Tag Archive App Store Data

Netmarble Games IPO: A Fast Fade for Lineage 2?

Lawrence Abrams No Comments

Introduction

Netmarble is the largest mobile game publisher in South Korea.

The company has just secured investor commitments to buy 16.9 Million shares worth $2.3 Billion in a May 2017 IPO on the Korea KOSPI stock exchange.  

This IPO would value the company at $11 Billion based on investor demand at the high end of the offer range of $138 USD / share (or 157,000 Korean Won / share)

This is a very big deal. It would be the largest IPO on the Korean exchange since 2010 and second largest tech IPO in the world in the last two years after Snap and ahead of Line.

We will show in detail below that this is a highly speculative IPO, even for mobile game companies who are often dismissed by investors as being one hit wonders.

This IPO is unlike the disappointing mobile game IPOs of King Digital Entertainment in 2014 and Zynga in 2011 where both companies had enough audited numbers in their S-1s to suggest that their best days were behind them.

On the contrary, Netmarble’s best days are ahead of them.  But, investors are insane to give this company such a lofty valuation based entirely on unaudited revenue numbers of a single new game launched only four months ago.

We will present evidence hinting that early annualized revenue run rates (ARR) for the game have slipped noticeably in March 2017 — the third month since launch.  We predict that once investors realize this, the stock should drop 30+% from its expected IPO price.

Evidence of a Drop-off in ARR

On December 13, 2016 Netmarble launched a mobile role-playing game called Lineage ll: Revolution  (L2R) based on licensed IP from NCSoft’s legendary PC game Lineage. According to app analytics company App Annie, the game immediately rose to #1 on the S. Korean iOS Apple revenue rank charts and has remain so to this day.

 

 Just because L2R has remained ranked #1 on the S. Korean charts for the past four months, and likely will continue to do so for months, it is still possible that ARR has declined by $100s of Millions since release.

This is because there is a severe power function relation in the mobile game industry between ARR and revenue rank. Typically, at the top of the USA charts, there can be a $600 Million ARR difference between the #1 and #2 ranked game, say $2.2 Billion ARR for #1 and $1.6 Billion ARR for #2.

For example, below is a power function we derived in an earlier paper on the Netmarble IPO for top ranked games on USA iOS app store.

For the S. Korean chart now, it is conceivable that the gap between #1 ranked L2R and the #2 ranked Everybody’s Marble, also by Netmarble published on Kakao, could be $700 Million or more.

In January 2017, Netmarble told the Korean press L2R generated $176.6 Million in revenue between mid-December 2016 and mid-January 2017. That translates into $2+ Billion ARR.

Obviously, a $2 Billion ARR is not sustainable for the full year of 2017. This is because TOTAL Korean game revenue (mobile + console + PC) was only $4 Billion in 2016, according to Newzoo.

Netmarble has not made any official full year forecasts for L2R nor for the company as a whole. We do know that official 2016 revenue for the total company was $1.34 Billion.

In March 2017 analysts covering the company told The Korea Times  that they expect revenue to double to $2.7 Billion, largely based on the early success of L2R.  Assuming organic growth of around 25%, this implies that the 2017 forecast for L2R would be around $1 Billion.

We present two pieces of evidence that even a $1 Billion in total revenue for 2017 is unlikely.

The first piece of evidence is an App Annie trend chart showing L2R download rank. Note that while L2R was ranked #1 in downloads for the first month since release, downloads have steadily dropped below #30 by late March 2017.  

It is doubtful this drop off was caused by a drop off in advertising by Netmarble.  It is more likely due to a lack of strong word-of-mouth by early players that this is a great game.

The other piece of evidence of a drop off in ARR comes from a monthly summary report put out by SuperData listing the top grossing mobile games globally for that month.  

For February 2017, SuperData reported L2R was the top grossing game globally.  But, for March, it reported that L2R dropped to #10 (See below)

 

 

Valuing Netmarble Based on Realistic Expectations for L2R

As we stated earlier, Netmarble’s IPO is scheduled for May 2017.  Investors have already committed to buying 16.9 Million shares at the top end of the offering range of $138 USD / share or 157,000 Korean won / share.

