Gambling
During the past six months, Glu's shares temporarily spiked from an announcement of a move into mobile gambling with United Kingdom partner Probability PLC, and then the legalization of on-line gambling in some states in America such as Nevada and New Jersey. Day traders thought they were riding with lady luck, but the goose in share price didn't last too long. This is primarily because this relationship with Probability will not be a material contribution in 2013. Both Mr. Cannon and Mr. Ludwig emphasized this during their presentations.
Glu management believes they are just scratching the surface of what could become a meaningful revenue stream for the company. Here are some paraphrased quotes from the two presenters.
Greg Cannon:
Obviously long term you will want to be in the U.S., but with the legislation in Nevada and New Jersey, it is still too early to tell where Glu fits in. Do we want to go after our own license? Do we want to just work with a partner? So we will evaluate and use the knowledge and experience for gaming with working with Probability to determine that long term strategy.
Eric Ludwig:
We're definitely the early stages, and that’s the reason why we’ve not given any number for guidance to this in our numbers today. The UK market is still a very small revenue generating market for real-money gambling with the big prices in the states. But we think long-term, this is a great market, and has a great opportunity in the United States. Then there’s a lot of different ways to attack it, either with or without getting licenses, doing real money gambling on skill-based level and sweepstakes.I don't know about you, but when I hear the word sweepstakes, I think of the Irish Sweepstakes, like the lottery. I'm not sure if this is what they are alluding to, but perhaps it's an extension of the mobile slot games they are providing for gamblers throughout the UK. With Probability, they are launching a White Label social casino with Zinga, Blackjack and Roulette. However, it must be emphasized, this won't be adding anything significant to the top line for awhile.
Monetization
Glu Mobile now has forty million active users playing their games on a monthly basis. Ninety percent of these consumers are on smartphones and tablets. Glu made a clean break from feature phones, and have now transitioned to primarily the iOS (AAPL) and Android (GOOG) operating systems. However, as well as Glu has executed in core game play, production values and consumer reach, they've come up short where monetization is concerned. This is why they're on the hot seat, not as a gaming entity, but as a publicly traded company.
I think management showed backbone by being up front with this, and highlighted it as the number one priority for the company as they transition from a player vs. environment organization, to a player vs. player production house. Eric Ludwig acknowledged that with the previous player vs. environment platform, the company didn't have any home run games using a baseball analogy. Just a lot of doubles and triples, or at least this is how I interpreted it. This is why the company is focusing on more social interactivity.
Games-as-a-service, Social Gaming 2.0, Player vs. Player, whatever you want to call it, this is where you're going to get the blockbuster games. They made a big step in the right direction by purchasing GameSpy last year, but now they have to produce. Although Glu Mobile has been in business for twelve years, it's still a turnaround story on Wall Street, no matter how high their production values are. They've got nowhere to run, but there are now low expectations for the company where last year, it was just the opposite.
You don't have to be a bean counter to know that monetization matters. If Glu doesn't start to increase revenues, it could be a death trap, just like Rite Aid (RAD). Rite Aid is the third largest drug store chain in the United States, yet their stock hasn't gotten over $3 for ten years now. I'm not suggesting this will be the fate for Glu, but pointing out that just because a stock is inexpensive, doesn't guarantee instantaneous results.
Third-Party Publishing
A new venture for Glu Mobile is their third-party publishing division. This may be exactly the right medicine to get the stock in gear because it will increase revenues for the company in 2013. Glu is a successful developer, so they know how to get a game to the international market. What they are doing now is partnering with small gaming companies in China, Japan and Korea that have achieved success in their native markets, and are bringing those games to the Western World by localizing the languages to English, Russian or Portuguese.
Glu has long track records with Apple, Google, Facebook (FB) and Amazon (AMZN) to get these third-party games to the right distribution channels. They're anticipating launching at least six third-party publishing titles in 2013. Two early in the third quarter, and the balance late in the third quarter, or the fourth quarter. In the long-run the third party publishing division would have the same EBITDA margin as what their internal studios will have.
Greg Cannon commented about the margin profile where it concerns the third-party games:
Obviously in the near term the gross margin will be impacted because we’re having to pay a rev share back to those partners initially. We have brought down our full year guidance to 88% on the gross margin basis to allow for those rev shares, but ultimately by reducing the R&D investment on the third party publishing, you still get to it the similar long term EBITDA margin.It should be noted that Glu ended the first quarter with $21 million in cash, DSO [days sales outstanding] less than 60 days and no debt on the books. However, they are guiding lower to $14 million in cash by the end of the year without having to tap the capital or equity market.
Conclusion
Gambling, monetization and third-party publishing were the brunt of both presentations. Management also spoke briefly about the Quad Screen Future where they will be bringing Glu Mobile games to Apple laptops and HDTV's in addition to smartphones and tablets. You will be able to scale Glu games to all of these consumer products. Even now, you can do this to some extent. However, that is a reach into the future, and I'm more concerned about the next twelve months.
Bottom line is that the company restructured in November after a very promising Summer of 2012. What a difference a few months makes. If you want a turnaround equity with a lot of potential, Glu Mobile is the place to be. However, even though they are the poster child of pure-play mobile gaming, it's a risky investment, like all turnaround stocks.