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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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 GOMOs 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.

AUGUST 22, 2014

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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 Gos major competitors
China Mobiles recent ban of a substantial amount of GOMOs literature product (which
contributed about one third of FY 2013 revenue) due to excessive pornographic/adult
content
Ongoing free fall of 3G.cn, GOMOs 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 GOMOs reported numbers since the IPO because the
download and usage metrics as well as interest indicators do not bear out the purported scale of
GOMOs 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 GOMOs 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:


AUGUST 22, 2014

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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 GOMOs 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 GOMOS NUMBERS BE REAL?
Given all that as context, GOMOs numbers make zero sense.

Below is a chart of the key metrics from their past earnings calls.


AUGUST 22, 2014

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How can GOMOs declining interest and usage worldwide (Googles data is global) deliver
these types of numbers? How can GOMOs reported numbers be doing anything but going
down?

There are only three possibilities behind this massive discrepancy between third-party data and
GOMOs reported data:

Possibility 1: GOMOs 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 whats 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 Annies results were a little more favorable for Next Launcher than Googles (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 14
Go Launcher revenue (mn RMB) 3 4.7 11 15.4 24 36.9 41.6 50.9 45.1
Total users 99 133 166 207 244 284 325 364 401
Active users 34 44 54 65 73 81 87 94 100
paid downloads 0.2 0.3 0.4 0.5 0.5 0.5 0.5 0.6 0.5
ARPU (RMB) 15.0 15.7 27.5 30.8 48.0 73.8 83.2 84.8 90.2
0
100
200
300
400
500
600
700
Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114
GoLauncherrevenue(mnRMB) Activeusers
Totalusers paiddownloads
ARPU(RMB)

AUGUST 22, 2014

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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 Googles, one would think that Googles
trend analysis might have some merit:

Google Search Trends for GetJar from 2011-August 2014

Whats 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

AUGUST 22, 2014

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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 cant 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
GOMOs metrics, at least Baidu, the Google of China, would show some signs of prominence.

A recent search on Baidus version of Google Trends showed such little volume related to any of
GOMOs products that they didnt 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


AUGUST 22, 2014

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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
QIHUs 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 its not Possibility 1 and its 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 GOMOs 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 GOMOs 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 GOMOs quarterly
metrics??

Who could be next?

Given the pattern above and the puzzling disconnect between third-party data and GOMOs
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 companys 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 options
1
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 GOMOs 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 Chinas three state-owned carriers China Mobile (the largest), China
Unicom and China Telecom. GOMOs 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 Chinas 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
GOMOs 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 weeks will be an interesting earnings call indeed. We believe it will provide the negative
catalyst for GOMO to drop another leg.

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

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