Artificial Life: Attractive Trade for the Booming iPhone/Pad Market

| About: Artificial Life, (ALIF)

Normally I don't write about other opportunities than Chinese ones. But this one I wanted to share because they are also expanding in the Chinese market for mobile games.

Artificial Life, Inc. (OTC BB: ALIF) is a public US corporation headquartered in Los Angeles, with its production center in Hong Kong and additional offices in Berlin (EMEA headquarters) and Tokyo. As a leading provider of broadband 3G content and technology solutions in the world, they develop and sell a wide range of mobile applications for 3G, 3.5G and 4G network-enabled mobile (smart) phones. Currently their main business areas are: high quality 2D and 3D interactive (massive multiplayer) mobile games, mobile participation television (MoPA-TV®), mobile business applications (Mobil Diab® and Mobile Property) and their mobile commerce technology platform OPUS-M™. Recognized internationally for outstanding content quality and technology. The company has received many international awards and has been ranked one of the fastest growing companies in Asia Pacific by Deloitte.

The company has signed major licensing deals with Linkin Park, Robbie Williams, Red Bull Racing F1, BMW Sauber F1, BMW AG, Red Bull Air Race, Starz Media, Paramount, Cartoon Network, STAR TV, VfB Stuttgart, Borussia Dortmund, FC Bayern München, and Klitschko Brothers. They are now selling their products through over 1200 active channels of resellers and carriers around the globe and sold approximately 20 million licenses of mobile games in 2009.

You can download a corporate factsheet here.

The company announced solid growth in revenues and profits for fiscal year 2009. Revenues grew 22% to $27,454,474 and net income was $7,568,719, representing a net profit margin after taxes of 28%.

During the course of 2009, Artificial Life Inc. strengthened its global position as a leading, full-service mobile software provider by offering a wide variety of mobile products, including mobile games, mobile TV, mobile business applications, and mobile productivity tools and technology.

For the year 2009, Artificial Life sold over 12 million licenses for its mobile Java games worldwide. 2009 also saw significant growth in the market for iPhone games and applications, and though a relative newcomer to the iPhone market, the company became one of the leading iPhone publishers. The company had over 10 million game downloads globally and 70% of its games achieved a top-10 ranking, 46% a top-5 ranking, and 33% of the games even reached a #1 ranking on Apple’s (NASDAQ:AAPL) download charts in many countries around the globe.

Approximately 51% of Artificial Life’s revenues were derived from mobile games, while approximately 22% were derived from sales of non-game-related mobile products such as Mobil Diab™, a mobile healthcare application for business; 21% from sales of MobileBooster®, a productivity tool that has now become an integrated part of the newly released m-commerce platform, OPUS-M™; and 6% from sales of Mobile Property, a mobile application for the real estate industry.

Net income decreased in 2009 to $7,568,719 as compared to $10,575,285 for the year ended December 31, 2008. The decrease of $3,006,566 was primarily due to stock-based compensation expense of $2,385,500, bad debt expense of $2,636,979, and income tax benefit of $1,060,000 in this year compared to income tax benefit of $106,870 in 2008. The basic and diluted net income per share for the year ended December 31, 2009 was $0.15 compared to the basic and diluted net income per share for the year ended December 31, 2008 of $0.23 and $0.22, respectively.

Eberhard Schoneburg, CEO of Artificial Life, Inc., said:

2009 was again a very positive year for Artificial Life despite the global financial crisis that has hit many of our clients and affected most of our key competitors negatively. We managed to remain profitable with a solid 28% net profit margin and grew 22% in terms of revenues even though we deferred an additional $4.8 million in revenues and respective potential profits to 2010. We improved our accounts receivables situation by collecting substantial amount of cash in Q4 2009 and Q1 2010, and by utilizing working capital strategies to offset receivables and payables with certain customers and licensors and to acquire licenses while minimizing cash outflow and cash usage. We have benefited from a liquidity perspective and reduced our credit risk and exposure.

On May 10 they revealed their current iPhone title sales, download numbers and key ranking statistics. The company announced that as of April 30th, 2010, it has produced and released 29 games for the iPhone, iPod touch and iPad. So far, the top title was downloaded close to 2.8 million times, the second most over 2.3 million times and the third most over 1.7 million times. The average number of downloads per game was about 0.42 million. Paid iPhone games were sold at between USD 0.99 to USD 4.99 with an average price per game of USD 2.49.

The total number of iPhone game downloads generated as of the end of April 2010 was approximately 4.4 million in total compared to approximately 8 million for the whole year of 2009. The company had already announced earlier this year the release of three new iPhone games on the Apple App Store: Linkin Park 8-Bit Rebellion! -- the first ever massive multiplayer iPhone game featuring the rock band Linkin Park; Red Bull Racing Challenge and Spartacus: Blood and Sand -- the official game for the TV series from Starz Digital Media.

Artificial Life's latest release, the Linkin Park 8-Bit Rebellion! game was particularly successful and has hit the #1 rank for music games for iPhone and iPad in a total of 22 countries, achieved a Top 5 ranking in 38 countries and Top 10 ranking in 47 countries since its release. In the Adventure Game category it reached Top 5 rankings in 16 and Top 10 rankings in 21 countries. The game also achieved a Top 50 overall games ranking in 18 countries and Top Gross 50 record in 15 countries respectively.

Among the produced games, 21 are based on licensed and branded intellectual property from a variety of licensors while 8 games are based on Artificial Life's proprietary IP. The games have been sold in a total of 84 countries worldwide. The distribution of game downloads by regions is: 52% in North America, 32% in Europe and Africa, 11% in Asia Pacific, 3% in Latin America and 2% in the Middle East. The Top 5 countries in terms of number of downloads for our products are: United States, United Kingdom, Canada, France and Germany (with 47%, 10%, 6%, 5% and 5% of downloads respectively).

As of April 30th, 2010, all the new games released have achieved Top 100 or higher download rankings in their categories.

Eberhard Schoneburg, CEO of Artificial Life, Inc., said:

2010 has started very well for our iPhone and iPad business. We again achieved many #1 rankings for our products all around the globe. This speaks for the quality of our games. And just in the first 4 months of the year we have already generated over 50% of the downloads we generated in the full fiscal year 2009. We will continue to produce high quality games and business apps for the iPhone and iPad throughout the remainder of the year. We also invested heavily in new products and technologies in 2009 to further strengthen our technological advantage and leading position in the mobile content space for the years to come. We more than doubled our investments in new technologies and products with over $22 million in 2009, as compared to $10 million invested in 2008. Most of these investments were dedicated to our new OPUS-M™ platform, our tele-medicine platform and mobile diabetes application Mobil Diab®, and our new and very powerful augmented reality technology. We expect to see substantial growth and new business in all these areas in the coming months and years.

Their IR-department works good. I sent an email and my questions were answered the next day. They are actively seeking for diversification not only in terms of sales geography but also in terms of products. For mobile games, they try to expand their shares in all markets, including Asia, with the upcoming launch of various iPhone games in Asian languages. At the same time, Artificial Life is moving into areas such as business applications, and has devoted substantial effort since last year on the launch of a new line of products using augmented reality. In my opinion they can achieve an EPS between $ 0.25 and $ 0.30 this year. At a stockprice of $ 1.20 there is enough room for price appreciation.

Disclosure: Long: Entry ($ 1.20)