First quarter 2014 has just closed as I write this article about GLU Mobile (NASDAQ:GLUU), a pure play mobile gaming company. With access to daily app store revenue rankings for the past 3 months, I believe that GLU's revenue will exceed guidance a full month ahead of its 10-Q release and conference call scheduled for April 28, 2014. However, it won't be a blowout like last quarter.
Freely available app store data represents a new step up in the democratization of investor data. It builds on the strides made by internet access to real time stock prices, live conference calls (albeit with scripted questioning by Wall Street analysts), and live blogging of major new tech releases. It is part of the same trend toward equal access to investor data that famed Fidelity fund manager Peter Lynch wrote about after realizing that any shopper could see the disruptiveness of L'eggs hosiery sold through grocery stores in the early 1970s.
Had I been following app store data 3 months ago, I could have made a killing buying GLU before it announced 4Q 2013 results on February 6, 2014. On that day, the company disclosed a 60% Q/Q revenue explosion due to the successful release of Deer Hunter 2014. The share price shot up from $3.87 to $4.94 for a one day gain of 28%.
I know, "shoulda, woulda, coulda." But let me walk you through the charts of GLU ex post to pique your interest before proceeding on to an ex ante analysis of the chart of GLU's franchise game, Deer Hunter 2014 (DH14), plus the charts of FIVE new releases: Eternity Warrior 3, RoboCop ™, Motocross Meltdown, Front Line Commando 2, and Pirates of Everseas.
I present first a spreadsheet of trailing 4 quarters of revenue for 3 of the most followed publicly held pure play mobile gaming stocks listed on US stock exchanges.
New mobile game releases can create a 50% or move Q/Q revenue pop like Deer Hunter 2014 for GLU and the Saga series for King Digital Entertainment (NYSE:KING). But, my reading of data derived from app stores suggests that even mega-hits like Candy Crush Saga plateau and fade after 3 quarters. You will get killed playing these stocks if you rely only on 10-Qs or interim sale data released by Wall Street analysts at their convenience.
Fortunately, there are several data analytics companies that track daily app store downloads and in-app purchases of mobile gaming companies. We have a limited access, free account at App Annie. (Disclosure: I have not received any remuneration from App Annie.) Another sources is Distimo.
With a free account, you cannot download any data. But you can take screenshots of graphs of daily rankings (1-1000) of mobile games by revenue, where revenue is the sum of download revenue + in-app purchases. These graphs can be filtered by app store - Apple Store, Google Play, and Amazon - by mobile game type, and by country. App store data does not include revenue from advertising. But most mobile games these days are free-to-play with monetization via in-app purchases.
Below is a graph of GLU's stock price, showing the 28% pop on February 6, 2014 based on a 60% Q/Q revenue growth for 4Q 2013.
The chart above was foreshadowed by App Annie data. On September 18, 2013, GLU released Dear Hunter 2014 (DH14). It immediately shot up to an App Annie Top 10 revenue ranking and remained there during October and November. During December, the game slowly slipped down to a Top 15 ranking.
A more granular view of the above:
As a space saver, we show only App Annie data derived from the U.S. Apple Store, believing that this sample is reflective for GLU games as a whole. For other games with a significant following in Asia, data derived from Google Play store should be included, as Android is the primary smartphone OS there.
In hindsight, I know now that a Top 15 game was unprecedented for GLU. Based on recent disclosures by KING and GLU, I now have a rough map of App Annie revenue ranking to quarterly $ revenue.
The long-tail of this graph will come into play when analyzing GLU game revenue ranking charts for 1Q2014.
In sum, the data above signaled a month before GLU's 10-Q release in February 2014 that DH14 was a hit and that GLU would blow through guidance.
