Glu Mobile: Sticking to Growth

Consumers worldwide are stuck on cell phones, with the devices seemingly glued to their ears. And many are using their phones for entertainment -- mostly to play games -- as well as a communications device for voice and text messages.

A prime contender to become a true on-the-go content king is Glu Mobile Inc. (Nasdaq: GLUU), a California startup that has blossomed in the past few years. The company, known as Sorrent prior to May 2005, became a public company in March, when it offered 7.3 million shares at $11.50 each. Since then, its stock has risen about 20%.

Glu Mobile is the publisher of a strong portfolio of games for mobile devices. Some of its original titles include Super K.O. Boxing!, Stranded and Brain Genius. It’s also adopted titles based on other, more traditional games including Clue and Monopoly, and popular subjects such as the World Series of Poker. Its first-quarter lineup also included Centipede, based on the Atari classic, and Project Gotham Racing, based on a popular title from Microsoft Corp. (Nasdaq: MSFT).

Recently, in conjunction with the “Transformers” movie, the company rolled out a game that lets players battle the Decepticons in the role of Optimus Prime.

Growth has been spectacular with two key acquisitions. CEO Greg Ballard noted on the company’s first-quarter conference call May 2 – its first as a public company – that its revenue was $7 million in 2004. After acquiring game maker Macrospace, revenue shot up to $25 million in 2005. In early 2006, Glu acquired iFone and leveraged those new titles and licenses into revenue growth of 80%, climbing to $46 million.

Since it went public this year, news has been coming out of the San Mateo, Calif., company even faster than your typical first-person shoot-’em-up. Glu announced new content and distribution deals and has opened a design studio in Beijing. It’s also distributing ringtones and other visual content as part of a development deal with Warner Bros. On the horizon: Glu has the rights to produce a mobile game based on Activision’s wildly popular Xbox franchise, Call of Duty, beyond what’s already on the market from several competitors.

Mobile content is a hot topic, with research firm iSuppli predicting that the market for premium mobile content will more than double in the next four years. iSuppli said video is likely to be the biggest driver for the content, expanding from an estimated $1 billion this year to more than $6 billion in 2008. Overall, content for mobile devices including cell phones could top $44 billion by 2011, from an estimated $20 billion this year.

Still, iSuppli says it’s spotted a slowdown in mobile gaming growth, most notably in Asia, even though Glu Mobile and Japanese competitor Square Enix (Tokyo: 9684) gained market share in the first quarter of 2007.

With the recent run-up in the stock market, Glu’s shares have also moved firmly higher, well into the $13-$16 range of analysts’ expectations compiled by Thomson Financial. The recent mean estimate of eight analysts surveyed by Thomson is $14.83. On Friday, Glu Mobile closed at $12.80.

Since May 1, more than a half-dozen analysts have initiated coverage on Glu Mobile, with the usual mixed bag of opinion. Yet about two-thirds of them have at least a “buy” rating on the stock.

On June 1, Deutsche Bank analyst Jonathan Goldberg initiated coverage with a “buy” rating and a $16 price target – indicating a 28% upside potential at the time. That helped light a fire under Glu, with shares rising as much as 5.7% intraday.

Other analysts remain mixed. Nollenberger initiated coverage July 9 at “neutral,” saying that while it has a favorable opinion about Glu, it’s concerned about competitive pressures. Glu, Nollenberger says, is fairly valued around $14, based on 35 times the fiscal 2008 earnings estimates.

In early May, Bank of America initiated coverage with a “neutral” rating and $13 price target. Goldman Sachs started Glu with a “buy” and a $14 target, while Lehman Bros. started it at “overweight” with a $14 target. Last month Kaufman initiated coverage with a “buy” rating and a $16 price target, based in part on Glu’s strong relationships with content owners and the largest wireless carriers. At the same time, Needham & Co. reiterated its “buy” rating and a $15 target, following a Glu games showcase in New York; it had initiated coverage the month before.

Glu Mobile released its first-quarter financial report on May 2, sounding optimistic while still posting a loss. On a pro forma basis, revenue for the quarter ended March 31 increased 94% to $15.7 million from the year before, as its loss shrank to $764,000 from $3.5 million. The per-share loss declined to $0.59 from $0.76.

Issuing an outlook for 2007, Glu Mobile said it was expecting revenue of $68 million to $70 million, but shareholders could see a loss of between $0.12 and $0.16 per share. According to analysts surveyed by Thomson Financial, the company could be in the black by next year, with revenue projected to increase 51% to a range of $100 million to $110 million. The EPS estimate compiled by analysts surveyed by Thomson calls for $0.28 next year.

CEO Ballard told investors on the first-quarter conference call:

We had a great quarter. We are also very focused on building a business with long-term traction. … We believe that we are at the forefront of a tremendous opportunity.

He also noted the potential benefit from what was, at the time, the pending release of the iPhone from Apple Inc. (Nasdaq: APPL). But he also was sounding out the opportunity to take advantage of the technology built into many other handsets.

“These handsets, right now, are capable of an amazing thing,” Ballard said on the call, while citing the need to improve the cell phone interface. “You can play games today that are as exciting as imaginable, both 3D and 2D games that are quite engaging. The issue for most consumers today is they can’t figure out how to navigate through the deck and find the games that they want … and in many case, (are) not even aware that they exist.”

Glu Mobile, which is scheduled to report second-quarter results on August 1, appears well-positioned to capitalize on the continued growth in mobile content, in the United States and in other regions.

“It’s still pretty difficult to buy a game, and it’s still, in cocktail conversation, pretty obvious that the vast majority of people walking around don’t know that you could buy a game,” Ballard said. “And yet, this last year in the United States, there were 80 million console units sold in the second half of 2006 … 80 million console units were sold, 50 million downloads of games off of phones. So, as early as we are, and as complicated as it is to buy a game off a phone, as a mass-market, it’s already starting to show its muscle.”

GLUU 3-mo chart