Tag Archive IPO

Netmarble IPO: Priced for Perfection

Lawrence Abrams No Comments

Netmarble is the ninth largest mobile app game publisher in the world and the largest in South Korea.

The company is seeking to sell 17 million shares on the Korean KOSPI stock exchange in early May garnering proceeds of between $1.8 Billion and $2.4 Billion USD (all USD figures converted from Korean Won at .00088 USD / Won). Roughly half will be used for new acquisitions and half will be used to retire debt.

This is a big deal IPO by both Korean and USA standards.

It represents the largest IPO in S. Korea in 7 years. It would rank as the one of the largest tech IPO globally in last 2 years.

In January 2017, Netmarble launched a mobile role-playing game called Lineage ll: Revolution 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 revenue rank charts.

Netmarble told the Korean press that the game generated $176.6 Million in revenue in the first month. That translates into an annualized revenue run rate [ARR] of $2+ Billion.

Obviously, that run rate is not sustainable. But, even if the game managed to produce $1+ Billion in revenue during 2017, it would place Netmarble in the rarefied company of Niantic, Supercell and MZ (formerly Machine Zone) as the only companies that released a $1+ Billion Dollar game in the last 2 years.

The IPO will be watched closely by the mobile game industry given the poor post-IPO performances of King Digital Entertainment in 2014 and Zynga in 2011.

A case could be made that these IPOs were anomalies and not a fair test of how a mobile game stock is capable of performing. Both Zynga and King Digital had enough numbers in their S-1s to suggest that their best days were behind them at the time of their IPOs.

However, there is absolutely no question that Netmarble’s best days are ahead of it. There is no question that its revenues and profits will soar in 2017 if Lineage II manages to sustain an ARR greater than $1+ Billion.

Lineage II is not all that Netmarble has going for it in 2017. In February 2017, the company completed a $700+ Million acquisition of the Vancouver studio of the USA mobile game company Kabam.

If managed properly (questionable as we will argue below), Netmarble could generate a fresh $100 to $300 Million in revenue from two Kabam game. One is Marvel: Contest of Champions which has been a long running Top 15 revenue rank game in the USA. The other is the recently released game Transformers: Forged to Fight based on IP licensed from Hasbro.

No question, 2017 will be a spectacular year for Netmarble. The Korea Times has reported that analysts there expect Netmarble’s forward 2017 revenue to be around $ 2.7 Billion, a whopping 107% YoY increase. This is a far cry from Zynga’s and King’s anemic post-IPO YoY revenue growth rates of 12% and 20%, respectively.

The question is has all of this been priced into Netmarble’s IPO price and valuation?

Our analysis will show that expectations for revenue doubling in 2017 has been fully priced into the IPO. Netmarble’s IPO is priced for perfection.

Furthermore, there is a pattern of greed on the part of Netmarble’s management that has not served it well. It includes:

While Netmarble’s short term prospects are tied to the performance of Lineage II in Korea, its long term prospects are tied to success in the West.

The company has announced that it intends to localize and release the Lineage game in China but those prospects are uncertain, even with Tencent (TCEHY) as a significant minority stockholder.

The uncertainty is result of China’s recent freeze on licensing new games from Korean companies due to geopolitical tensions between the two countries.

In our opinion, Netmarble’s greedy handling of the Kabam games causes us to believe that Netmarble’s current and future acquisitions will underperform due to employee and player defections.

We start with a summary of the IPO — the expected price range, and the expected post-IPO valuation based on those prices.

The next spreadsheet is our valuation of Netmarble as a multiple of 2017 forward sales. We have been unable to find any official company forward looking revenue statement. If there is one in the Korean version of their S-1, we have found no reference to it by the Korean financial press.

Lacking official numbers, we use $2.7 Billion for Netmarble 2017 forward sales, a number reported by The Korea Times that analysts there expect.

Any lesser number would only increase our estimated price / forward sales ratio (P/S), which is already high. Any greater number would be incredulous as Newzoo has reported that TOTAL Korean game revenue (mobile + console + PC) was only $4 Billion in 2016.

Moreover, given the $4 Billion Newzoo figure, it seem incredulous that there would be enough demand in Korea to sustain any single mobile game at an $1+ Billion ARR.

The next spreadsheet is a comparison of the valuation / forward sales (P/S) ratios of Netmarble — 3.3 — with Com2uS — 2.61.