This values the company at $11.7 Billion.  Dividing that valuation by analysts forecasts for 2017 revenue of $2.7 Billion,  we arrive at valuation of 4.3 time forward ARR.  This ratio enables comparisons with  market-derived valuation ratios of publicly-held companies. 

For example, in another paper of ours on the Netmarble IPO,  we derived a valuation ratio for Com2uS of 2.61.  Com2uS is a Korean-based mobile game company listed on KOSPI exchange.   Com2uS is much better known than Netmarble due to its global hit mobile game Summoners War.  

While Com2uS is growing slower than Netmarble, its future sales are more predictable. Based on this comparison, we concluded that Netmarble’s IPO was overpriced by 26%.

In the spreadsheet below,  we also break down Netmarble’s 2017 overall revenue growth forecast into estimates of organic growth versus new sales from L2R — which we peg at $1 Billion.

 

 The final spreadsheet presents “what if?” analysis of Netmarble’s value and stock price  if more solid evidence starts showing up indicating that L2R’s 2017 ARR will be closer to $600 Million than $1 Billion.

Note that when revenue forecasts are significantly cut back, there is usually a corresponding compression in valuation ratios.  So, we built into our “what if?” analysis a compression of Netmarble’s valuation ratio from 4.3 to 3.5 times forward ARR.  

Official sales figures will start coming from Netmarble a month or so after the end of its 2Q17 quarter in June 2017.  We expect management to guide 2017 revenue well short of initial forecasts of $2.7 Billion due to L2R’s ARR well below $1 Billion.

The stock should fall well below IPO prices.  We predict a decline on the order of 33% by July or August 2017.

Kabam: What Causes A Unicorn To Stop Skating To Where The Puck Is Going

Lawrence Abrams No Comments

The growth in the numbers of technology startups valued over $1 Billion, so-called unicorns, has abruptly stopped and even reversed.

In the last several months, a number of unicorns have seen their valuations marked down by mutual funds. This has been accompanied by a number of titillating articles about frivolous spending — Dropbox’s Chrome Panda sculpture — and debauchery — Zenefits’ sex in the stairwells — claimed to be endemic to high flying unicorns.

Unlike stories of fallen unicorns, this article is about a company that “officially” is still on all unicorn lists. It is about the mobile game company Kabam, elevated to unicorn status by its last funding round in August 2014 of $120 Million by the Chinese platform company Alibaba.

Kabam had early success at developing games based on movie IP licensed from major studios like Disney’s Marvel studio, Warner Bros., and Lionsgate.

Beginning in 2014, Kabam started timing new releases to coincide with the releases of mega-hit movie sequels like Fast and Furious and the Hunger Games. The results have been a disastrous string of five failures and one success.

Kabam Timeline of Hits and Misses

Kabam Timeline of Hits and Misses

 

 

 

 

 

 

 

 

What caused this unicorn to stumble?

There is an inspiring YouTube video of a Keynote address given by Kabam co-founder Holly Liu at a Women 2.0 Conference in 2014.

She talks about key moments in the early history of Kabam when the founders decided to “Go Big” in her words. By this, she meant building products based on a vision of where a market was going rather where the market was at. Today, we use a hockey metaphor of “skating to where the puck is going” not “skating to where it is”

Kabam’s Downfall: “Skating to Where the Puck Is” after 2013

Specifically, for the Kabam founders it was deciding in 2007 to port their games to Facebook via its newly created API in a year when the dominant access to games was through the PC browser.

Then again, at the height of game company success on Facebook in 2010, Kabam founders were anticipating Facebook’s closure of its game API and made the visionary decision to develop only for the mobile phone.

Silicon Valley VCs have a bias toward supporting founders opinions over professional managers when startups periodically face existential choices.

This is because founders have vision (“skate to where the puck is going”) and want to build long-lasting companies. They have a Facebook “move fast and break things” mindset that is risky, but can result in outsized payouts in the end.

Whereas professional managers prefer risk-averse choices (“skate to where the puck is” ) that look to be the fastest path to cashing out via a buyout or an IPO.

Kabam stopped making visionary choices in 2013. What had happened was the emergence of a “talk the talk” culture championed by hired professional managers that favored strategies geared toward short-term revenue goals followed by an IPO.

