Glu Mobile Still Struggling to Monetize Mobile Games

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For over a year now, Glu Mobile (NASDAQ: GLUU) has provided an interesting investment idea to benefit from the surge in mobile gaming due to the adoption of smartphones and wireless broadband. Along the way, though, the company continues to run into monetization and platform issues, even with seemingly popular games.

The company is a leading global developer and publisher of freemium games for smartphone and tablet devices focused on creating original IP games such Contract Killer, Deer Hunter, and Gun Bros.

Glu Mobile has several new promising technologies, including a real-money gaming portfolio and a platform to launch games-as-a-service (GaaS) to further monetize and improve retention traction of already popular games. The question remains whether the business is predictable enough to generate strong returns or whether small, private firms will always generate outlandish returns based on surprise hits such as Angry Birds and Miner Craft.

More disappointing results

A consistent theme with Glu Mobile has been constantly reporting disappointing results. The company never seems to live up to the high expectations it creates. For Q2, analysts now expect the company to see a nearly 30% decline in revenues to only $17.2 million. The number is down from over $24 million last year and most investors had to have expected a surge to at least $30 million this year.

At least for Q3, analysts expect a slight increase in year-over-year revenue with a return to strong revenue growth for 2014. The major consequence of the disappointing results at the end of 2012 and the start of 2013 has been a continued string of net losses. The expectations were originally set for a profitable year in 2013. That has now been pushed off into 2014, and no investor can be confident of it being achieved at this point. Glu Mobile only has roughly $20 million cash, so further cash burn could require the raising of additional capital.

Some exciting developments

Glu Mobile has some promising developments with the push towards third party publishing, a shift towards games-as-a-service, and the development of real-money games, including both gambling and sills-based.

With an international distribution network, the company will now publish games for other studios with the collection of around 50% of the revenues generated. The plans are for distributing six third party games in 2013 and 12 in 2014.

Glu Mobile plans to invest heavily in the gaming service that provides an always on, persistent “world” called Gluon. The goal is to have frequently updated content and events such as tournaments that allows for constant player interaction. The service will include leader boards, chats, alliances, player profiles, and a storefront. The goal is to launch the service in Q4 via Eternity Warriors III, Frontline Commando 2, and Deer Hunter.

The company recently selected Skillz to introduce skill-based, real-money gaming in Glu’s skill-based games. The Skillz tournament platform will allow users to compete for cash prizes in games such as Deer Hunter Reloaded in up to 37 U.S. states by the end of Q213.

Fierce competition

Even outside of the relentless new gaming studios that pop up all the time and build some of the best games, any small players such as Glu Mobile will always face pressure from the big players such as Electronic Arts (NASDAQ: EA) and now Zynga (NASDAQ: ZNGA). The problem facing Glu Mobile is that these players along with others have much deeper pockets. Glu will have to out innovate and create better games in order to survive in an industry where a predictable winner hasn’t been easy to create.

Electronic Arts remains the preeminent game producer, and along with Zynga both have over $1 billion in cash to invest in the mobile gaming sector. Though EA has a significant console gaming revenue base, it is quickly moving into mobile as the top global publisher on the iOS platform. The company lists over $100 million in quarterly mobile revenue in Q113.

Zynga built itself into prominence developing for the Facebook platform, but it is now fiercely focused on mobile. The company reported that comScore listed it as number 6 in total time spent on mobile with 11.2 billion minutes. For Q113, mobile bookings were 22% of total bookings or roughly $50 million. The company remains very reliant on Facebook for revenue despite the strong mobile usage. Zynga has a roughly 70 million monthly user based compared to the 40 million for Glu Mobile.

Bottom line

While initial signs emerged of improving monetization via games launched during Q113, the company still was forced to guide for Q213 to a level substantially below the original expectations only a year ago. The company has several new initiatives with the GaaS, real-money games, third party publishing, and enhanced monetization plans that all individually could propel the stock higher.

For now though, Glu Mobile remains an extremely interesting stock with homerun potential that does nothing but strike out. The company only has a market value of around 2 times revenue, so any improvements in monetizing the existing gaming franchises could reward investors. One big hit and this stock could soar, but that big hit appears more and more improbable every day that passes.

While Activision and Microsoft have been taking the headlines when it comes to console gaming, investors following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. The Motley Fool's special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.

Mark Holder and Stone Fox Capital Advisors, LLC has no positions of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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