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Glu Mobile is Ready to go to the Next Level

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I really love the games Gun Bros and Contract Killer; spending hours playing it every day on my smartphone. But the publisher of the games, Glu Mobile (NASDAQ: GLUU), didn’t get much investor love after its second quarter earnings report. The maker of mobile games raced past estimates in the second quarter, but a tepid outlook for the current quarter sent shares south.

I have always been a Glu Mobile bull, not only because they make great mobile games, but because they are plying their trade in the rapidly growing mobile gaming arena. Glu’s strategy of growing both organically and inorganically is worth noting and the company has seen its top line gather momentum this year, and the stock price has followed suit.

A perfect wave…almost

In its recently reported quarter, Glu played an almost perfect wave, killing most of the enemies, but a soft guidance took away some of the health. The company’s top line (non-GAAP) grew 35% from last year to $24.2 million in the quarter. The revenue growth was led by impressive performances from Deer Hunter Reloaded and Little Kingdom, both of which were developed by Griptonite, which Glu had acquired last year.

Also, Glu’s gross margin improved to 87% in the quarter from 78% last year, a sign that the company is getting more efficient. On an adjusted basis, Glu swung to a profit of $199,000 from a loss of $506,000 last year. Apart from these impressive statistics, another point worthy of note was the 111% year over year jump in smartphone revenue.

Conquering more

Glu continues to benefit from its strategy of bolt-on acquisitions. It had purchased Blammo Games and Griptonite last year, and both of them seem to be integrating well into Glu’s structure, as both were in the black in the just-concluded quarter. And Glu has gone one step better this time by acquiring GameSpy from IGN Entertainment for $3 million. This acquisition was a logical step for Glu, since it will enable its games to deliver a better multiplayer and cross-platform gaming experience.

GameSpy’s technology is already used in Gun Bros, and I believe that the acquisition would be smoothly integrated into Glu’s business, especially considering its past record. Moreover, it will enable Glu to expand its presence in the mobile multiplayer gaming stage, and would probably start getting accretive from next year.

A solid pipeline

But Glu is not pumping up its revenue through inorganic measures only. The company is highly focused on expanding its own development team and almost doubled its R&D expense from last year. It has already released a couple of games this quarter -- Mutant Roadkill and Gears and Guts -- and is slated to release Dragon Quest this month.  But most of Glu’s releases, seven to be precise, are set to be released after mid-September, which is possibly the reason the company guided lower than the Street.

Glu has timed its game releases according to the holiday season when a number of new phones are launched. More importantly, the company has timed its game releases around the launch of Apple’s (NASDAQ: AAPL) next iteration of the iPhone. Apple’s devices have been a great hunting ground for Glu, with games such as Small Street, Blood and Glory and Deer Hunter Reloaded having featured as the top-grossing games on the iOS store. With the iPhone upgrade just around the corner, Glu’s move of releasing a barrage of games makes good business sense.

Also, Glu is ready to refresh its most successful titles through sequels. It is readying Blood and Glory Legends, Gun Bros Two, Contract Killer Two, and Contract Killer Zombies: Evelyn’s Story for launch in the fourth quarter along with five new titles. These games are expected to generate higher revenue for Glu this year. As a result, the company expects revenue in the range of $94.4 million and $96.4 million this year, which signifies a year over year growth of an astonishing nearly 45%.

Better than the rest

Mobile gaming -- which means both smartphones and tablets -- is a rage now and will grow in leaps and bounds going forward. Glu is spearheading this revolution and others, such as Zynga (NASDAQ: ZNGA) and Electronic Arts have finally started taking note of this. Zynga, in a dynamic shift, has now started laying stress on generating revenue from mobile, and demoted its COO while promoting its mobile division chiefs. This is certainly a drastic change of approach for the social media gaming company, which got famous on Facebook.

The bottom line

But Glu is miles ahead of these companies since it has been playing the mobile game very well for quite some time now. It has got expertise, has made some good acquisitions on the way, and is not dependent on a social network but on the smartphone and tablet boom. Most importantly, the company has added 44% to investors’ coffers so far this year whereas the others have been decimated. Going by the impressive moves that Glu has made, and with holiday season coming soon, the stock has the potential of going even higher. 

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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. If you have questions about this post or the Fool’s blog network, click here for information.

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