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Ted Stamas
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Degree in business administration from Ithaca College in Ithaca, New York. Been investing over 25 years, and writing in various formats for 30 years. Primarily investing in technology, focusing on wireless sector. Trade infrequently. Twitter handle is @TedStamas
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The Ithaca Experiment
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  • Glu Mobile Goes On The Road

    Earlier this week, members of the Glu Mobile (GLUU) executive team hit the road, and made two investor presentations. The first one came on May 21st, and was spearheaded by Chief Financial Officer Eric Ludwig at the Stifel Nicolaus Internet, Media & Telecom Conference. The second show was one day later at the B. Riley & Company Investor Conference, with Glu Vice President of Finance Greg Cannon as the master of ceremonies. This article will amalgamate both speeches to shed some light on topics that may enable investors to get a better grip on Glu Mobile's overall strategy, plus clarify some misconceptions about the company.

    Gambling

    During the past six months, Glu's shares temporarily spiked from an announcement of a move into mobile gambling with United Kingdom partner Probability PLC, and then the legalization of on-line gambling in some states in America such as Nevada and New Jersey. Day traders thought they were riding with lady luck, but the goose in share price didn't last too long. This is primarily because this relationship with Probability will not be a material contribution in 2013. Both Mr. Cannon and Mr. Ludwig emphasized this during their presentations.

    Glu management believes they are just scratching the surface of what could become a meaningful revenue stream for the company. Here are some paraphrased quotes from the two presenters.

    Greg Cannon:

    Obviously long term you will want to be in the U.S., but with the legislation in Nevada and New Jersey, it is still too early to tell where Glu fits in. Do we want to go after our own license? Do we want to just work with a partner? So we will evaluate and use the knowledge and experience for gaming with working with Probability to determine that long term strategy.

    Eric Ludwig:

    We're definitely the early stages, and that's the reason why we've not given any number for guidance to this in our numbers today. The UK market is still a very small revenue generating market for real-money gambling with the big prices in the states. But we think long-term, this is a great market, and has a great opportunity in the United States. Then there's a lot of different ways to attack it, either with or without getting licenses, doing real money gambling on skill-based level and sweepstakes.

    I don't know about you, but when I hear the word sweepstakes, I think of the Irish Sweepstakes, like the lottery. I'm not sure if this is what they are alluding to, but perhaps it's an extension of the mobile slot games they are providing for gamblers throughout the UK. With Probability, they are launching a White Label social casino with Zinga, Blackjack and Roulette. However, it must be emphasized, this won't be adding anything significant to the top line for awhile.

    Monetization

    Glu Mobile now has forty million active users playing their games on a monthly basis. Ninety percent of these consumers are on smartphones and tablets. Glu made a clean break from feature phones, and have now transitioned to primarily the iOS (AAPL) and Android (GOOG) operating systems. However, as well as Glu has executed in core game play, production values and consumer reach, they've come up short where monetization is concerned. This is why they're on the hot seat, not as a gaming entity, but as a publicly traded company.

    I think management showed backbone by being up front with this, and highlighted it as the number one priority for the company as they transition from a player vs. environment organization, to a player vs. player production house. Eric Ludwig acknowledged that with the previous player vs. environment platform, the company didn't have any home run games using a baseball analogy. Just a lot of doubles and triples, or at least this is how I interpreted it. This is why the company is focusing on more social interactivity.

    Games-as-a-service, Social Gaming 2.0, Player vs. Player, whatever you want to call it, this is where you're going to get the blockbuster games. They made a big step in the right direction by purchasing GameSpy last year, but now they have to produce. Although Glu Mobile has been in business for twelve years, it's still a turnaround story on Wall Street, no matter how high their production values are. They've got nowhere to run, but there are now low expectations for the company where last year, it was just the opposite.

    You don't have to be a bean counter to know that monetization matters. If Glu doesn't start to increase revenues, it could be a death trap, just like Rite Aid (RAD). Rite Aid is the third largest drug store chain in the United States, yet their stock hasn't gotten over $3 for ten years now. I'm not suggesting this will be the fate for Glu, but pointing out that just because a stock is inexpensive, doesn't guarantee instantaneous results.

    Third-Party Publishing

    A new venture for Glu Mobile is their third-party publishing division. This may be exactly the right medicine to get the stock in gear because it will increase revenues for the company in 2013. Glu is a successful developer, so they know how to get a game to the international market. What they are doing now is partnering with small gaming companies in China, Japan and Korea that have achieved success in their native markets, and are bringing those games to the Western World by localizing the languages to English, Russian or Portuguese.

    Glu has long track records with Apple, Google, Facebook (FB) and Amazon (AMZN) to get these third-party games to the right distribution channels. They're anticipating launching at least six third-party publishing titles in 2013. Two early in the third quarter, and the balance late in the third quarter, or the fourth quarter. In the long-run the third party publishing division would have the same EBITDA margin as what their internal studios will have.

