Does Glu's New Dress Make Its Revenue Look Fat?

Does Glu's New Dress Make Its Revenue Look Fat?

Things just don't app up at Glu Mobile .

Shares of the mobile apps publisher tumbled 11% yesterday after offering up uninspiring guidance following a substantial accounting tweak.

Adjusted revenue slipped 22% to $23.3 million as folks just aren't engaging in free-to-play social and casual games the way they used to. Glu's deficit of $0.05 a share is actually slightly better than analysts expected, but that's not much of a consolation when the top line is going the wrong way. Glu had posted breakeven results a year earlier.

We know that companies are having a hard time pushing apps these days.

The industry won some long overdue validation when market leader Zynga tapped Xbox chief Don Mattrick to serve as its new CEO last month. Toy giant Hasbro made things interesting a few days later by shelling out $112 million for a 70% stake in Backflip Studios.

If an executive at the world's largest software company was willing to head up Zynga -- and if the second-largest toy maker was picking up a controlling stake in a company best known for an app where you fling virtual items at an office coworker -- what could that mean for Glu as either a talent or buyout magnet?

However, all of the love faded two weeks ago when Zynga delivered another rough quarter with bookings plunging 31%. Just like Glu, Zynga's tiny profit a year earlier reversed into an adjusted deficit this time around.

Things aren't pretty, and they're not going to get better in the current quarter for Glu.

Glu's guidance requires the mother of all asterisks -- and I'll haul that in shortly -- but the takeaway here is that it wasn't very encouraging.

Glu sees a loss of roughly $0.10 a share on $19.6 million to $21 million in adjusted revenue. Analysts were targeting a deficit of $0.03 a share with $21.8 million at the top. It's a bigger miss than you may think, but I'm getting ahead of myself as I wait for that asterisk to show up. Just bask in the shame of the sequential slide for a moment.

Glu forecasts revenue of $96.8 million to $98.9 million for all of 2013, and while that's well ahead of Wall Street's call for $84.4 million, the expected loss of $0.22 a share to $0.24 a share is a lot more red ink than the $0.13 a share that the pros were modeling.

And -- in a case of perfect timing -- here's where the dump truck drops off that 800-pound asterisk that I've been telling you about.

Glu is changing the way it reports its revenue. It restated financials as far back as 2010 as it now considers the 30% in commissions that gets doled out to the iOS and Android app marketplaces for in-game purchases to be recorded as revenue. Cost of revenue goes up by an equal amount -- so gross profit remains the same -- but in the end it means revenue is now dramatically inflated.

How much air is going in? Well, the $87.8 million in revenue that it originally reported last year is now $108.9 million. Looking at that guidance for 2013 that seems so impressive at first now doesn't seem like an upward revision at all. And don't even get me started on how the pumped-up guidance for the current quarter is still a miss.

There doesn't seem to be anything necessarily sinister with the accounting shift. It's perfectly legal, and the stock's sharp drop yesterday proves that Glu is not fooling anybody with the move.

The silver lining here is that Glu has a busy pipeline of games coming out, and it expects to resume its growth by the fourth quarter. Fickle gamers may have a different opinion, but at least it's something that investors can look forward to without bumping their heads with that eyesore of an asterisk.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Hasbro. 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.

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