Saturday, February 9, 2013

Glu Mobile: In Search Of A Blockbuster

During the past year, Glu Mobile's (GLUU) shares rose to almost $6 on much fanfare from the investing community and a loyal base of rabid fans. Their fall from grace began with an overall market sell-off, then investors were blindsided in 2012 Q3 when the company was T-boned by a faster than expected industry migration to social mobile gaming.

Player vs. environment (playing against the machine), was in vogue for years because that is what the limits of the technology allowed. That's been supplanted by player vs. player, or Social Gaming 2.0. Because of this migration, the company delayed a majority of Q4 launches until Q2 2013 to make them multi-player ready. Shares got crushed. Glu has languished in the $2 range for three months, and if market conditions worsen, shares may go lower.

Glu's on a mission to take their established position as one of the premier mobile gaming companies, to one of the more traditional elite gaming companies, as mobile and console systems begin to blur. According to CEO Niccolo de Masi in the 4Q Conference Call:

We believe Social Gaming 2.0 will be about the rising importance of tablets rather than phones, 20 minute rather than 2 minute sessions, in-game communities not between game Facebook (FB) connections, multi-player instead of single-player interactions, and 3D realism rather than 2D cartoon production values.
That's essentially what console games give the end user. However, you can't play them on a smartphone or tablet - until now. Glu Mobile's management believes they have the talent and infrastructure in place to make that all happen for gamers on the go. Their aspirations are high. As yet there has never been a $50 million shooter experience on mobile, but Glu believes they have the franchises and DNA to make that happen.

If you own shares of Glu Mobile, or have been following the company, this may be old news to you. I've written extensively about the organization, and don't want to go over territory I've already covered. My last article with give you an assessment of the disappointing Q3, and their acquisition of GameSpy Technology. GameSpy's infrastructure put Glu front and center in the ability to be a major player in social/mobile games.

What I would like to highlight are two initiatives the company recently engaged in that may be contributing revenue streams going forward. Both have to do with gambling. The most recent is Glu's stake in start-up Bee Cave Games. The company's founders have extensive casino backgrounds, and have most recently worked at Zynga (ZNGA). Bee Cave Games will produce casino style games for both Facebook and mobile consumers.

This may extend the offerings Glu has slated with their recent partnership with Probability PLC (PBTY.L). Probability is the UK's only pure-play publicly-traded mobile gambling company.

According to the press release:

Glu original IP-branded casino games will be offered as part of the Probability portfolio, and will be made available to a broad range of distribution channels including, potentially, Probability's partners such as PaddyPower, William Hill, Ladbrokes, and other network partners.
Glu Mobile is an international organization, and online/mobile gambling is legal in many parts of the world. With Glu's infrastructure and know-how, this could be a nice profit generator, not only overseas, but stateside as well if some politicians have their way. The first joint venture with Glu and Probability is set to launch in Q1 on iOS in the UK.

Glu Mobile was projected to become profitable in 2012, but because of the delay in title launches, that prognostication is a thing of the past. In fact, according to a financial statement issued by the company, Glu will remain in the red through the end of this year. Here are the 2013 expectations:

  • Non-GAAP revenue is expected to be between $84.0 million and $92.0 million and non-GAAP smartphone revenue is expected to be between $80.0 million and $88.0 million.
  • Non-GAAP gross margin is expected to be approximately 91.5%.
  • Adjusted EBITDA is expected to range from $(1.8) million to $(7.5) million.
  • Non-GAAP net loss is expected to be between $(5.9) million and $(11.6) million, or a net loss of $(0.09) to $(0.17) per weighted-average basic shares outstanding.
  • Weighted-average common shares outstanding are expected to be approximately 67.3 million basic and 73.0 million diluted.
  • We expect to have a cash balance on December 31, 2013 of approximately $14.0 million with no debt.
CEO de Masi made this statement at the beginning of the conference call: "Our aim is to invest in not fighting the current war, but the next.". Fighting for market share, and investing in infrastructure is exactly what Glu Mobile is doing, but that doesn't exempt them for being in the penalty box for the near term for poor performance.

Investing is results business, and for the last year, Glu has basically been handcuffed, although the stock has traded in a wide range ($1.99-$5.90). Right now it crosses the tape at $2.50, and I am underwater with it in my personal portfolio. My belief is that this equity is going to pay off, just like the one armed bandit mobile games they are developing. However, not everybody on Wall Street is convinced Glu's "freemium" gaming strategy is the best business plan.

What I believe you get from investing in a company like Glu Mobile is the chance to get in on the ground floor of what looks to be an exciting, and explosive industry: mobile gaming. At $2.50, it's a potential ten bagger if they do indeed hit that grand slam with a $50 million action franchise. Even if they don't hit it out of the park, they may get taken over by a larger gaming company, or, climb the tape incrementally with solid execution. This past year has been one step forward, two steps back for the company, but I have faith in the management, so I remain long Glu Mobile.