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Glu Mobile (NASDAQ: GLUU) hosted its first Investor/Analyst day in years on May 30th in New York, and has been on a "roadshow" with conference after conference. This is a sign to me that management is invigorated and again excited about its future prospects. The entire senior management team was in attendance for the analyst day and spoke to its specific areas of focus. The presentation was pretty thorough lasting over two hours, and these are some of the most important takeaways for investors.

Growth of Asia

Glu has done well penetrating the saturated U.S. market, but its real growth strategy is overseas and specifically in Asia. Glu has offices in Beijing and Moscow, and has competitive advantages over competition there in that its games are localized and immediately available in 10 languages upon launch, across over 700+ devices.

Emerging markets have much less competition than the developed markets, and Korean growth is up 37% in the 1st quarter 2013 over the 1st quarter of 2012. Korea and the other regions in Glu's global footprint decrease risk and Glu's dependency on developed nations.

To further capitalize on the company's growth in Korea, Glu announced on May 29th that it had expanded its distribution with Kakao Games and Sk Planet's Store.

Kakoa Games has a popular messenger app called Kakao Talk with over 80 million users. Kakoa Games offers more than 100 games to its users and will include Glu games as of the third quarter this year.

Sk Planet's T-Store is the largest carrier owned Android marketplace, accounting for over 50% of all Android revenue in Korea. Sk Planet's subscribers currently have to purchase apps through Sk Planet's T-Store, unlike in the US where regardless of your wireless carrier there is a central Android and iOS marketplace. Gaining access to the other 50% of that market could essentially double Glu's revenue in Korea. Glu had a total of almost $5 million in revenue from APAC/China in the first quarter of 2013. That figure should grow substantially in the 3rd quarter.

Tablet Penetration

Tablets are growing at the fastest rate of all platforms and now constitutes 50% of Glu's revenue. This rapid growth is fueled by a couple of factors, but manly because of their low cost and multifunction capabilities. The significant thing to note here is that tablets are very much apart of Glu's quad screen focus. Each title the company releases is designed with a high enough pixel density to look great on a large screen TV. This makes the transition to other platforms such as tablets and computers very easy. Users are also willing to shell out a little more for a tablet game as the game play is better and the perceived value is higher than on a smartphone.

As part of Glu's production process, games that are successful on the smartphone will transition to the tablet, then the computer, and then the TV. The little extra development cost pays nice dividends and opens the game to new audiences. It also increases the value of the game to those interested in playing across multiple screens or devices, again creating more value and increasing the likeliness of some form of monetization.

Rise in Advertising Revenue

Chris Akhavan came to Glu from Tapjoy, a leading mobile advertising platform that Glu has had a longstanding relationship with. Chris and Glu plan to better use ad spend and start implementing video advertisements to improve monetization. Glu has seen advertising make up as much as 30% of revenues in the past, and management sees it returning to those levels. Because of the high quality of the games that Glu produces, users are very willing to participate in offers or watch a short video clip such as a movie trailer in order to earn free items in the game, versus shelling out money for them. This move will better exploit the 90+% of Glu's users that are not currently spending money on in-app purchases. I myself have participated in these types of offers and they are an easy way for users to get free currency. The user gets free stuff and the company makes some money. I quite frankly would have been happy to participate just for getting to play the game for free because i know the company needs to make money somehow. Glu is finally starting to realize this as an opportunity that is not currently being taking advantage of.

Another avenue of improvement for advertising revenues is Glu's move away from Ad networks that are taking a 30% cut of advertising revenues. Glu plans on cutting out the middle-man and forming deals directly with the top 25 advertisers. Glu has a large user base and concentrated demographics within its games. The company could for example ink an advertising deal with US Weekly to promote within its Stardom games, or sign a contract with Bass Pro Shops to advertise in its Deer Hunter games. These are areas where Glu can actually demand a premium for advertising, and companies would gladly pay it.

Other Improvements in Monetization

Glu is learning from previous mistakes and is moving away from the one time purchases/durable goods economy toward more consumables and "try before you buy" up-sells. Previously users would spend say $1.99 on a gun that they would be able to use for the rest of the game. They would then have no need to purchase anything beyond that to complete the game and the spending would stop there. What Glu has found from new strategies is that there is a better way to monetize those users willing to spend money on goods and upgrades. The following are some of the new strategies the company has implemented.

