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Summary

  • GLUU has significantly beat estimates the previous two quarters, triggering spikes in the stock price.
  • The company built in softer guidance for 2Q14 based on the lack of releases during the quarter, however app data suggests the current titles continue to be successful.
  • The recent stock offering generated $32.4M for the company, setting it up to speed up development of current projects and shop around for acquisitions.

As the 2nd quarter is coming to a close, finance departments and investor relations will begin to consolidate the numbers and prepare for earnings calls and presentations. I believe this will be another quarter with Glu Mobile (NASDAQ:GLUU) that will exceed guidance and expectations. For the 2nd quarter, GLUU planned into the guidance an acknowledgement that there would be a lull in new game and update releases. Because of this, the guidance was lower:

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(Source: GLUU 1Q14 earnings presentation)

Based on current trends I believe this quarter will exceed expectations and guidance once again. I also expect the company to lay out more details on the recent public offering, and the plans for using the money going forward.

2Q14 Earnings

GLUU is a global developer and publisher of free-to-play games for smartphone and tablet devices. The free-to-play strategy means that forward earnings are a combination of Daily Active Users (DAU) and the ad revenue tied to each of those users. Not everyone who downloads the games will play the game every day, but the number of downloads, in theory will increase the number of DAUs. So, if the game can remain popular in the App Store and Google Play, then the number of DAUs should increase.

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In addition, within each of the platforms, if a user decides they do not want to view the mobile ads, they opt to buy out of them through in-app purchases.

(click to enlarge)

So with those numbers, investors should next look at the trends in both daily downloads, and DAUs to determine how this quarter will compare to the previous quarter.

First, the number of downloads.

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(Source: GLU Confidentially Marketed Public Offering presentation)

The popularity of the games the company has been releasing has lead people back to other popular titles. As can be seen from the last quarter, the company had an increase in downloads of 30% over the previous quarter (79.6 million vs 105.6 million), and an increase in 17% of cumulative installs.

Second, the number of DAUs.

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(Source: GLU Confidentially Marketed Public Offering presentation)

The numbers are continuing to trend up, but looking at the historic norms as percentages will help to predict future monetization:

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(Source: data compiled from GLU Confidentially Marketed Public Offering presentation)

Roughly on average, 1% of all cumulative installs will continue to be Daily Active Users, and 9% will continue to be monthly active users. While those numbers have fluctuated over the previous quarters, I believe the averages should help to predict future trends.

Franchise Trends

So going forward, app data will help to predict if the trends on downloads will continue or slowdown.

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(Source: GLU Confidentially Marketed Public Offering presentation)

Deer Hunter, Eternal Warriors and Frontline Commando represent roughly 50% of the revenue breakout for the quarter. While the other franchises will help to more accurately predict the number of downloads, I believe that looking at these three, representing 50% of the revenue, will help as a barometer. As a note, while the App Annie data comes from the Apple Store, similar rankings are found on the Google Play store.

Deer Hunter 2014

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(Source: App Annie)

Deer Hunter 2014 has had two updates during the quarter which have helped to keep the franchise high in the Rank History on the Apple Store. While it dipped below the top 100 rankings overall, it did bounce back up to the 60s as of the 10th of June. (As one of the DAUs for this game, I can personally testify to how addictive it is, and how much I look forward to releases.) While the company continues to make plans for the series, it has already planned for Dino Hunter to be released in July 2014, using the Deer Hunter engine.

Eternal Warriors 3

While Eternal Warriors 3 has not been as popular as Deer Hunter 2014, through the quarter it climbed in popularity due to updates and new releases before settling back down to where it began the quarter. However, compared to 1Q14, the game appears to be making a comeback and rebounding somewhat.

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(Source: App Annie)

Frontline Commando

Frontline Commando has two installments that are still producing for the company: Frontline Commando 2 and Frontline Commando D-Day. The company has the next installment of the series, Frontline Commando D-Day2 scheduled to come out this year.

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(Source: GLU Confidentially Marketed Public Offering presentation)

In terms of downloads, I expect the Frontline Commando franchise to have a much larger play on revenues this quarter. Frontline Commando 2 was released at the tail end of last quarter, and had very little effect on revenues for that quarter. While it has been declining in popularity, as would be expected as a game ages, the cumulative effect of downloads will continue to increase the potential population.

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(Source: App Annie)

Continued Updates

These three franchises, along with the rest of the portfolio, have been able to continue in popularity and due to the work the company is doing in updating the games. These updates keep the games from getting stale and played out. For me, it seems that every time I finish a level in Deer Hunter 2014, there is a new update that has just been loaded, a new deal on in app purchases, or a new level to finish. These updates help to trigger users and pull them back to the games.

Quarterly Update

So going back to the formula:

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If the % of DAUs (or MAUs) remains constant at around 1% (or 9% for MAUs), and the Number of cumulative downloads goes up, and the Ad Revenue remains constant, then in theory the Revenue should also go up. In reality, Daily Active Users and Monthly Active Users tend to fall as games become old and stale. The challenge for the company is to keep the games fresh, and users coming back to play, which is where I believe the updates come into play.

Recent Offering

The company just completed a round of offering, raising $32.4 million and selling 9,861,250 shares. As part of the presentation accompanying the offering, the company stated their intent to use the proceeds for both General Corporate expenses and to enter more acquisitions. For the corporate side, it intends to use the money to develop the 007 game and the next update for Deer Hunter, as well as expanding marketing.

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(Source: GLU Confidentially Marketed Public Offering presentation)

I feel bullish about the prospects of additional acquisitions. I believe the company has a good strategy for monetizing these games, and am curious to see how they will apply that model to the recent acquisition of the Diner Dash series. I believe that by acquiring previous hits that have gone stale, dusting them off, and applying this model will continue to expand the inventory and diversify revenue streams.

Conclusion

While the company initially issued softer guidance for 2Q14, I believe based on the data, that this quarter will offer similar results as the last quarter. Downloads of the franchises are remaining similar to the previous quarter, and recent updates to these games will continue to hook users and increase the amount of DAUs and MAUs. I also expect the company to continue to look for acquisition targets that will fit the model used by the company.

Disclosure: The author is long GLUU. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Glu Mobile - Why I Believe It Will Be Another Blowout Quarter

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