Glu Mobile Inc. Is Real

The recent results of Glu Mobile (NASDAQ: GLUU  ) suggest the mobile game developer is finally hitting full stride. The company solidly smashed previous guidance for a second straight quarter and now looks more likely to reach its high goals for the rest of the year and into 2015. Possibly more important, the company has turned a profit in the last couple of quarters, proving that the concept can deliver.

The mobile game sector has been under pressure due to the weak IPO from King Digital Entertainment (NYSE: KING  ) . While King Digital and Zynga (NASDAQ: ZNGA  ) before it were plagued by one-hit wonders that the companies couldn't repeat, Glu Mobile is starting to generate solid repeatable results based on small hit franchises.

Huge quarter despite weak releases
The much-hyped release schedule in the first quarter was mostly disappointing. Of the five games released during the period, only Eternity Warriors 3 -- technically launched at the end of December -- had solid numbers. Glu Mobile produced the highest quarterly revenue in its history, at $47 million, with only $7.1 million generated from the releases during the quarter.

The usage metrics saw huge increases, especially over past norms. Prior to the Deer Hunter 2014 release in September, the company averaged below 4 million daily average users, or DAUs, and 40 million monthly average users, or MAUs. For the last the three quarters, the numbers have surged to reach 7 million and 64.5 million, respectively.

All of these user gains led to strong adjusted EBITDA that totaled $12.7 million during the last two quarters, up from only small positives in the prior-year periods and historically. Not only was the company able to substantially grow revenue, but also it achieved the success while improving margins, proving that scale exists in the business, even with small hits.

The first-quarter gross margin of 69% generated by Glu Mobile was impressive and virtually matched the margins of King Digital and Zynga. The difference is that a top hit can produce excessive EBITDA margins, which in the case of King Digital, hit more than 40%, compared to roughly 15% at Glu Mobile. Struggling Zynga posted a less-than-10% EBITDA margin, though it built up a heavy expense base that it has spent the last couple of years reducing.

More than Deer Hunter
While the Deer Hunter 2014 game was a huge winner during the fourth quarter, Glu Mobile saw more balanced results in the first quarter. The latest addition of the Deer Hunter franchise contributed $17.2 million, or 37%, of the quarterly revenue. Eternity Warrior 3 generated a solid $10.2 million and RoboCop produced a decent $3.5 million.

In total, Glu Mobile reported first-quarter revenue of $47 million compared to guidance of $38 million-$40 million. While investors clearly expected the company to exceed that low-ball guidance based on how long Deer Hunter 2014 has stayed in the top 50 grossing games, it is always ideal to see the company actually hit those expectations.

The diversification of revenue is very clear in the earnings slide that highlights more than $12 million of revenue produced by games released more than a year ago.

Source Glu Mobile

King Digital continues an attempt to move beyond the major hit of Candy Crush Saga, but the latest games can't match that success. It is almost impossible to replace a game that produces $1 billion in annual revenue. For the first quarter, King Digital obtained 67% of bookings from the hit game.

Zynga is attempting to go down the path of producing consistent winners with predictable margins. As the company cuts costs further and improves booking, margins should improve and return the company to solid profits.

Bottom line
Over the last six months, Glu Mobile has shown that it can monetize small hits into a profitable business. A couple of hits similar to the latest franchise of Deer Hunter could turn into large profits for investors. As more users around the globe turn to smartphones and tablets, Glu Mobile should only see its user base expand along with revenue, making it an attractive stock on the recent dip.

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