Mystery Chests - These are a chance based purchase in which a user can spend $.99 and get an item either worth $.99 or something worth $4.99. What Glu has found is that people are willing to spend a little on the chance of getting more for their money. Glu has even offered incentives to purchase those mystery boxes in bulk with a guarantee of receiving a special item in addition to the mystery boxes. After the introduction of mystery boxes, Glu saw 46% of total revenues coming from this new source of monetization.

Daily Rewards - This simple concept gives users an incentive to log in every day, increasing exposure to special offers that may entice them into making a purchase, and improving retention overall.

Glu implemented just these few changes in the Heroes of Destiny V1.1 update, and ARPDAU increased 41% the week after the update and leveled out at 10% higher.

Average Paying Users also increased 27%, and the long-term value of the game increased 41% over the first version, a huge move in the right direction toward Glu's monetization goals.

Glu also implemented some changes to Frontline Commando: D-Day, the company's biggest hit to date with around 1 million daily active users. Those changes include:

Eliminating pay walls - Pay walls are points in the game that are very difficult to get past unless you purchase an upgrade. These have been a long standing monetization tool, and were previously thought to be a necessary one in the Free-to-Play model. After all, why would you pay for something if you could play the entire game for free without doing so? What Glu discovered is that "pay walls" were actually causing people to abandon its game altogether, adversely impacting player retention. By removing these pay walls and implementing other monetization strategies such as "packages" and "try before you buy" up-sells, Glu was able to improve both retention and monetization.

Package Packs - This new strategy takes existing items in the game and bulks them together for a discounted price. The nice thing about this for Glu is that it can bulk items that users were not purchasing before, but that they had already spent the time developing graphics and the mechanics for, and bulking them with things that players actually did want. The collective package was then offered at a set price at a nice discount from purchasing the items individually. So whereas a user may have spent $2.99 on a gun alone, they can now get the gun, a grenade, a vest, and a scope for just $4.99. This "value" increases the likelihood that a user will make a purchase and also boost revenue for Glu.

Try Before You Buy - This concept explains itself. It simply allows users to use an item for a round of game play, see how awesome it is, and then offers a one-time discount to purchase it at the end of the round. Early results show it is an effective way to get purchases.

The introduction of these new monetization tactics showed the following improvements in metrics in Glu's games:

Frontline Commando: D-Day (Live only 4 days in Q1)

Increase in paying users by 25%

Improved ARPDAU 33% from $.046 per user to $.061 per user

Increase in aggregated ARPDAU by 28%

Increase in Package Revenue with an adoption rate over 75%

Improve LTV by 38%

Eternity Warriors II: Q1 Revenue $2.1M

Increased ARPDAU by 60%

Increased Revenue by 62%

50% of total revenue came from the new items introduced

Contract Killer 2: Q1 Revenue $1.8 Million

Weekly ARPDAU increased 57%

Average Monthly ARPDAU was up 51%

These early numbers are quite impressive. Monetization is the driving force of revenues. If revenue is $19M, as was the case for Glu in Q1, then a 33% increase in that revenue equates to an additional $6.27 M in revenues. That sort of improvement across the board is all that Glu needs to push it to profitability. It simply needs to apply those methods across its entire portfolio, and that is precisely where the new GaaS model begins to shine.

GaaS

This is the most exciting development from Glu in my opinion. Management describes Games as a Service as an evolution, not a fad, because it is the future of gaming. Gluon is the GaaS server platform built on the technology that Glu acquired through its GameSpy acquisition. The compelling point here is that it has the potential to be a real game changer for Glu. I think of it as Glu's Golden Ticket. It is indeed productized across all Glu games, meaning that changes or improvements can be implemented across all games at once if necessary. So when Glu finds monetization systems that work, such as mystery boxes or video ads, it's almost as simple as a click of a button to implement it to all of its games across its entire portfolio. This is something that Glu says no one else in the industry has, and that this technology, along with its talent, will enable the company to outperform competitors going forward.

GaaS is clearly the new focus of management. In addition to everything mentioned above, it will greatly reduce the cost and time it takes for Glu to update its games. This quicker turnaround time will enable Glu's developers to provide updates on an estimated monthly basis, versus the 2-6 months current update cycle. Figures show that updates greatly improve retention of users and trigger a large spike in the monetization metrics. The ability to provide them more often will create more of these spikes and increase total revenue across all of its games on the Glu-on server.

Some important features of GaaS are:

  1. Always online, both players and operators.
  2. Investment in a persistent "world"
  3. Frequently updated contents and events
  4. Ongoing player interaction/social aspects
  5. E-Commerce operations and analysis

With the new Glu-on server, all of the users are on the same platform. Glu's monetization team can compile metrics across all the Glu games that a user is playing. According to Ricchetti, it's similar to what Amazon does in suggesting items to the user and grouping things together for them to buy. The system enables Glu to target different customers in different ways, which increases their likeliness to make a purchase.