Now we turn to an ex ante analysis of whether GLU will beat revenue guidance for 1Q. Here is the guidance from an SA transcript of GLU's 4Q conference call on February 5, 2014"
"Turning to the first quarter of 2014, we currently expect our total non-GAAP revenues to be in the range of $38 million to $40 million, an increase of 54% to 62% compared to the first quarter of last year and slightly down compared to Q4. This guidance assumes Deer Hunter 2014 to contribute approximately one-third of total non-GAAP revenues during the quarter.
We are also seeing solid initial traction from EW3, RoboCop and Motocross Meltdown, which will lead to broader revenue diversity in Q1 as compared to Q4."
In sum, GLU's guidance is for a slight down Q/Q. Based on the charts below, I believe that GLU will have an up Q/Q in the 10% range, enough to push the stock up from its current depressed level. But, none of the new releases came close to the Top 15 hit of DH14.
First, we present the revenue ranking chart of DH14 for 1Q. The "half empty" view is that DH14's revenue continued to slide from a Top 15 game to a nadir ranking of 31 on January 31st. The "half full" view was that GLU made two important release updates that reversed the slide and DH14 ended the quarter at 13.
On January 31st, version 1.2.2 was released boosting revenue ranking from 31 to 14 in a day. On March 18th, version 2.0.0 was released again boosting revenue ranking from 40 to 13 in a day.
I don't see this reversal pattern in charts of games put out by other companies. The usual game revenue pattern is up, plateau, then steady decline. I believe the above chart is a reflection of GLU's ability to manage a game post-release and to make frequent updates that boost in-app revenue.
Also, not too much should be made in revenue ranking swings of games ranked below 15. There is a long tail relation between revenue ranking and $ revenue - see the graph above again. Ten point ranking swings below 15 are associated with modest $ revenue swings.
We are still in the very early stages - with only 4 actual data points - of fleshing this relation out, but roughly, we estimate that a 5 point drop in DH14's ranking over the course of 1Q resulted in a quarterly revenue drop in the $5M range.
The science of mapping app store rankings to $ revenue is evolving rapidly. We have found another attempt made by Think Gaming based on estimates of daily active users multiplied by estimates of average revenue per user.
Based on comments of an earlier article of mine on SA, I want clarify what I mean by a Top 10 or Top 15 rank on "the charts." My rankings come from App Annie, not directly from Apple Store charts. There have been a number of articles published lately warning about "gaming" the Apple Store charts by using bots to create download spikes. There is even a report of a developer spending thousands of dollars to spike in-app revenue of his game. In response, Apple (NASDAQ:AAPL) has altered its chart algorithm to reduce fraud.
So with these caveats in mind, the question becomes, can the release of FIVE new GLU games in 1Q overcome DH14's decline? Here are the charts and insight a full month before the 10-Q comes out.
First up was Eternity Warrior 3 released on December 31, 2013. The game barely cracked the top 100 initially and has faded since then.
Next up was RoboCop™ released on January 7th. It got as high as 89 on January 16th, but has faded. While affixing a hit movie name to a game generates downloads, it is quality that generates revenue. The RoboCop™ chart is a warning to GLU as it moves forward with releases of other branded games.
Next up was Motocross Meltdown released on January 21th. It never cracked the Top 100.
Next was Front Line Commando 2 released on March 5th. This was probably GLU's biggest hope for a hit as it is a franchise game with some name recognition. The game was the best of the 1Q lot, but never cracked the Top 50. An update is warranted here.
Last was Pirates of Everseas released just two weeks ago on March 18th. It never cracked the Top 200.
While there are no new releases that have come close to DH14's success, GLU has demonstrated clearly that it can deliver a number of new games on time. We believe that the sum total revenue from five new releases was sufficient to offset a decline from DH14. GLU will beat its 1Q revenue guidance, but not by much.
Obviously, there is room for improvement here. The positive take-away from 1Q is that GLU has proven that it can deliver a slew of new games on or before the date promised. Not many gaming companies have proven that. With its engagement management platform, GluOn, now in place, it has the capability of boosting revenue of games post-release.
Disclosure: I am long GLUU, ZNGA. 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.