Glu Mobile: Beating Zynga And Electronic Arts To Mobile Growth

| About: Glu Mobile (GLUU)

Based on this week's earnings conference calls and executive management commentary by three top gaming companies, it is becoming very evident that the future growth in gaming is on mobile based devices (smartphones and tablets) and that one company is way ahead of the pack in benefiting the most from this macro growth trend's tailwinds.

That company is Glu Mobile (GLUU), a leading global developer and publisher of freemium games for smartphone and tablet devices for a wide range of platforms including iOS, Android, Windows Phone, Google Chrome and Mac OS. Glu is headquartered in San Francisco and has an international reach with major offices overseas in Brazil, Canada, China and Russia.

As Glu Mobile's CEO Niccolo DeMasi put it in last night's conference call, "we have been skating to where the puck is going." Since DeMasi arrived as CEO in 2010, GLUU has designed and built a company focused only on mobile gaming. This once small area of gaming focus is now what companies like Facebook (FB), Zynga (ZNGA), and Electronic Arts (EA) see as their path to a successful growth future.

For evidence to validate this huge growth trend in gaming, you need only look to the incredible Q2 financial results of GLUU and the commentary of the executives of the top gaming companies.

Glu's Impressive Growth in Mobile Gaming Revenue

Yesterday, GLUU beat the upper end of guidance for the tenth consecutive quarter powered by its mobile focus, lack of dependence on Facebook web users, and strength in mail-oriented games. Second quarter 2012 results included these highlights:

1. 111% quarterly smartphone revenue growth year over year

2. $24.2 million revenue (up 35% year over year)

3. Gross margin of 91% (up 10% year over year)

4. Freemium revenue grew 151% to $19.2 million

5. Raised Q3 & 2012 full year guidance

6. Reiterated the launch of 23 titles in 2012

GLUU's stellar results in mobile gaming should not come as a surprise if you listen to what its competitors are saying about where their growth opportunities will come from.

What Tech Gaming's Top CEOs Say About Mobile's Future

In Electronic Arts' quarterly conference call on July 31, listeners walked away knowing exactly what GLUU has known since 2010. Despite the continued industry weakness in packaged games for consoles, CEO John Riccitiello noted that EA "saw double-digit growth in mobile driven by games on smartphones and tablets."

EA's Director of Labels Frank Gibeau confirmed the new growth sweet spot for gaming by saying, "Free-to-play is EA's fastest-growing business model, with year-over-year revenues that are up 156%." He continued, "I'm convinced that free-to-play will emerge as the leading business model for mobile gaming."

Additionally this week, social gaming company Zynga provided investors with a roadmap to where they see the growth in gaming. The company demoted their COO John Schappert and promoted the head of their mobile division, David Ko.

According to a Bloomberg report, "the reorganization was aimed in part at making mobile-software development more of a priority across Zynga, the people said. Ko will work with Chiang to involve more of the company's best designers on apps for smartphones and tablets, they said."

Like Electronic Arts, Zynga is placing more emphasis on mobile gaming on smartphones and tablets because that is where the growth and profitable future opportunities are in this space.

Hearing the chorus of similar bullish commentary on mobile gaming from EA and ZNGA, GLUU's DeMasi couldn't help but comment on this point in yesterday's earnings call by saying,

"They say that emulation is the greatest form of flattery. Over the past 6-9 months, many of our competitors, both private and public, have deemphasized or even abandoned Facebook web in order to pivot to mobile. It is extremely validating where GLUU has been for 10 quarters now to see others adopt such similar strategies."

Rick Factors

If you were to identify any risk factors in GLUU's story going forward it would be their execution in releasing new games and their ability to successfully integrate their latest acquisition of Gamespy (announced last night) and Blammo (acquired last year).

On games, CEO DeMasi reiterated in yesterday's earnings call that guidance remains for the release of 23 new games in 2012. Obviously, if any of these games were delayed, it would slow down expected second half 2012 revenue projections.

And on acquisitions, GLUU has been very successfull with stellar results to date on their Griptonite and Deer Hunter acquisitions, but the verdict is still out on yesterday's acquisition of GameSpy and last year's Blammo acquisition. To date, Blammo has only produced one new game title, Stardom. More production is expected from Blammo's casual gaming studio, but so far the visible, finished work product has been minimal.


For investors looking to ride the tailwinds of this massive secular growth trend are wise to hitch a ride with the most experienced, fast growing, and only pure-play in social mobile gaming, Glu Mobile. With GLUU's announcement last night of their GameSpy acquisition, GLUU will become even stronger in this space.

The Zynga-inspired selloff in this sector (which has nothing to do with GLUU's just reported earnings beat and raised full year guidance) has provided investors with a great entry in the low $4 range. With analyst price targets at $7 to $10/share based on earnings estimates, this stock is a very likely double from here within the next 6 months as 2013 earnings visibility comes into focus.

Disclosure: I am long GLUU.

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