Sustained Profitability Should Be Here For Glu Mobile

| About: Glu Mobile (GLUU)


Q4 has been one of the most exciting quarters in history for investors in Glu Mobile (NASDAQ:GLUU), which has seen the company's stock push 52 week highs amid excitement about its best performing game ever in Deer Hunter 2014. The success of that single game also has investors expecting something that we haven't been able to realistically hope for prior to Q4, and that is a positive net income figure for the quarter. Glu has given forecasts of $31.5-32.5M in revenue for Q4 with $750,000 in EBITDA and $0-$400,000 in net income. I think this guidance was somewhat conservative even at the time, and it seems that these numbers will be beat when Glu releases results on February 5th.

Q4 Game Performance

Game Release Date Peak Q4 Rank Q4 Peak Date Rank 12/31
Mech Battle Arena 10-Dec 1373 13-Dec -
Gun Zombie 2 4-Dec 167 9-Dec -
Gang Lords 24-Sep 1344 11-Oct -
Deer Hunter 2014 17-Sep 5 30-Oct 12
Odyssey: AOG 1-Aug 786 3-Oct -
Frontline Commando: D-Day 27-Mar 148 1-Oct 216

(All data provided by

One thing that should be clear from the chart above is that Glu's results in Q4 rest almost entirely upon the performance of Deer Hunter 2014 because every other game released around Q4 was a total flop. This was partially by design, as Glu pushed back releases of their more popular titles into Q1 upon realizing the success of Deer Hunter, but there are still very few positives to take away aside from Deer Hunter.

The good news is the results from Deer Hunter should be phenomenal enough to far outweigh the poor performances of the other games. In my previous article I examined the performance of a similarly performing game and laid out what investors could expect in terms of revenue if DH14 could maintain a high position on the grossing charts. I think that Deer Hunter will post significantly better numbers than my "best case" scenario of $17M for the quarter for several reasons:

1. DH14 outperformed my benchmark game in peak rating, floor rating, and average grossing ratings.

2. The mobile gaming market has grown since the period in which I took results from the benchmark (Q4 of 2012).

3. The numbers simply add up in Deer Hunter 2014's favor.

I believe #3 here is the most important point, so I will go into further detail on that. In the 13 days DH14 was available in Q3 it generated $2.7M. Simply extrapolated over the 92 days in Q4 would give us $19.1M in revenue, but I think even that figure is far too low. During Q3 DH14 was generating that revenue almost exclusively from iOS because the game launched later on the Google Play store. It took until October 5th for DH14 to break into the top 15 on Android, where it stayed for the remainder of Q4. Considering that Android accounted for 31% of revenues in Q3, I would have to increase the $19.1M figure from above by 31% to factor in the revenue DH14 pulled in from Android in Q4. After doing this the new revenue estimate for DH14 alone would come out to just over $25M in Q4. These should be exciting numbers for shareholders, considering that this game alone is likely to generate more revenue than Glu has posted in any prior quarter in 2013. The burning question still remains: Will it be enough to make Glu profitable in Q4? Let's take a look:

What it Would Take For Profitability

Using information that the company provided in the Q3 conference call, I will put together a rough breakeven estimate for Glu in Q4. Glu expects a small quarter over quarter increase in non-GAAP OpEx to $22.8M, and factoring in $1.1M in amortization plus $1.3M in stock-based compensation gives us GAAP fixed costs of $25.2M. With that in mind, and using Glu's gross margin estimate of 72% for Q4, I calculate that Glu would need about $35M in revenue to post a positive net income figure. My figure is materially higher than Glu's because I choose to include non-cash GAAP expenses that Glu strips out when reporting non-GAAP figures.

I do not think Deer Hunter alone will drive Glu to profitability in Q4, but I believe it is possible, if not likely, that continued revenue streams from previous successful titles will provide enough incremental revenue for Glu to post a profit. I included Frontline Commando: D-Day from Q1 in my chart of game performances because it shows that some of the games released multiple quarters ago are still generating revenue for Glu. Games like FC: D-Day, Eternity Warriors 2, STARDOM: HOLLYWOOD and even whatever the lackluster Q4 releases manage to scrape together should be enough to propel Glu to at least break even when combined with the massive success of Deer Hunter 2014.

Company News

Glu released several interesting news stories throughout Q4. None of the stories are likely to contribute to Q4 results but present some longer-term points to consider.

1. Glu announced a partnership with Japanese gaming company COLOPL - it is difficult to determine how valuable this will be because, thus far, Glu Publishing has not produced any noteworthy games. If some quality titles that generate significant revenue come of this partnership that will be great, but if we are stuck with more mediocre titles then this could become an afterthought.

2. Glu announced its first title made for Google Glass - while this development is cool, it does not have any particular implications for the company in the near future. It remains to be seen how popular Google Glass will become and how much gaming will be done on Glass. If there is an immediate positive to take away from this it is the strengthening of the relationship between Glu and Google (NASDAQ:GOOG).

3. Glu partners with Kim Kardashian for celebrity lifestyle game - this bit of news might draw groans from some investors, but luckily this move was done to target a different audience. The "STARDOM" series of games has already proven to be successful and this partnership should build upon that success and improve the marketability of these games to the target market- teenage girls. Glu has recognized that the market of young, female mobile gamers is widely underserved and therein lies a significant opportunity to build upon the presence they already have in that space.

Looking into Q1 14

Q1 looks to be another exciting quarter for investors. Big name releases such as Eternity Warriors: 3, Frontline Commando 2, Motocross Meltdown, and Robocop should all serve to expand upon the success that DH14 is enjoying. Robocop has been showing increasing traction since its release and should continue to do so at least until the movie premiers in February. Eternity Warriors 3 was released at the end of Q4 and the data from this game is also positive. Both games are currently maintaining top 100 ranks in the app store and are not showing signs of slowing down.

The upcoming releases are just as impressive as the games that have already come out. Frontline Commando 2 is an exciting release because, as I noted earlier, the previous version released in Q1 of 2013 is still performing well after many months (a long time in the mobile gaming market). If FC 2 can build on that success then it should be another hit to look forward to from Glu. Motocross Meltdown is a game that Glu has been heavily marketing and if the results equal the hype it is likely to be a solid game for the company.

All in all, things appear to be looking very good for Glu right now as investors anxiously await the results from Q4 and the forecasts for 2014. The bar has been set higher than ever by DH14 and anything short of profits for Q1 and beyond will be very disappointing.


Going forward I am cautiously optimistic regarding the performance of Glu. Deer Hunter 2014 will not maintain this level of success into 2014, so Glu is going to have to produce more hit games to continue to increase top and bottom lines. The GaaS model is showing signs of promise such as in DH14, but there are still hints of uncertainty such as the awful performance of the other releases in Q4. Glu Publishing has been a disappointment so far but I think things are likely to get better as the kinks of the business model are worked out and the division becomes more consistent.

2013 was an awful year for the most part with Glu. Investors had to bear an awful surprise in the $14M equity raise (near the 52 week low, no less), there were many game delays, declining revenue, a sneaky accounting change, and less transparency about game releases. I am hoping that Q4 turns everything around and paves the way for a successful and profitable 2014 so that investors are able to put all of that behind us and reap the benefits of a higher stock price.

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.

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