Sungy Mobile 2Q '14 Earnings Preview - GOMO a No-Go

WWW.TRINITYRESEARCHGROUP.COM 8/22/14

Sungy Mobile 2Q ’14 Earnings Preview: GOMO a No-Go

SUNGY MOBILE 2Q ’14 EARNINGS PREVIEW: GOMO A NO-GO AUGUST 22, 2014

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EXECUTIVE SUMMARY

We believe GOMO has substantially overstated operating metrics and financials in the past, particularly for their launcher and literature products, the two largest contributors to revenue.

In spite of these overstated numbers, GOMO should turn in their worst quarter ever on 8/27, whiffing on every metric: revenue, EPS and 3Q guidance.

The most damning negative will be severe degradation of its flagship product, Go Launcher, which is the main reason QIHU invested but has now lost strategic interest.

The Getjar acquisition that promised entry into the mobile platform market has turned into a full-blown disaster that has key employees leaving in droves.

We expect the recent resignations of several key executives to continue with the resignation of the CFO, which will put into question GOMO's overstated metrics and financials.

A quick glance at GOMO’s chart since the 11/21/13 IPO tells the story of a company that has corrected substantially from its IPO euphoria. The bottom appears to be in, with the stock trading sideways at about $10.50 since mid-July.

However, we believe there is still substantial downside because the extent to which GOMO has begun a full-blown collapse will become apparent when they report 2Q earnings on 8/27.


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There is simply no other way to interpret the following recent evidence:

Sharp decline in usage metrics for all of the major mobile apps that comprise their “Go” line of products: Go Launcher, Go Locker, Go SMS Pro and Go Weather (and other smaller, inconsequential apps that never took off as these others once did)

Sharp increase in usage metrics for all of Go’s major competitors China Mobile’s recent ban of a substantial amount of GOMO’s literature product (which

contributed about one third of FY 2013 revenue) due to excessive pornographic/adult content

Ongoing free fall of 3G.cn, GOMO’s mobile portal that has become so irrelevant it does not even show up on any of the major third-party mobile portal ranking tables in China anymore

A recent and still ongoing exodus of key execs, with internal talk of more resignations to come shortly

ENTIRE LINE OF “GO” APPS WELL PAST THEIR SHORT-LIVED PEAK We have been highly skeptical of GOMO’s reported numbers since the IPO because the download and usage metrics as well as interest indicators do not bear out the purported scale of GOMO’s user base and the type of growth the management team has been guiding to. At the highest level, a simple trend analysis on Google for GOMO’s three flagship Go products and their next generation launcher (Next Launcher) tells the story of a company that has to be in substantial decline from a usage and therefore revenue perspective. Google Search Trends from 2011-August 2014 (100 represents all-time peak)

While search data is not perfectly correlated to download or monetization data, the correlation is significant, since the amount of Internet chatter a mobile app generates is a decent proxy for the amount of usage it gets. For example, Whatsapp, which has been around for at least as long as the core Go apps, has a very different search trend chart:


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Google Search Trends for WhatsApp from 2011-August 2014 (Aug score is 100, all-time peak)

The same trend analysis for other popular apps such as Snapchat, Tinder, Viber, 360 Launcher, Clean Master, Battery Doctor, etc. produce similar results. What makes GOMO such an analyzable company is that most of its revenue (over 70%, according to their IPO prospectus and road show presentation) comes from outside of China. Mobile metrics for Chinese companies are notoriously hard to track because the app distribution and app platform ecosystem is much more fragmented than in the rest of the world, where two or three huge players (of which Google and Apple are usually the top two) tend to dominate. But outside of China and a few select much smaller emerging markets, the rest of the mobile world is well-documented by third parties such as App Annie. Below are some charts from App Annie of GOMO’s supposedly wildly popular products in various parts of the world ex-China. We selected USA, Japan and Korea in particular because those are the largest and most developed mobile app markets outside of China and are therefore a good benchmark for global companies with the type of scale GOMO claims. But similar charts can be generated for most countries that App Annie tracks.