In 2013, Kabam’s revenue grew 100% that year, fueled in part by the explosion of mobile phone purchases. Kabam had 3 hit games with greater than $100 Million in annualized revenue.

CEO Kevin Chou talked to the press about timetables for an IPO. He even announced publicly early April of 2014 that revenue was forecasted to grow 80+% or more and be in the range of $550 — $650 Million.

The safe bet to achieving these short term goals was to release as many games with $100 M in annualized revenue as possible. And that is what Kabam did, with disastrous results.

Visionary game founders in 2013 would have seen that only a company with multiple chart-topping $1 Billion games could ever have a chance at an IPO.

They would have known that another mobile game company Machine Zone (now MZ) was doing the visionary thing by building a ultra-low latency many-to-many game platform based on Erlang and investing in dedicated servers with field programmable gate arrays.

Visionary founders at Kabam would have stopped doing more of the same, and would have started building a new platform. They would have shut off all talk of IPO, stopped giving the press explicit financial numbers and revenue forecasts, and told investors that revenue would plummet in 2014.

In our opinion, the source of Kabam short-sighted culture was non-engineering managers brought in run Kabam’s operations. COO Kent Wakeford, a lawyer and former AOL executive, has been the face of Kabam to the press in matters of deals. To his credit, he consistently deflected any questions dealing with IPO specifics.

The real source of Kabam’s culture of “talk the talk” was former SVP of Corporate Communications Steve Swasey. The idea for making annual explicit financial disclosures can directly be traced Swasey.

The height of Kabam’s arrogance occurred in December 2013 when Kabam announced that it bought the naming rights for the Cal-Berkeley’s football field for $18 Million paid over 15 years. This idea had to be initiated by Steve Swasey. But, to be fair, this symbol of arriveste had to be approved by Kabam’s Board of Directors and founders.

One can understand the desire of Kabam’s co-founders — all three UC-Berkeley grads — to give back to their alma mater. But, founders should wait years after their IPO to give cash for University buildings. For example, buildings on the the Bay Area campus of Stanford and Berkeley include no less than Gates, Allen, Moore, Varian, Hewlett, Packard, and Wozniak.

In our opinion, we do not think Kabam can recover. It is running out of cash. The IPO window is permanently closed to mobile game companies after the Zynga and King Digital IPO debacles. Kabam’s only hope for more funds is Alibaba, its prime investor to date.

The naming of the football field at UC-Berkeley in December 2013 looks to be Kabam’s symbolic “Kiss of Death.”

Former SVP of Corporate Communications Steve Swasey at Cal Football Field Naming

Kabam’s IPO Plans Are Kaput

Lawrence Abrams No Comments

Summary

  • Kabam is a mobile game startup with IPO aspirations and a reportedly $1 billion-plus valuation.
  • In early December, the CEO delayed IPO plans, blaming generally unfavorable conditions for a mobile game company IPO.
  • We show that the real reason for the delay was the disastrous performance of two of three new releases based on hit movie IP.
  • Kabam’s failures raise questions as to the sustainability of its headcount, its ability to produce hits based on movie IP and whether any mobile game company should do an IPO.

We are just a couple days into the New Year and already we have our first scratch – Kabam – from lists of technology companies most likely to do a 2015 IPO.

Kabam is a San Francisco-based mobile gaming company that had a track record of licensing movie IP (intellectual property) and producing top 25 revenue-ranking mobile games. But two new, highly-anticipated games based on The Hunger Games and The Lord of the Rings movie IP have had disastrous releases as evidenced by sub-200 App Annie revenue rankings.

As a result, Kabam’s plans for an IPO are kaput for now.

Kabam CEO Kevin Chou confirmed this day in a December 10, 2014 interview with the NYT. But, he blamed the delay on a generally poor environment for mobile game company IPOs created by the Zynga (NASDAQ:ZNGA) and King (NYSE:KING) post-IPO debacles.

In this article, we present App Annie revenue ranking charts of recent releases from Kabam showing terrible gamer response to two of its three most recent releases. In our opinion, this is the real reason for Kabam’s IPO postponement.

We wish to state at the outset that our definition of “plans to do an IPO” aredirect quotes from CEO Chou stating Kabam has plans to do an IPO. This is in contrast to a strict definition — filing an S-1, which Kabam has never done, as has been point out to us by the company.

