How Glu Mobile Became Profitable

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?

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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2014, at 11:52 PM, badeconomy wrote:

    Great article ,explaining the restructuring of the glu which just the beginning of a path to great success in the industry that is exploding .

  • Report this Comment On February 11, 2014, at 10:03 AM, Lufbery wrote:

    Adrian - Nice article with some good high level thoughts on their framework and requirements to for profitability going forward. I believe they need to remain breakeven or a few cents...but should focus on top line Revs at this point. They have a very good chance to hit $200M if they roll out another hit...or a DH15 mid year. What are your thoughts on takeover? You mention Activision and EA above...wondering if GLUU has enough Revs for them to make a move (and a difference) to their current Mobile strategy...company's look for ways where 1+1=3 when making an acquisition. Do you (or other readers) think GLUUs technology has that kind of appeal? Maybe it is their global footprint that would be attractive for distribution of AB or EA's games? Interested in your thoughts.

  • Report this Comment On February 11, 2014, at 2:17 PM, badeconomy wrote:

    I have followed glu for last 2 1/2 years and I am some what familiar with management. After restructuring that began about 15 month ago and the results of the last report confirming the new direction, Glu would like to have a longer period of growth before even considering to be bought. Glu is very confident that they are on the right track and the industry knows that as well. Glu will be much more valuable as company about a year from now and the industry is aware of that as well. I am not suggesting that it is not possible that tomorrow Google would offer $20 a share and Glu would not accept it. I am just addressing the sentiment of glus accusation in the industry. For now i believe Glu is a great investment with this management.

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