Glu Mobile's Bright Future

Apr.28.14 | About: Glu Mobile (GLUU)

Summary

Glu Mobile will report 1Q14 results on April 30th.

The entire gaming sector saw a down turn over the past few months, representing a buying opportunity for investors.

The launch of Deer Hunter 2014 and recent upgrades should help GLUU exceed estimates.

On Wednesday, April 30, 2014 Glu Mobile, Inc. (NASDAQ:GLUU) will report its financial results for the first quarter after the U.S. markets close. Last quarter saw GLUU jump 25% after earnings blew out expectations.

Click to enlarge

GLUU is a developer of action/adventure and casual games for the smartphones and tablet devices users. The company has market cap of over $325 million, and an enterprise value of around $310 million. During the last quarter the company reported almost $35 million in revenues after the launch of Deer Hunter 2014.

Analyst expectations and Guidance

The surprise last quarter was how much the company was able to beat expectations due to the launch of Deer Hunter 14:

Click to enlarge

During the last conference call, the company released the guidance for 2014, projecting $38-40 million for the 1st Quarter:

Click to enlarge

(Source: Company presentation)

On Wednesday April 23rd, Zynga (NASDAQ:ZNGA) released its 1st Quarter results, beating expectations and signaling a turnaround in the company.

Click to enlarge

(Source: Company presentation)

While both companies are different and have their own challenges, it should signal a swing in the gaming industry. For ZNGA, the company's ability to move into the mobile sector and reduce dependence on Facebook and online gaming, should help the future of the company.

For GLUU, the upcoming earnings should tell investors how well the company has been able to continue monetizing Deer Hunter 14, continue to develop additional games, and move into other markets.

The whole sector has experienced a slump over the past month, including the IPO of King Digital Entertainment (BATS:KING):

Click to enlarge

Developments

Over the course of the 1st Quarter, GLUU has continued to improve the business through increased development of Deer Hunter 2014, increasing the library of games, and expanding into different markets.

Deer Hunter 2014 was released during 4th Quarter 2013, and contributed over $27 million towards non-GAAP revenue for the company. Since then, the company has released Deer Hunter 2014 v2.0 adding additional levels, weapons, and challenges. This should help to maintain the solid rankings and revenue the company has seen from the franchise.

Click to enlarge

(Source: Company presentation)

The game spent most of the Quarter as a top 60 app in the US overall. Within the US-Games sector, the app hovered around the #20 rank for the Quarter, and spent most of the Quarter in the top 10 for the Arcade/Action sectors. The app did see a healthy boost from the release of v 2.0 in mid-March, which will continue into the 2nd Quarter. (While the data from AppAnnie.com is shown for the Google Play Store, all the apps saw similar rankings across the platforms. The data is also focused on the US market, and is not taking into account rankings from other countries.)

Click to enlarge

(Source: App Annie)

Compared to the last Quarter, the rankings have fallen some, but the app has maintained its prominence as a top performer. However, investors should keep in mind, these rankings are a snap shot of the day and how many downloads the app has in a given time frame. It does not take into account the cumulative effect of all downloads over the time periods.

Click to enlarge

(Source: App Annie)

While the Deer Hunter franchise has been a huge hit for the company, it is also working to develop other franchise games that will help to diversify the revenue stream. In the 1st Quarter, GLUU also launched RoboCop, Defenders and Dragons, Motorcross Meltdown, and Frontline Commando 2.

Click to enlarge

(Source: Company presentation)

While none of the games have come close to the success of Deer Hunter, each has been a success in their own categories, and will help to diversify the revenues the company generates. Defenders and Dragons briefly cracked the top 300 for the US market before falling. After the release of Motorcross Meltdown, it reached the #1 spot for the US-Racing category before starting to descend. Over all, the game never really was a success outside the racing category. Robocop spent a significant amount of time in the top 50 for the US-Arcade/Action category, but overall has been fading in the overall US market. The Frontline Commando 2 has continued to be a success in the US, and a top performer in the Action category, spending most of the Quarter in the top 10 for the US-Action market.

Click to enlarge

(Source: screenshots from each app on appannie.com)

While none of the recent releases were blockbusters in the same line as what the Deer Hunter franchise has been, they all help to diversify the revenue stream for the company.

The company is also working to diversify the markets it participates in, both regionally and in terms of technology platforms.

The company still generates most of its revenue from the US market, but is growing steadily in the APAC/China region. The opening of the Chinese market to the iPhone and iOS platform will provide another avenue into the market.

Click to enlarge

In addition to regional expansion, the company is also expanding into other platforms. When Amazon launched the Amazon Fire TV, GLUU was quick to adapt the Deer Hunter franchise to be playable on the box. The early entry into this segment will bode well for the future as other hardware manufacturers attempt to incorporate gaming into Smart TV's and streaming media players. Google Chromecast, Apple TV, Roku, and Amazon are all moving into the internet streaming device market.

Click to enlarge

(Source: amazon.com)

Going forward

The company has already been cautions in the 2nd Quarter guidance, expecting between $30 and 32 million in revenue due to a lull in the release of new titles already planned for the Quarter. During the upcoming conference call, analysts should expect to hear if the company is reaffirming that guidance or if it will alter the guidance based on successes with Deer Hunter, Amazon Fire, or other titles.

The company is working on developing a James Bond titled game in conjunction with EON Productions and MGM Interactive. The name alone and access to the James Bond title has the potential to establish another major franchise for the company, as long as the game lives up to the potential. Previous James Bond games, launched for Nintendo, Sony Playstation, and Microsoft X-Box, have all been huge successes.

Short effect?

GLUU has seen a fairly constant level of shorts over the past two months, sitting around 12 million shares. However, as the average daily share volume has decreased, the amount of time required to cover has gone up. On the other side, ZNGA has seen the volume of short interest increase almost 100% over the past two months. Based on the recent Quarterly results from ZNGA, there could be a positive catalyst for the stock as some of those seek to cover their short positions.

Click to enlarge

(Source: screen shots from nasdaq.com)

Conclusion

The successes of ZNGA over the last few quarters to begin turning around their model and expand more into the mobile platforms and rely less on Facebook should help to bring investors back into the Gaming sector. For GLUU, this means investors will be eagerly watching for the earnings report on April 30th to see how the company has been able to continue growing the Deer Hunter franchise and expanding its base with other titles.

Disclosure: I am long GLUU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.