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Many of the claims GOMO made during various meetings and interviews we were part of throughout the past couple of quarters were unverifiable and often, we found them to be untrue. For example, the company told us that they are the largest launcher developer in the Korean market, but our research suggests that nobody is close to Kakao, the company that makes the most popular messaging platform in the country. Also, they claimed that a lot of the new growth was coming out of Southeast Asia, where they were seeing explosive growth. Meanwhile, our checks with some of the largest carriers and smartphone distributors in the region bore out a reality that we had suspected from prior work in the region. While the numbers may indeed be stronger on a relative basis, there is no chance those regions can make up for the fall in the key app markets because monetization in Southeast Asia pales, by at least two orders of magnitude, in comparison to that of the developed regions.

CAN GOMO’S NUMBERS BE REAL? Given all that as context, GOMO’s numbers make zero sense. Below is a chart of the key metrics from their past earnings calls.


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How can GOMO’s declining interest and usage worldwide (Google’s data is global) deliver these types of numbers? How can GOMO’s reported numbers be doing anything but going down? There are only three possibilities behind this massive discrepancy between third-party data and GOMO’s reported data:

Possibility 1: GOMO’s new products are absolutely crushing it and making up the shortfall in their core products

Possibility 2: GOMO finally cracked the China market, which was less than 30% of its revenues in the past, and that mega-market is what’s more than offsetting the obvious decline everywhere else

Possibility 3: GOMO, whether intentionally or unintentionally, is not reporting accurate numbers

NEW PRODUCTS NOT CRUSHING IT EITHER The only two new products in their portfolio that have anywhere near the kind of scale to be able to fit possibility number 1 are the Next Launcher and the recently acquired GetJar. App Annie’s results were a little more favorable for Next Launcher than Google’s (see first chart), but there was no third party source we found that showed any growth in Next.

Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14Go Launcher revenue (mn RMB) 3 4.7 11 15.4 24 36.9 41.6 50.9 45.1Total users 99 133 166 207 244 284 325 364 401Active users 34 44 54 65 73 81 87 94 100paid downloads 0.2 0.3 0.4 0.5 0.5 0.5 0.5 0.6 0.5ARPU (RMB) 15.0 15.7 27.5 30.8 48.0 73.8 83.2 84.8 90.2

0

100

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Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14

Go Launcher revenue (mn RMB) Active users

Total users paid downloads

ARPU (RMB)


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What about GetJar? On 2/12/14, GOMO announced the acquisition of GetJar, a mobile ad network based in California. Given that their office is a few miles from Google’s, one would think that Google’s trend analysis might have some merit: Google Search Trends for GetJar from 2011-August 2014

What’s more, we spoke to a former employee who had recently left GetJar and learned that there has been an exodus of talent from the company, with key engineers and product people having


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left or preparing to do so. Apparently, the acquisition and integration is not going well, and we have to believe the numbers can’t be doing too well either.

GOMO A NOBODY IN CHINA Admittedly, the Chinese market is much harder to analyze and quite fragmented, but if any company was showing the kind of growth in China necessary to offset the broader decline in GOMO’s metrics, at least Baidu, the Google of China, would show some signs of prominence. A recent search on Baidu’s version of Google Trends showed such little volume related to any of GOMO’s products that they didn’t even register on a chart. We had to scroll down to the rankings to verify that GOMO is well behind all the usual suspects who lead the app market in China. Baidu Shows 30% YoY and 5% MoM Decline for Go Launcher

Baidu Shows Go Launcher Hopelessly Behind Competition


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Baidu Shows Go Launcher Hopelessly Behind Competition

If those charts do not suffice, then perhaps the outcome of a recent conversation we had with QIHU’s corporate development team will. QIHU was the largest strategic to invest in the IPO because they were interested in the launcher product. However, now that the launcher has not only stopped growing but actually reversed and started a decline, all strategic interest is apparently gone. So back to our three possibilities… if it’s not Possibility 1 and it’s not Possibility 2 and there are only three possibilities, then….

KEY EXECUTIVES BAILING Maybe a hint that Possibility 3 might have some merit is the fact that GOMO’s own executives are running for the hills. Here is a list (probably incomplete) of all the executives who have left GOMO that we have tracked:

Chief Marketing Officer Zhang Minhui inexplicably left the company two months before the IPO.

Former CFO Yang Shuqin also left the company two months before the IPO after a total tenure of a whopping four months.


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Audit Committee Chair and director of GOMO’s board Jonathan Zhang left the company six months after the IPO.

VP of Sales Cao Ming left the company in June. Cao was not just a VP of Sales. He was one of the founders and set up the sales team at GOMO from scratch.