We feel that of SA followers, and the investing world in general, are comfortable with the first definition and not the second. There are plenty of articles on SA talking about companies with “plans for an IPO” where a S-1 has never been filed. Uber and Airbnb are the most prominent.

If you are uncomfortable with our definition, please read no further.

So first, we want to present URLs where there is a direct quote from CEO Chou of IPO plans.

We start with a Bloomberg video interview way back in October 15 2013. Pay attention to segment 2:11 – 2:45

Interviewer: Are you thinking about an IPO”

Kevin Chou: “We are.”

Next a Wall Street Journal interview on February 17, 2014

“WSJ: You have said previously that you are considering an initial public offering. Any updates?

Chou: We had another very serious discussion about an IPO in our board meeting in January. Our revenue is growing rapidly and we have been profitable since 2012. We have over $70 million of cash in our bank account. We are at the scale, where we can actively consider an IPO. But we also want to do it when the time is right, and we don’t have a definitive timeframe yet.”

Finally, a Newslook video interview given around the time of the Alibaba investment in August 2014. Pay attention to segment 3:30-3:53

Chou: ” You know it could be as early as 2015″

In early 2014 interviews, CEO Chou was justified in saying that the an plans for a Kabam IPO would be unwise due to Zynga and King’s performance.

But even then, part of the blame was attributable to a 2014 revenue fade of its most successful game The Hobbit: Kingdom of Middle-earth, based on an IP license from Warner Bros. (a division of Time Warner (NYSE:TWX)).

Below is an App Annie revenue ranking chart of The Hobbit game, showing the game’s Top 10 revenue ranking in 2013 and the fade throughout 2014 to a Top 30 position today.

(click to enlarge)

The relation between revenue dollars and revenue rank is a severe power function. We have estimated that a #10 ranking game is associated with an annualized revenue run rate of around $250M worldwide where as #25 rank is associated with an annualized run rate of around $90M worldwide.

The power function ratchets up at #5. We estimate that the top 5 revenue ranking games worldwide today have an annualized run rate of between $800M and $1,500M – Clash of Clans (Supercell), Candy Crush Saga, Puzzles and Dragons (GungHo Online), Game of War-Fire Age (Machine Zone), andMonster Strike (Mixi).

In mid-2014, Kabam announced a series of IP licensing deals with Warner Bros., Lions Gate (NYSE:LGF) and Disney’s (NYSE:DIS) Marvel Division.

The company reportedly built up its headcount to 850 employees worldwide with 400 in San Francisco, 350 developers in its Beijing studio headed by co-founder Mike Li, and 85 developers in its Vancouver studio.

It accepted a $120M strategic investment from Alibaba that reportedly valued the company at more than $1B. This was on top of $125M in venture capital money raised previously from the likes of Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Ventures, Intel (NASDAQ:INTC) Capital, Warner Bros., MGM and a number of other venture capital companies.

The company even purchased for $18M, spread out over 15 years, for the rights to place “KABAM” on the football field of The University of California at Berkeley, the CEO’s alma mater. (A startup kiss of death?).

In May 2014, Kabam announced a deal with Lions Gate to make a game based on The Hunger Games movie franchise starring Jennifer Lawrence.

This game would be developed by its 300-person Beijing studio, headed by co-founder Michael Li. It was this studio that developed Kingdom of Camelot, Kabam’s first big hit, released in March 2012.

The Hunger Games game was released on November 5, 2014 and the results have been disastrous despite the fact that the movie has been a hit.

(click to enlarge)

In June 2014, Kabam announced a licensing deal with Warner Bros. to make another game based on The Lord of the Rings IP.

This game was released on October 15, 2014 and again the results have been disastrous despite the fact that movie has been a huge hit:

(click to enlarge)

Finally, In July 2014, Kabam announced that its Vancouver studio was at work on a game based on licensed IP from Disney’s Marvel Entertainment Division. On December 10, 2014, the Marvel-based game was released.

Only the Marvel game has performed decently with a current App Annie revenue rank of #33:

(click to enlarge)

Kabam still might recover in 2015 with scheduled releases of another Marvel-based game and a game based on Mad Max IP licensed from Warner Bros.