So for example, if a user is seen to spend a lot of time playing one of Glu's shooter games, the server would know to advertise a similar game such as Deer Hunter, versus pushing Stardom, which is less likely to fit the players interests. The same goes for in-app purchases. If a particular user historically prefers to purchase an upgraded character or hero over a gun, then Glu can tailor special offers away from guns and toward a hero in which a person is more likely to purchase.

Glu's 2H games will be the first to include these new GaaS features and will be a good indication of what Glu's games will look like from here on out. Those games are Eternity Warriors III, Frontline Commando 2, Deer Hunter Reloaded, all of which are Glu's most popular franchises.

3rd Party Publishing

Glu has talked a lot about it's 3rd party publishing division and it sounds promising with 3 titles signed for publishing already. Glu expects to have 6 3rd party titles launched by the end of the year. This move takes a lot of risk off of Glu for creating a hit. Instead of spending a million dollars each on 20 mediocre games a year, it can spend $10M on 10 really good games, and the other $10M developing and promoting 30 3rd party games that have already proven to be successful. The beauty of this model is that Glu has a proven hit on its hands, and reaps 50% of the profits.

The first titles to be published on Glu's 3rd Party Platform will be Warriors of Magi, and Age of Gods. Investors will be wise to watch the performance of these games on the charts as Glu has a lot riding on this segment of its business.

Real Money Gaming

Though Glu may not have the market cap to dominate the gambling industry, what it lacks in resources it makes up for nimbleness and its ability to execute quickly. When an opportunity presents itself, investors can count on Glu to be an early (if not the first) mover into the new arena. Glu was the first public company to launch real money gambling through its partnership with UK based Probability PLC and the first to launch Skill based gaming through its partnership will Skillz Inc.

Glu's Real money ventures include 2 slots games, one designed around its Samurai vs Zombies intellectual property, and the other around the popular Contract Killer franchise. In the 3rd quarter, Glu will also offer a full "gambling suite" through Probability PLC in the UK. Though investors will likely not gain much knowledge about the revenue income from these ventures in the next earnings call, the important thing for investors is that Glu is poising itself for the US. When the laws are relaxed to allow online gambling Glu will be ready to implement its gambling suite stateside.

Skill based gaming is another new area for Glu. As I mentioned it is the first public company to enter this arena, which is legal in 37 states. I find this to be a smart move by Glu as the horizon on real money gambling is still unknown. It will also prove a nice transitional phase for both Glu and its users for when real money gambling is made available.

The premise is that people will pay a small amount of money to compete tournament style, and the winners will receive their portion of the prize pool according to how they place. Glu has said that the entire prize pool will be paid out to contestants, leaving Glu to make money from the items people purchase to improve their chances of winning.

Glu's CEO Niccolo de Masi was interviewed on Bloomberg TV concerning the move into the cash for skills gaming. Video found here.

Conclusion

I have been bullish on Glu Mobile since the low $2 range. The company has seen some very volatile swings up and down, but I still believe this company is a great turnaround play. Here's why:

  1. Management is more focused than ever
  2. New additions to management has Glu working smarter, not harder
  3. Glu's new Glu-on server will be a game changer
  4. The rapid growth in mobile and tablets
  5. Glu's small size enables the company to make a shift quickly when needed
  6. Glu is more than ever a likely acquisition target as companies like Zynga (NASDAQ: ZNGA) struggle in the shift to mobile.
  7. Multi-platform capabilities and scalability
  8. Real Money Gambling ventures in the UK and the launch of its "gambling suite" in the 3rd Quarter.
  9. Skill based gaming launching in 3rd quarter with Deer Hunter Reloaded
  10. Major improvements in monetization
  11. Untapped advertising revenue potential
  12. Huge growth in Asia amid less competition
  13. Financially secure with no need to raise additional capital
  14. Insider purchases and ownership are bullish
  15. Management recently reaffirmed guidance for the 2nd quarter and full year

Glu's share price has experienced an unusually poor first half performance, especially when compared to the overall market. This creates a potential value for investors that believe in the company's ability to continue to improve its monetization and execute its business plan well. The second half catalysts discussed above, the expected return to top line growth and the potential for Glu to turn a profit make it a candidate at least worth keeping an eye on.

Source: New Monetization Changes Pay Off For Glu Mobile