.00 range, reflecting the optimism surrounding the company's improving strategy and financial results. It traded in this range for most of 2012, even breaking into the $5.00 range for a period after delivering what has been its best quarter ever in Q2 2012. This is where Glu's feel-good story ends. Since Q2 2012 Glu has disappointed investors with revenue stagnation and declines, pushed back releases for games due to lack of execution, and continually disappointing results and forecasts.
What Is Going On?
Here is a chart of Glu's real revenue since Q1 2012 (I am using Glu's old revenue recognition model):
The trend is clear: Glu has been generating less revenue each quarter since Q2 2012. This does not bode well for any company, much less a small-cap growth company operating in an extremely high-growth market. Forecasts for Q3 '13 serve to continue the trend, though Glu management says they expect growth to resume in Q4 '13 and continue into 2014. Unfortunately, based upon the continued failure to produce results throughout 2013, it is getting more difficult to take management's word at face value.
Things Seem to Have Gone Very Wrong
In Q3 of 2012 Glu announced an extremely disappointing quarter (lower q/q revenue) and guidance which sent the stock plummeting from over $5 to just above $2. The stock has made weak pushes into the $3 range in parts of 2013 but it has slide back into the low $2's because of continually disappointing results and guidance. On the Q2 2012 conference call Glu management teases investors with the potential for operating profitability:
"we will reach full-year adjusted EBITDA profitability for 2012 without needing to ask the capital markets and without taking on any debt."
A quick look at Glu's operating cash flow shows that Glu had a negative operating cash flow of $6.8 million for 2012. That was not the only disappointment that came from 2012. In Q3 2012 CEO De Masi said:
"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."
This news was bad at the time, but it was assumed that the titles would still provide revenue further in the future. This was not the case. Only two of the five titles (Dragon Storm and Gun Bros 2) were pushed into 2013, indicating that the rest were so bad that they had to be canned entirely. In that same call Glu said they expected five titles to be released in Q1 of 2013 and an additional five titles in Q2. What actually happened was yet another disappointment - Glu released seven games in Q1 and released zero games in Q2. That must mean a lot of games coming in Q3, right?
"We had previously believed Black Gate, Tons of Guns and Gang Lords would be sufficiently optimized to merit worldwide release and marketing in Q3. As this timing has now moved to Q4…"
Apparently not. Glu continues to tell investors to wait around as they "figure it out". For Q3 we will have only the unimpressive releases from the Publishing division and the results of the only fully launched internal game, "Zombies Ate My Friends" , to look forward to in addition to the revenue from older games. I will write a more in depth article of what I expect from Q3 later, but it is clear that it will not be a blockbuster quarter by any measure. Management provides us with this bit of optimism from the Q2 2013 conference call:
"Q4 will be where the rubber meets the road and Glu substantially completes its transition to a games as service company."
That sounds good and all, but investors are continuing to lose trust in management. Statements such as this are becoming all too familiar for investors who have followed this company for any period of time:
"The second big impact to the third quarter is that our third-party publishing titles are ramping slower than originally forecasted, due to the product tuning and westernization of the products taking longer."
I used to think Glu's Publishing division held the key to improving Glu's bottom line, but it is becoming apparent that Glu is struggling on all fronts now. Publishing seemed to be the most promising avenue to profitability for a company that has consistently lost money. Now, even that has been hurt by the disappointing realities that always seem to arise in opposition to management's promises.
Questionable Decisions By Management
I am of the belief that such a long and consistent record of disappointments could not be the product of bad fortune alone. I tend to look at management when asking why a company is struggling. Glu's management has not only failed to produce the results they've publicly hoped for, but they've made several decisions that have eroded my confidence in their care for shareholders. Back in February of 2013, when Glu released 2012 results, they had this to say about raising money in 2013:
"we anticipate ending 2013 with at least $14 million in cash and no debt and we are comfortable with that level of cash to operate our business." - Q4 2012
"we are confident in our ability to end 2013 without the need to raise additional capital." - Q4 2012
These were reasonable assumptions at the time. Then in the Q1 '13 call they said:
"we continue to anticipate and in 2013 with at least $14 million in cash and no debts, and we are comfortable with that level of cash to operate our business."
This was disappointing to investors who had hoped to see less cash burn by this point, but still gave investors hope that there was no impending need of financing. Continuing on to Q2, 2013:
"In addition, we now expect to end the year with at least 19 -- $9 million in cash and no debt, while this is lower than our prior expectation of $14 million, we remain comfortable with our ability to manage the variable levers of our business such that we can operate that level of cash while executing our strategy."
Adding to the long list of disappointments is the quickly-dwindling cash balance estimates, but this still does not give investors any hint that Glu has plans to raise money in the near future. So, when Glu announced their intentions to raise $13.2M by issuing shares to the public on September 11th, investors did not have a single indication from management that this was even possible. This action is likely to put further pressure on share price and erode investor faith in management. It also indicates that things at Glu are going worse than even their most conservative estimates could have predicted.
That's not the only thing that should be worrying investors at this point. It is clear that management is absolutely terrible at predicting what Glu is going to do in the future, but that alone is not enough reason to question their intentions. What concerns me specifically is the accounting change that Glu announced with their Q2 results. I did a detailed analysis in another article, but the basic takeaway is that Glu implemented an accounting change that will boost revenue by ~30% and boost COGS by an equal amount. The change will not impact the business and its only purpose is to artificially inflate Glu's revenue on paper. This fact, combined with the timing of the release, makes it look very much like management is trying to hide the underperformance of the company by making unnecessary accounting changes.
I am of the belief that management should not be hiding anything from shareholders, much less implementing an otherwise useless accounting change which will only serve to boost Glu's revenue on paper. The fact that they have tried to hide their decline in revenue with their accounting coupled with the complete lack of warning about the impending financing has destroyed my faith and confidence in the management of this company.
Based on the history of disappointments and likelihood of continued disappointments, this stock has become a true "dog" that I would not recommend to anyone until Glu manages to produce the results that have always been just out of reach. Revenue is slipping; profitability is sliding further away from possibility; and management has given investors little reason to trust them over the past year.