But, Kabam’s recent failures raise several questions for us pertaining to Kabam specifically and to the mobile game industry generally:

  1. Can Kabam afford to maintain its 850 headcount, especially the 300 headcount at its Beijing studio responsible for the poorly-received The Hunger Games game?
  2. Are the recent the poor results the specific fault of Kabam or the fact that basing games on hit movie IP is no longer a valid strategy?
  3. Given the dual difficulty of producing and sustaining a Top 10 revenue-ranking mobile game, might there be a better alternative for financing and providing investor liquidity than IPOs?

Relating App Store Revenue Rank to Revenue

Lawrence Abrams No Comments

From two of my recent Quora posts:

Question: How much money does the average mobile game make?

There are tons of games on the App Store and Google Play. Everyone seems to know about the hit games. How much revenue does the run-of-the-mill game generate? Is the revenue curve steady and flat? Do some genres do much better than others?

My answer:

Question should be rephrased:

How much money does the MEDIAN revenue rank game make.. ie game with revenue rank 100,000 out of about 200,000+ on iOS Apple US?

Answer: near zero.

Relation between mobile game revenue and revenue rank is a severe power function, more severe than the bookstore relation estimated 10 years ago and used to justify “long tail” inclusiveness in online stores.

I have estimated that top 10 revenue rank games derive 50% of revenue whereas the “long tail” of mobile game revenue ranks — games ranked 10,001 – 200,000+ derive only 5% of revenue. Long tail here is far smaller than books where revenue rank books 10,001 – 200,000 derive 30% of revenue.

To go back to the first question, I have a more precise answer. I have estimated that the trailing 12 month global mobile game revenue, less 30% cut from Apple and Google is $11.2B. Mobile game long tail — games ranked 10,001 to say 200,000 get 5% or $560M. Divide that by # of games in long tail — 200,000 – 10,001 = 189,999 560,000,000/198,999 = $2,847 is the AVERAGE yearly revenue of a mobile game in the long tail– with revenue rank > 10,000.

Question: How can you estimate the revenue of a mobile app based on its revenue rankings in App Annie?

There should be an exponential drop off, so if someone has done a study with a few data

My answer:

It is a power function with an upward kink at game rank #3-4

mapping update
As far as games, these are my current estimated revenue run rate after 30% store cut worldwide on iOS and Google (note portion of revenue is 4:1 iOS to Google)

Big 3 — what I call the “and, of, the” of a Zipf power function.

Clash of Clans $1.8B (Supercell)
Puzzle and Dragons $1.6B (GungHo Online)
Candy Crush Saga $1.0B (King)

Next 7
Monster Strike $900M (Mixi)
Game of War: Fire Age $600M (Machine Age)
Brave Frontier $400M (Alim/gumi)
Hay Day $400M (Supercell)
Farm Heroes Saga $350M (King)
Battle in Warring Games $200M (Sumzap)
Pet Rescue Sage $175M (King)

Top 10 World Wide Mobile Games by Revenue Rank receive estimated 50% of mobile game app store revenue >>> $6.5B out of $11B

In contrast, I have estimated “long-tail” of mobile game app store revenue — games ranked 10,001 + to 240,000 receive around 5% of revenue.

This is a lot less that the original “long tail” estimates for book sales of book ranked 10,000+ of around 30%

Not much loss in cutting out the “long tail” in mobile games on the app store in return for great gain in app store discovery and quality of merchandise.

RIP Long Tail Justification for Online Store Inclusiveness: 2004:2014

Kabam: Mobile Gaming Company IPOs after King and Zynga

Lawrence Abrams No Comments

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Kabam is a San Francisco-based mobile gaming company with three hit games each of which has reportedly grossed over $100 M since launching.  In a recent interview with the Wall Street Journal, Kabam’s CEO Kevin Chou disclosed that

“Kabam has raised $125 million from investors including Canaan Partners, Redpoint           Ventures, Intel Capital, Pinnacle Ventures, Google Ventures and SK Telelcom                     Ventures. The company increased revenue 100% to more than $360 million in 2013           and expects to generate between $550 and $650 million in 2014.”

Chou said that it “is still gunning for an IPO despite King Digital Entertainment’s (KING) disappointing debut”.

