On Wednesday, October 30, 2013 Glu Mobile (NASDAQ:GLUU) reported better than expected Q3 financial results. Management also provided strong guidance for Q4 2013 and full-year 2014. After the conference call a colleague, holding a substantial investment in Glu Mobile, phoned to say he was a little baffled by the after hours selling. He said:
I can't see anything in the financial report, the guidance or the conference call that would cause people to sell. Did I miss something? Did you see anything? It's not rational.
My colleague's assessment was spot-on and likely represents the sentiment of many Glu Mobile investors and the analysts that upgraded Glu Mobile to a "BUY." Glu's financial results and forecast were above expectations and quite impressive. Unfortunately, the cognitive process does not always produce rational behavior, but occasionally lends itself to irrational decisions and regrettable consequences, or what I prefer to call a "buying opportunity."
That being said, we must always remember that short selling money managers, hedge funds, and other groups conduct bear raids that can easily create irrational moves in a stock's price. These groups are notorious for false rumors and headline-grabbing pseudo-news articles that are void of meaningful substance or content. However, my forte is not explaining irrational behavior in the market, but identifying and profiting from its presence.
Now lets review the real facts surrounding Glu's Q3 performance and beyond.
Q3 2013 Financial Result Actually Beat Guidance
Glu's financial performance and projections were better than forecasted and fundamentally sound.
- Gross Revenues Beat Estimates -- During Q2 conference call, CFO Eric Ludwig forecasted Glu's Q3 gross revenues between $19.6 million to $21 million, non-GAAP. The actual Q3 number exceeds estimates and came in at $22.6 million. This is a great number especially when you consider Glu is still transitioning into "GluOn" or games-as-a-service. Surprisingly, revenues increased in the midst of a retooling quarter.
- EPS Beats Estimates -- The non-GAAP EPS forecast for Q3 were between ($0.10) to ($0.11) loss. Once again good news prevails. Glu beats by $0.04, coming in at ($0.07). Investors should be encouraged by the EPS because they are consistent with management's historically conservative mindset not to overstate expectations.
- Total Cash Balance Up -- Glu forecasted a cash balance of $11.5 million for the end of Q3. They actually finished with $13.7 million (2.2 million above forecast) plus $14 million from stock proceeds, totaling $27.7 million. And there is a $10 million deal for warrants coming up soon with MGM Interactive.
- No Debt -- Glu Mobile has $0 debt and sufficient capital (27.7 million) to fund the expansion into Asia and rollout their "GluOn" mobile game titles in Q4 and through 2014.
Q4 2013 Forecast 50% Jump In Revenue - Earnings Per Share Projected Between Breakeven To $0.01 Profit
Profitability is on the horizon. This is one of the many reasons why I am confident of a $5.50 price target and why Glu has received so many recent "BUY" upgrades.
Management is forecasting for the current quarter (Q4 2013) about $11 million in new revenues, a 50% increase over Q4 2012. Projections for Q4 will be strong and driven by "GluOn" games like Deer Hunter 2014. "GluOn" (games-as-a-service) is responsible for Deer Hunter 2014 breaking previous revenue records, read here.
Revenues for Q4 2013 are expected to be between $31.5 million and $32.5 million, non-GAAP. This represents a 50% increase over 2012 Q4 revenues of $20.8 million. This is a very strong forecast by management that likely represents a projection of current daily revenues.
Management is projecting a breakeven to profitable Q4 2013 with EPS coming in between $0.00 to $0.01 per share. With Glu's history of understating and over performing expectations, I will not be surprised if Glu exceeds this conservative estimate and post between $0.02 to $0.03 EPS in Q4 2013.
2014 Full Year Guidance Forecasted Upward 15% - 20%
Based on the successful results of "GluOn," management is projecting between 15% to 20% revenue growth for 2014, compared to 2013 full-year results. Glu's estimates are obviously on the conservative side for two reasons:
- Management's projections are historically conservative.
- Glu has only released 1 of its games from the scheduled pipeline. There are several more to come under the "GluOn" lucrative model.
During the Q3 conference call their was a recurring theme from management that caught my attention -- "confidence." Often when I task an employee with an important project I will ask, "can you do it?" There is only one acceptable response, a confident "yes I can!" Six different times during the conference call management employed this word to convey their strong commitment to increasing shareholder value and achieving new revenue growth.
- Our confidence in the shooter category has never wavered...
- Our confidence continues to build...
- I have full confidence our teams will continue to build upon the impressive revenue growth...
- We remain confident at [that]our strategy to increase monetization...
- I will say that a success like Deer Hunter 2014, if anything greatly solidifies the confidence in that position...
- We are confident in the strength of the foundations we have laid and our ability to drive long-term robust sustainable growth...
If management continues to execute as successfully as we are now seeing, investors will be rewarded as shares continue to rise.
Glu Mobile is a leading global developer and publisher of freemium games for smartphone and tablet devices. Glu is focused on creating compelling original IP games such as CONTRACT KILLER, GUN BROS, DEER HUNTER, BLOOD & GLORY, and SAMURAI VS. ZOMBIES DEFENSE on a wide range of platforms including iOS, Android™, Windows Phone, Google Chrome, and Mac OS. Glu's unique technology platform enables its titles to be accessible to a broad audience of consumers globally.