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Glu Mobile (Nasdaq: GLUU ) , developer and marketer of mobile games, came out with its third-quarter results, posting a net loss of $6.2 million. Let's take a closer, Foolish look at what holds Glu together.
The scores ceiling
Glu's third-quarter non-GAAP revenue went up by 16% to $17.8 million from the year-ago quarter, mainly driven by a huge leap in smartphone game revenues, which grew from just $2.3 million to a jaw-dropping $9.6 million.
Increasing demand for mobile games from smartphone users has driven the company's revenues higher.
The company believes that it stands to benefit from the popularity of smartphones like Apple's (Nasdaq: AAPL ) famous iPhones and iPads that run on the iOS, mobiles and tablets that run on Google's (Nasdaq: GOOG ) Android operating system, and Nokia's (NYSE: NOK ) mobile phones that run on Microsoft Windows mobile software. This trend is already apparent from its Android-based gaming revenue, which has more than doubled from the previous quarter, and now forms 30% of its total revenues.
Glu expects the decline in its feature phone-based segment to continue due to a shift in developmental focus on smartphone-based games. The reason for this shift could be because feature phones generally use software that cannot run complex applications and games, though they usually have the capability to run apps based on Qualcomm's (Nasdaq: QCOM ) Brew or Oracle's (Nasdaq: ORCL ) Java platforms. But these platforms are stand-alone, have their limitations, and don't integrate very well.
Coming back to the quarter's results, the company's operating expenses went up by to $20.8 million on the back of research and developmental expenses that skyrocketed by 84%. Glu's acquisition of gaming companies Griptonite and Blammo are partly the reason. And if my guess is right, the higher R&D spending is also a consequence of Glu's plans to launch more games in the fourth quarter.
Still on level zero
Glu's past performance in terms of operating and net profits has been, to say the least, incredibly abysmal. The company has consistently reported operating losses and net losses for quite some time as illustrated by the following chart.
Source: S&P Capital IQ.
Glu's highly uninspiring performance makes me wonder when it will ultimately start showing some green on its income statement, though management claims that profits will finally see the light of day in 2013. But not before it has made its new acquisitions fully operational. Till then, it expects to continue burning cash for the full year in 2012 but still break even on an average basis.
A silver lining, perhaps?
But let's not just focus on the negatives. According to market intelligence firm IDC, the mobile phone industry is expected to ship an estimated 472 million smartphones in 2011, and this number will probably double to 982 million by the end of 2015. If this indeed comes true, it would certainly spur the demand for smartphone apps and games. But Glu's success would also depend upon the level of competition, which is intense.
The Foolish bottom line
It will be interesting to see whether the company is finally able to remove itself from the red in the coming quarters. The rapid proliferation of smartphones should aid it in the process. But the proof will be in the pudding. To stay on top of Glu's performance, feel free to add it to your very own personalized watchlist. Don't worry, it's free, and helps you to stay up to speed with the latest news and analysis for your favorite companies.