A similar sentiment might have been elicited a year ago from King Digital’s CEO to the effect that King was gunning for an IPO despite Zynga’s (ZNGA) disappointing debut in 2011.

The US mobile gaming industry cannot afford another disappointing IPO.

I am a fan of the US mobile gaming industry. I think the long term prospects are bright. But, the industry has a problem. The problem is NOT that the financials are hit-driven and spiky. The problem is a bad track record of pricing and timing of IPOs.

Right now Kabam and Palo Alto-based Machine Zone are two mobile gaming start-ups with hit games and yearly revenue run rates exceeding $500M. Both are very profitable and deserve to go public.

Like King, these two very successful start-ups are sitting on plenty of cash — estimated at roughly $200 M to $300 M each — generated from these hits. The need for an IPO is not for working capital or even for acquisitions.  The need is to provide liquidity to existing investors and employees with stock options.

There are important lessons from the disappointing IPOs of King and Zynga to be considered ahead of the next IPO:

(1) Don’t price (buy) a mobile gaming IPO at much more than 2 time trailing price-sale ratio.

(2) There is a small window to go public (buy into) successfully. It is between month 4  and month 7 during which a hit game is consistently among Top 10 on the iOS Apple store US revenue ranking charts.

The purpose of this article is to present data and charts supporting these two lessons. First, we present a comparison of IPO and current trailing price-sales (P/S) ratios of King and Zynga.

Trailing PS

(Source King F-1 and Zynga S-1)

King went public at the pinnacle of success of its “Billion Dollar Club” game Candy Crush Saga. At the time of its IPO in early March 2014, its Q/Q revenue was flat for 2 quarters.

Zynga went public on the cusp of the transition from PC browser-based games accessed from Facebook to native smartphone games downloaded from app stores. Its stock has dropped 66% since the IPO, caused by the multiplicative effect of declining revenue and a declining P/S ratio.

Based on these two disappointing post-IPO performances, I believe that the next mobile game company IPO should be priced with a reasonable assurance of stock appreciation post-IPO. It should be a win-win, not a win-lose transaction between existing and new investors.

The current trailing P/S ratio of King is 2.23. I think that 2.23 is a win-win standard for pricing the next mobile gaming IPO.

The Wall Street Journal reported that in July 2013, Kabam employees sold $38.5M worth of stock in a private transaction that implied a $700M valuation for the company. According to the Wall Street interview cited above, Kabam estimates that its 2014 revenue will be between $550M am $650M. (We peg it at the low end due to the declining revenue trend in its latest hit game The Hobbit: Kingdoms of Middle-earth.)

Priced reasonably at King’s current P/S ratio of 2.23 and a current yearly revenue run rate of $550M, Kabam’s IPO value would be $1.23B, up nicely 75% from the previous valuation 2013.

A more reasonable pricing of an IPO is not enough. Timing of the IPO matters. The rising revenue trajectory of a hit game is not likely to last beyond 12 months. And while great gaming companies like Kabam, Machine Zone, King, and Supercell have demonstrated an ability to launch multiple hits, the launch dates are often a year or more apart. Mobile gaming companies have just one small window a year to go public.

We review first the timing of the King IPO in light of the disclosed financials in it pre-IPO SEC filing summarized below:

screen shot 2014-02-18 at 6.59.53 am

(Source King F-1)

People were horrified when they first saw this graphic depicting flat Q/Q revenue just before the IPO in March 2014. There was a sense of impending doom. And sure enough the stock dropped 16% the day of the IPO.

In hindsight, the time for King to do their IPO would have been in 2Q2013 (June-August) giving management and IPO investors a full 6 months of rising financials.

Before I evaluate the best time for a Kabam IPO, we need to present the results of an one of my earlier papers where I estimated the relation between a specific game’s revenue ranking on app store charts and its dollar revenue. I use revenue ranking charts for iOS Apple Store in the US which are available for free from App Annie.

Occasionally, publicly held companies like King (for the Saga series) and Glu Mobile (for Deer Hunter 2014) have reported quarterly revenues for specific games. This allows an exact correlation with the App Annie revenue rank at the time. Below is a depiction of the Zipf-like power function relation between app store revenue and revenue rank for 4Q2013 with 4 actual data points:

Power Function

Looking ahead to Kabam’s prospective IPO, we believe that it would be best for them to do it when they have a Top 10 hit on the rise. This would give them at least one game with a rising quarterly run rate of $50M or a yearly run rate of $200M.

