How Glu Mobile Became Profitable

Learn how mobile games publisher Glu Mobile delivered positive net income after years of losses, and how the company can become consistently profitable.

Feb 10, 2014 at 7:00PM

Shares of mobile games publisher Glu Mobile (NASDAQ:GLUU) jumped nearly 28% on Feb. 6, after the company posted better-than-expected financial results for the fourth quarter of 2013. The company saw quarterly revenue rise 62%, year over year, reaching $42.8 million, which translated to adjusted net income of $0.07 per share.

This number was significantly better than the breakeven levels the Street was expecting. More important, this is the first quarter that Glu Mobile saw positive earnings per share, as the company has been operating at a net loss since its founding. As gamers continue shifting their budgets from consoles to mobile devices, this successful quarter could mark the beginning of a long, profitable story for Glu Mobile, which is still a small player in the game publishing industry dominated by giants Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ: ATVI). But what exactly is driving up Glu Mobile's earnings? Can the company become consistently profitable?

Glu

Source: Glu Mobile Investor Relations

Explaining the great quarter
Glu Mobile's amazing fourth-quarter performance was mainly due to the successful release of Deer Hunter 2014, a hunting simulator game that allows users travel from North America to Central Africa to hunt exotic animals. The game saw more than 70 million downloads over 192 countries, and quickly became the highest revenue-generating game in Glu Mobile's history. The game generated $27.4 million alone, representing more than 50% of the company's total revenue for the fourth quarter.

From now on
Glu Mobile needs to see about $35 million in revenue per quarter to avoid losses. In the most recent quarter, breaking even was not a problem, thanks to the massive success of Deer Hunter 2014. However, can the company replicate the success of Deer Hunter 2014? Although the game-publishing industry is a hit-or-miss business, Glu Mobile does show some signals that it is capable of developing top revenue-generating games on a consistent basis.

Deer Hunter 2014 was developed using a new approach to monetization that the company started embracing early in 2013, when it hired a new monetization team for its Heroes of Destiny title. After changing the game's focus from emphasizing single-player, exciting experiences to socially driven gameplay, the company saw a great improvement in average revenue per daily active user. This approach, combined with the concept of "gaming as a service" -- which focuses on keeping people playing games by creating games that are platforms in themselves -- has allowed Glu Mobile to increase its probability of success when releasing new titles.

EA and Activision are also going mobile
In terms of growth potential, it's Glu Mobile's direct exposure to the promising mobile gaming industry that makes it a clear stock to watch, as the company's games are developed mostly for smartphones and tablets. Low smartphone penetration rates in emerging markets, fast-growing tablets shipments, and a steady increase in global mobile traffic suggest that Glu Mobile's target user base will grow very quickly in the next few years.

Not surprisingly, giants Electronic Arts and Activision Blizzard continue increasing their mobile exposure. Electronic Arts has transformed its mobile business from paid, one-time downloads to free models that are monetized by additional in-game features. The company has successfully brought some of its best-known games to mobile devices, like The Sims and FIFA. As a result, the company's financial results for the latest quarter saw a big increase in the percentage of revenue linked to digital experiences, where mobile is recorded.

Activision Blizzard, the world's second-largest gaming company in terms of revenue, is also benefiting from mobile exposure, as evidenced by the company's better-than-expected fourth-quarter results, which helped shares rise 14% on Feb. 7. The company saw record digital sales and industry-leading engagement levels.

Final Foolish takeaway
Glu Mobile finally rewarded shareholders by delivering adjusted net income of $0.07 per share, compared to a $0.05 per-share loss in the same year-ago period. Although the road to sustainable profitability is long, the company's new monetization approach, "gaming as a service" credo, and wide experience in the mobile segment should help Glu Mobile to continue improving its top line and avoid losses.

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Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard. 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.

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