    Greg Cannon commented about the margin profile where it concerns the third-party games:

    Obviously in the near term the gross margin will be impacted because we're having to pay a rev share back to those partners initially. We have brought down our full year guidance to 88% on the gross margin basis to allow for those rev shares, but ultimately by reducing the R&D investment on the third party publishing, you still get to it the similar long term EBITDA margin.

    It should be noted that Glu ended the first quarter with $21 million in cash, DSO [days sales outstanding] less than 60 days and no debt on the books. However, they are guiding lower to $14 million in cash by the end of the year without having to tap the capital or equity market.

    Conclusion

    Gambling, monetization and third-party publishing were the brunt of both presentations. Management also spoke briefly about the Quad Screen Future where they will be bringing Glu Mobile games to Apple laptops and HDTV's in addition to smartphones and tablets. You will be able to scale Glu games to all of these consumer products. Even now, you can do this to some extent. However, that is a reach into the future, and I'm more concerned about the next twelve months.

    Bottom line is that the company restructured in November after a very promising Summer of 2012. What a difference a few months makes. If you want a turnaround equity with a lot of potential, Glu Mobile is the place to be. However, even though they are the poster child of pure-play mobile gaming, it's a risky investment, like all turnaround stocks.

    Disclosure: I am long GLUU, FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: GLUU, long-ideas
    May 24 4:13 PM | Link | Comment!
  • Riding High In April, Shot Down In May: Nuance Communications And Ruckus Wireless

    I've covered Nuance Communications (NUAN) and Ruckus Wirleless (RKUS) in previous posts. My last focus article on Nuance Communications concentrated on their Analyst/Investor Day presentation back in December of 2012. For Ruckus Wireless, I wrote about their inaugural conference call three short months ago. I liked both company's prospects, but they traded too high for my investing style at the time of the writing. Circumstances changed when both companies recently reported quarters that didn't live up to Wall Street expectations. As shares fell, I put my money where my mouth is, and took stakes in both companies.

    Ruckus Wireless

    Although Ruckus Wireless has been around for over ten years, it's only been a public company for six months. It closed today at $13.40/share, and the WiFi plumbing provider is basically back to square one to when the underwriters valued the stock between $13-$15 for its IPO late last year. Although it closed under the IPO price after the first day of trading, the stock shot up to $26.50 its first few months on the market. Two months ago when Ruckus was trading at $24, I put a $16 limit order on it, then waited.

    Be careful what you wish for. After missing Q1 earnings estimates, and guiding down for Q2 (a traditionally strong quarter for the company), the stock crashed through my initial offering, and I was stuck with shares at $15. Picked up more at $13.40, so my average cost is somewhere in the low $14 range. I'm not sure if this is like trying to catch a falling knife, but there's another Wall Street adage about bulls make money, bears make money, and pigs get slaughtered. I thought $14 was a good price for Ruckus Wireless, and I still do. You can't get all your holdings at 52 week lows.

    The problem with the quarter and tepid guidance is a delay of orders from telecom carriers in China and North America. Lazard Capital's downgrade from a Buy to a Neutral rating didn't help either. According to the analyst at Lazard, it may take a few quarters for Ruckus to get back on their growth trajectory. I'm willing to wait. Q3 tends to be strong for Ruckus, and although this is six months away, I prefer to load up on good companies while they are experiencing some growing pains. I'd like to buy all stocks when they are at rock bottom, but it just doesn't work out that way most of the time.

    Nuance Communications

    Where Ruckus cratered 25% the day after their conference call, Nuance communications did almost the same, dropping 20%, from $23 to $19 right after their lackluster earnings presentation. Not only did they miss on the top and bottom lines, but they also had poor guidance for 2013. They are in transitional mode, from desktop to mobile, and also by the overall industry shift to on-demand, or cloud based services. I purchased shares at $19, and the equity hasn't budged even though Wedbush Securities rated the stock an Outperform yesterday.

    Nuance has long been a favorite of mine for their futuristic voice recognition technologies. Just last week the company announced that they are providing a voice biometrics solution to securely and automatically confirm the identity of Barclays Wealth & Investment Management customers - using the sound of their voice. These are the type of companies I like to purchase, but it doesn't necessarily translate into a good investment unless the company can execute. In comes Carl Icahn.

    In early April, Carl Icahn took a "passive" 9.3% stake in Nuance. After the conference call, it was made public that Mr. Icahn increased his stake to 10.7%. Carl Icahn has a reputation for making money, whether it be from good old fashioned "passive" investing, or putting pressure on the boards of companies he invests in. I am not sure what his intentions are with Nuance, but he may take an active role in the company's direction. This could be by taking it private, selling off some of Nuance's under performing divisions like imaging, or selling the company to a larger organization.

    The fact that Mr. Icahn has taken a position in Nuance was not inconsequential when I decided to buy shares. I believe he may goose the share price in the short term if any headlines hit cyberspace spelling out his intentions. The stock trades near multi year lows. I thought is was a good bet despite my belief we are due for an overall market correction.

