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Why Glu Mobile Stock Melted 5% on Friday

What happened

Mobile-device games maker Glu Mobile (NASDAQ: GLUU) saw its stock price sliced by nearly 12% in early Friday trading, before climbing back to stick with a 5% loss by close of trading. The reason, as you probably surmised, was earnings.

Expected to report no more than a $0.03-per-share loss for Q4 2017, Glu instead reported a pro forma loss of $0.14 per share -- and lost $0.29 under less-forgiving generally accepted accounting principles (GAAP). This was despite Glu reporting sales of $80.2 million for the period -- ahead of estimates.

Man yelling at cellphone
Man yelling at cellphone

Not everyone was happy with Glu Mobile's score this quarter. Image source: Getty Images.

So what

Glu CEO Nick Earl put a brave face on the news, saying "fourth quarter performance ... capped off a historic year for Glu." And indeed, sales at the company grew 73% in comparison to Q4 2016.

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Problem was, as sales grew, profit margins plummeted. Glu Mobile ended up earning just 29.5% gross profits on its sales for the quarter, barely half the 55.9% gross margin recorded one year ago. As a result, despite growing sales, the company's net loss per diluted share more than doubled, to $0.29.

For the full year, sales grew 43% to $286.8 million, gross margin climbed 1070 basis points to 50.8%, and...Glu still ended up losing $0.72 per share -- 9% worse than last year.

Now what

For 2018, Glu Mobile predicts it will book sales of at most $335 million, and incur costs of at least $343 million. Glu Mobile did not, however, take the next logical step and guide investors to expect another loss this year. Instead, management begged off, saying "Glu is unable to predict, with reasonable accuracy, future changes in its deferred revenue and corresponding cost of revenue," and thus could "not provide guidance on a GAAP basis."

Wall Street analysts, on the other hand, have no such compunction. Up until today they had been predicting Glu Mobile would turn profitable this year, and earn $0.08 per share on $339.2 million in sales. Based on the limited guidance Glu did provide, it looks like that's not going to happen.

Hence the sell-off.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.