VP of Product and head of the launcher division Xin Li also bailed a few weeks ago. And we have already discussed the exodus in play at GetJar a few short months after the acquisition. It is one thing to lose executives when a company is in trouble or under investigation or very obviously cratering financially. But why are all these key people bailing if the company is growing as nicely as is shown by the previous chart we put together of GOMO’s quarterly metrics?? Who could be next? Given the pattern above and the puzzling disconnect between third-party data and GOMO’s numbers, we suspect current CFO Winston Li will bail next, followed by the audit chair. That would make two resignations for each of the key finance positions at GOMO in about a year, which should create a total loss of confidence in the company’s numbers thereafter. Could one or both of these executives have left or announced their intent to leave already? Aside from the obvious degradation in the metrics we have shown, there are two clues that bad news, and probably of the very bad variety, are imminent. First, the company suspiciously announced a $20 million buyback right before their blackout period before earnings. Typically, this type of news which is generally perceived as a positive is announced during the earnings call and not immediately before. So why before? To us, it is an obvious move to do damage control after the earnings event. What makes this move even more suspicious is the fact that the co-founder, Chairman and CEO Deng Yuqiang elected not to exercise his stock options1 expiring in April, which resulted in a decrease of his personal stake in GOMO from 22.1% of fully diluted shares (per the 2013 20-F filing) to 19.4%. So the CEO was not willing to put his own money behind his business, but when it comes to shareholder money, why not? If that is not shady, we don't know what is.

CAUGHT WITH THEIR PANTS DOWN As if there was not enough drama at GOMO, there is one last issue that has caught our undivided attention. The numbers we are most interested in learning about this quarter have nothing to do with the Go line of products or the new and improved Next launcher or even GetJar. We are fascinated by how the reading/literature app is doing. 1 http://www.techweb.com.cn/world/2014-08-21/2067217.shtml


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Although the management team does not appear particularly fond of this business, preferring to talk about launchers instead, mobile reading is about a third of GOMO’s total revenue and therefore a very important cash cow for GOMO. Mobile reading publishes both original and third-party content (on a revenue-sharing basis with content providers) largely through third-party distribution channels. By far the most important distribution channels are China’s three state-owned carriers China Mobile (the largest), China Unicom and China Telecom. GOMO’s own distribution channels, a barely-downloaded app called GG Book and the portal 3G.cn that is many years into a steep decline, are a small percentage of total distribution. Recently, the Chinese carriers led a major coordinated crackdown on content providers and were understandably quite tough on porn. This was part of a central government effort to purge the Chinese Web of porn, as reported here: http://www.hollywoodreporter.com/news/china-hires-sexual-content-appraisers-701153. Even some of China’s largest companies like SINA were subjected to full scrutiny: http://www.equities.com/editors-desk/stocks/technology/china-s-anti-porn-crackdown-has-a-big-trophy-sina-sina. Some businesses were completely shut down, like Kuaibo, the top competitor of listed online video sharing company Xunlei (XNET): http://www.scmp.com/news/china-insider/article/1574326/china-catches-fugitive-chief-video-sharing-site We learned recently that China Mobile, the largest mobile carrier and a huge channel for GOMO’s reading product, banned GOMO during this porn crackdown because the vast majority of their paid users were paying for porn. What numbers GOMO reports for reading/literature will tell us lot about how the company has been managing its financials this quarter, and whether we are right to strongly suspect that Possibility 3 will result in a very bad outcome for GOMO shareholders even at this seemingly depressed $10-11 level. As with its Go line of products, we expect the company will somehow find a way to report flat to slightly down quarterly sequential numbers for reading/literature despite taking a big hit from China Mobile and possibly other carriers as well. One way to look at the GOMO stock price chart at the beginning of this article is to say that the shares are off 70% from their 52-week high and so GOMO is due for a bounce. The more accurate way to look at that chart is to recognize that GOMO is only down 20% from its IPO day close but is much worse off than it has ever been, having lost half a dozen senior execs and a substantial portion of the acquired GetJar team, having lost all the momentum in its products which are now in decline, having lost a huge chunk of its reading/literature cash cow unexpectedly and about to lose more senior executives and possibly their new CFO. This week’s will be an interesting earnings call indeed. We believe it will provide the negative catalyst for GOMO to drop another leg.

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Sungy Mobile 2Q '14 Earnings Preview - GOMO a No-Go