Kabam seemed to have an amazing window to go public between January and April 2013. It had not one, but two Top 10 hits: Kingdoms of Camelot: Battle for the North at the pinnacle of its success and a rising star in The Hobbit: Kingdoms of Middle-earth. The Hobbit was just cracking the Top 10 at the end of the window in April 2012.

Kabam’s run’s rate in 1Q2013 was at least $100M. And there was some significant revenue upside post-IPO. Of course, no one knew for sure during 1Q2013 that the rest of 2013 would be so good for Kabam. But, a mobile game that cracks the Top 10 and stays there for 4 month is a sign of some “addiction” and I think that Kabam executives and board members knew that 2013 would be year of rising financials.

Trailing revenue by Kabam’s own account was around $180M for 2012. Valuation of the hypothetical IPO at our recommended 2.23 P/S would have only been only $400M.

Remember, the above the reference to an actual private sale in July 2013 valuing the company at $700M. Assuming a trailing revenue run rate at the average of 2012 and 2013 = (360+180)/2 = $270 M,  the implied trailing P/S at the time of this private transaction was only 2.59 — greater than my suggested standard of 2.23, but less than King’s later IPO value of 3.76.

Maybe, it was premature for Kabam to go public in 1Q2013 with such a good year ahead of itself in 2013.

But, those venture capitalists, employees with stock options, and IPO investors would be holding stock in a company with rising revenue and profit throughout 2013. Trailing revenue at the end of 2013 would have been $360 M. With an increasing post-IPO P/S of, say 3, Kabam would have been valued at $1.08 B by the end of 2013.

Kabam management and board would have been celebrating New Year’s 2014 with a bunch of happy stockholders and employees as the stock would have appreciated 250% post-IPO. And importantly, stockholders would have the liquidity to reduce their holding  if they had a bad feeling about King IPO later in 2014.

Alas, Kabam missed a great window of opportunity to go public between January and April of 2013.

It is easy to second-guess management and the board.  The big negative at the time was the performance of ZNGA’s stock post-IPO.  The stock went from an IPO price of $10.00 in November 2011 to a high of $14.50 in March 2012 only to fall 86% during 2012 to a low of $2.09 in November 2012.  Ouch!

Maybe as a consolation for missing a golden (bears) opportunity, Kabam’s 4 cofounders – all UC-Berkeley alumni, paid the University $18M in December, 2013 for stenciling a big KABAM on the gridiron at Memorial Stadium.

Furthermore, as the charts show below, Kingdoms of Camelot has continued to fade and now is only a Top 50 game. The Hobbit has remained amazingly strong, but shows just enough fade this past month to suggest that the IPO window has closed for Kabam in 2014.

Not to worry, Kabam still has plenty of cash and cache. Its management can see the Kabam name on the Cal football field as they watch their beloved Bears get crushed once again. So what, they are living proof that the industry is not plagued by one-hit wonders.

If Kabam’s existing investors are impatient for an IPO, Kabam has plenty of cash from its hit games to pay millions in dividends.   King did this did this before its IPO, paying out $500 million in dividends in the style of a private-equity dividend recap.

And, it was last week that the Wall Street Journal  reported  that Kabam has struck a deal with Lions Gate to develop mobile games based on the hit movie “Hunger Games”.

It is likely that the next big Kabam hit will be launched in conjunction with the 3rd installment of the Hunger Games scheduled for release in November 2014.  Given their track record for developing hits, I expect a Kabam IPO in 1Q2015.

Kingdoms of Camelot: 2013

Kingdoms of Camelot 2013 Battle for the North ®   Rank History   App Annie

The Hobbit: 2013

The Hobbit  Kingdoms of Middle 2013earth   Rank History   App Annie

 Kingdoms of Camelot: January – May 2014

Kingdoms of Camelot 2013 Battle for the North ®   Rank History   App Annie

 The Hobbit: January – January – May 2014

The Hobbit  Kingdoms of Middle 2013earth   Rank History   App Annie