    Conclusion

    While the market has been roaring, both Nuance Communications and Ruckus Wireless have been snoring. My investing goals in technology companies is to try and double my money in three years. With my purchase price of $14.40 for Ruckus, and a 25% plus earnings growth rate once it regains traction, I think my chances are good it to hit $29 by 2016. However, just like my investment with Acme Packet (recently bought by Oracle), which was also dependent upon Telecom Carriers, you may have to languish for a quarter or two until spending picks up.

    For Nuance, I think there may be pressure on the executive team to do something sooner than later. Besides Mr. Icahn's 10.7%, 14.6% of the company is owned by private equity firm Warburg Pincus LLC (as of March 14th). Although Warburg Pincus has been reducing their stake, those are two powerful entities that have a lot to say about the future of the company. Even if no actions are taken by Mr. Icahn, I still think I can double my money in 3 years. That would be a price of $38/share. Not an unreasonable goal if the market continues its climb.

    Disclosure: I am long RKUS, NUAN.

    Tags: NUAN, RKUS
    May 11 11:51 AM | Link | Comment!
  • Making A Play For Fusion-io With Proceeds From Acme Packet Windfall

    The details are well chronicled of Oracle's (ORCL) acquisition of Acme Packet (APKT) for $2.1 billion in cash, or $29.25/share. Cyberspace is flooded with articles on the subject, and Bloomberg provides a succinct synopsis of the buy-out. It's like a pig in a python. I've been covering Acme Packet since it was a show dog for the momentum crowd, and crossed the tape at over $80/share. I recommended buying the stock when it dropped to $25, and also owned it in my personal account with an average price of $23.

    It was a good day for me when I sold my shares for a roughly 25% profit in a little under a year. However, I was a disappointed with Oracle's tuck-in acquisition of the company. I really thought Acme Packet would double or triple in three years, getting back to their glory days, netting me a handsome profit. What's done is done. Acme's Board of Directors unanimously approved the transaction. The deal is expected to close in the first half of this year (subject to stockholder approval).

    So what to do with the proceeds? For my personal account, the simple solution was to place a $14 limit order on Fusion-io (FIO). If you aren't familiar with Fusion-io, they provide an enterprise storage memory platform. Basically, it's flash memory that is replacing disc drives in the data center. I've been covering the company since it had a blowout quarter in August of last year. I thought the equity was expensive back then when it traded at about $32, and still feel it's overvalued at $17.50. This stock was elevated to icon status, and got special treatment because of their two main customers, Apple (AAPL) and Facebook (FB).

    These two impressive clients account for 50% of Fusion-io's revenues, and here is where the problem lies. Both of these tech bellwethers are expected to contribute flat revenue streams to the company for the next two quarters. Although these are leading edge organizations as far as technology adoption, they aren't going to do too much for Fusion-io's top line till the second half of the year. With a market that may be topping, and lack of visibility for the next quarter or two, I'm gambling that I can purchase shares for a lower price.

    So what do I like about Fusion-io? Superior technology. My previous post about the company highlights their speedy facilitation of data that is significantly faster than their competitors. That's why Apple and Facebook invest so much in their products. However, their wares are expensive, and Intel (INTC) has gotten into the game with less expensive computing products. Fusion-io's solution was to introduce ioScale for price conscious customers.

    With a technological lead, high-end to low-end pricing solutions, and quality clients (China Mobile (CHL) and Pandora (P) are also in the mix), I can see where initially, Wall Street was enamored with Fusion-io. What I also like about them for a second half of 2013 play are freshly minted partnerships with Cisco (CSCO) and NetApp (NTAP) to sell Fusion's products. That's a lot of boots on the ground. However, those synergies won't come to fruition till later in the year. September is seven months from now, and a lot can happen between now and then.

    Before you put any money to work, let's examine some fundamentals. According to Yahoo Finance Analyst Estimates, Fusion-io is projected to lose money the next two quarters if we take the consensus. Last year, they made money, albeit, not much. This fiscal year, the company is projected to make $.18/share. That's a P/E Ratio of 100.

    Because it was such a shooting star, Wall Street evaluated the company on revenue growth, not earnings. If we examine the sales econometric, we can see that revenues are declining 14% year over year on a quarterly basis for Q3 which ends in March. It's not till next year (fiscal year ending June 2014), that revenues ramp to a healthy 35% growth clip. I don't want to overstate my thesis, but that is a long time from now, even with a market that is forward looking.

    With a 32% short float, you could purchase shares now, and take your chances that not only does the market move higher, but you'll also get a nice short squeeze. I'll stick with my $14 limit order and see if a bag my quarry. I think it's a great company, just not a great valuation.

    Disclosure: I am long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: APKT, FIO, short-ideas
    Feb 11 1:24 PM | Link | 1 Comment
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