Monday, December 30, 2013

Glu Mobile Is An Excellent Long-Term Play

Allow me to disclose to you an industry secret. The mobile games industry is not glamorous. Despite the car-salesman stock pitches, buzzwords such as "mobile gaming", "GaaS", and "cloud gaming", mobile gaming has proven to be an unforgiving and cutthroat industry. With the rare exception of the super-fans of hits like "Angry Birds" and "Candy Crush Saga", players of mobile games are notoriously fickle and terminally lose interest after a couple years. In terms of gaming, Zynga (NASDAQ:ZNGA), as a publicly traded company, has demonstrated that one big hit ("Farmville") cannot fully sustain revenue, cash flow, profits, and share price expectations. It seems that Glu Mobile (NASDAQ:GLUU) has gotten the formula right: to continuously fund a steady war chest of popular hits, which increases their chance of success through as many successful iterations (games) as possible. By being the only publicly traded mobile game company, GLUU has the capability through equity and leverage to acquire and fully capitalize on hits such as the "Deer Hunter" brand (acquired for $5mm in cash in April of 2012).
Glu Mobile is not your traditional value pick. At first glance it is a speculative play on the mobile games industry. However, when you dig deeper it becomes evident that Glu Mobile is a solid long-term growth investment, a company poised to explode into the video game industry as the dominant player.
Making video games is notoriously difficult. However, if history tells us anything, it highlights the Darwinian features of the video game industry, characterizing a bloody, volatile battle that ends with a few key victors; the ultimate result is a market dominated by a few big players. Take current industry leaders, EA (NASDAQ:EA), Activision Blizzard (NASDAQ:ATVI), and Take Two Interactive (NASDAQ:TTWO), players that have won the war by surviving countless battles (through takeovers and acquisitions) since the birth of the video game industry. The truth is, the nature of the business and the difficulty in creating blockbuster games gives larger companies with pools of capital an unfair advantage. And currently Glu Mobile is the only player with the deep pockets, intellectual capital, expertise, and talent to survive the long haul in the mobile gaming industry.
History
Glu started off as a video game publisher for feature phones. After a series of mergers and acquisitions, Glu has evolved into a cutting edge company publishing smartphone games for nearly every single major platform in the mobile industry. Recent hits include "Deer Hunter 2014", which has consistently made the leaderboards in the iTunes store for the past 2 months, with record setting sales figures and Monthly and Daily Active Users.
Macro
In the US, users spend upwards of 12% of content viewing time on a mobile device, while mobile ad spend accounts for only 3% of total spend. Contrast this with traditional internet, which accounts for 26% of content viewing time and 22% of ad spend. Comparatively, TV accounts for 42% of time spent and 43% of ad spend, radio accounts for 14% of time spent and 10% of ad spend, print 6% of time spent and 23% of ad spend. I can only see radio and print ad spend decreasing, with mobile making up the difference.
Glu is also very focused on developing games in the APAC region, citing that APAC business may eventually eclipse US business. APAC business is now over 30% of total revenue. The APAC region is the fastest growing mobile market (and also the market with the most potential) in the world, especially due to the massive user base in China. China Mobile (NYSE:CHL), China's largest carrier, has over 700mm subscribers. Only 180mm are 3g users, and its 4g network was only recently announced. As faster networks develop, widespread use of smartphones and mobile games will proliferate.
Financials
Multiple game delays have dragged on financials. Glu just reported Q313 results:
  • GAAP revenues of $21.7 million; non-GAAP revenues of $22.6 million exceed guidance
  • Cash balance of $27.7 million and no debt as of September 30, 2013
  • "Deer Hunter 2014" sets new Glu Mobile download, DAU and single-day revenue records
  • Q4 non-GAAP smartphone revenue guidance increased; expect to achieve Q4 adjusted EBITDA profitability
"Deer Hunter 2014" has been a smashing success, generating $2.4 mm in revenue in Q313. Keep in mind the release date was September 18, 2013 and Deer Hunter 2014 has only contributed a couple of weeks of revenue.
Otherwise, revenue has been steadily declining since Q212, although this can be attributed to the game delays. Although the revenue numbers and profit numbers aren't what we look for in a traditional value play, we need to focus on what's important - building an active user base and establishing scale to increase the likelihood of releasing a big hit. The active user figures are encouraging. In Q313 Daily Active Users and Monthly Active Users were at all-time highs.
Going Forward
Niccolo De Masi and his management team have a solid track record of identifying issues, creating solutions and executing flawlessly. In their 2012 year end conference, they identified monetization as their most significant issue (page 14). The Glu team responded by building out its GaaS (Games-as-a-Service) concept and putting up a record year in revenue (2012).
Catalyst
GLUU has set the bar high with its Q413 guidance. GLUU hopes to begin a path to profitability, predicting 0 to 0.4mm in net income. With Deer Hunter 2013 generating $2.4mm in less than a month's time, I am confident GLUU can reach total revenue forecasted to be $31.5-$32.5mm. With a historical gross margin of around 70%, that gives us $22mm gross profit on the low side, subtracting $20mm (more than in each of the past 3 quarters) in operating expenses and we arrive at a profitable figure. These are very rough estimates, but during the Q32013 conference call GLUU revealed that Q42013 has been profitable thus far (as of October 2013). In short, I find the long awaited turn to profitability to be realistic and a short-term catalyst for what may be a solid long-term investment. Earnings are to come Feb 3, 2014.
All figures were compiled from Glu's investor relations website which can be viewed here.
Disclosure: I am long GLUU. 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.

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