Com2uS is a Korean-based mobile game company listed on the Korean KOSPI exchange. Gamevil, a smaller publicly-held Korean game company, holds controlling interest in Com2uS.

Com2uS is much better known in the USA than Netmarble due to its global hit mobile game Summoners War. The game was released in the USA in June 2014 and has maintained a remarkably consistent Top 20 revenue rank in the USA for the last two years.

Based on this comparison, we believe that Netmarble’s IPO is overpriced by 26% at its announced price range of $106 to $138 USD or 121,000 to 157,000 Korean Won.

We believe that it would be a buy only around $84 USD or 95,250 Won.

You might argue that Netmarble’s upside potential is higher than Com2uS. That is true. But, we are not talking about financials, but stock prices whose movement is based on perceived and actualized performance that has not already been built into the current prices.

Netmarble is a buy at the announced IPO range if you believe that it will exceed an expected 107% in revenue growth this year. We think not.

Netmarble is a buy if you think it can successfully localize and release the Lineage II game in China in late 2017 or 2018. We say wait a half year before you invest to get a better feel for geopolitics between S. Korea and China.

Finally, Netmarble may be a buy if you believe that the newly released Transformer: Forged to Fight game will become a Top 8-10 hit like its cousin Marvel: Contest of Champions. We think not.

Our four years of reading App Annie charts suggests that there are no more “late bloomers” in the mobile game world. If a newly released game does not crack the top 50 in the first few days, it will never crack the Top 10.

Our reading of the App Annie chart says that the Transformers game is a bust.

(Source: App Annie)

While the Transformer game began development under Kabam, the final architecture and release schedule came under Netmarble’s watch. Both reflect a greediness that we believe has resulted in its quick bust.

The game was rushed into global release on April 5th after a relatively short two month soft-launch shakedown in Singapore and Canada.

Experienced early players of the game report that it is “too complex to play” and there is “kitchen sink” approach to development with a mashup of game genres and a mind-numbing complexity to scorekeeping and purchasing. To us, this suggests that the priorities are early monetization over long term player engagement.

In sum, Netmarble in not a buy at the announced IPO price range. Wait at least six month and evaluate its performance then.

Machine Zone (MZ): Game Unicorn with Marketable NewSQL Database?

Lawrence Abrams No Comments

Summary: This paper speculates that the startup Machine Zone intends to market a NewSQL database as a service and merits a $6 Billion valuation.

Written: July 25, 2015

Zone (MZ) is a Palo Alto-based  startup with a Top 2 iOS USA app store hit called “Game of War: Fire Age.” (GoW).

MZ describes Game of War: Fire Age as:

“.. a real-time mobile massively-multiplayer online game and parallel chatspeak translation application that translates over 40 languages for its players in real-time, connecting game players around the globe at the same time in a single virtual universe.”

We have written three other articles about this startup in the past year:

Machine Zone: IPO or What?   July 6, 2014 published by SeekingAlpha

Machine Zone: The $4 Billion Unicorn that Walks the Walk  March 24, 2015 published on our own blog http://glomoinvesting.com

Machine Zone and the Perversity of Unicorn Lists  March 26, 2015 published on Medium and our own blog

The theme running through prior articles is that the MZ’s status as a multi-billion dollar “Unicorn”  is not well known. This is because:

  1. The last company-confirmed VC funding round and implied valuation was made years ago before GoW was released. (The WSJ reported in June 2014 a funding round led by J.P.Morgan Chase valuing the company at $3 Billion, but this has never been confirmed.)
  2. The CEO Gabe Leydon has averaged about one interview a year for the past three years. Official press releases are even rarer.
  3. Even in rare interviews, the CEO shuns financial and game metrics, which have to be impressive. Instead Leydon uses these occasions to assert that MZ’s technology has applicability and marketability outside of gaming.

On July 15, 2015, Bloomberg reported  that the company was in discussions with investors for an additional $200 Million in funding at an implied valuation of $6 Billion.  Bloomberg noted that new valuation, double that reported a year ago,  hinged on investors being convinced of the marketability of MZ technology beyond mobile games. The article referenced an earlier Bloomberg interview with Robert Kolker where Leydon first made public statements about the marketability of its technology.

Dean Takahashi of VentureBeat also reported rumours of a new funding round.  But, he reported that MZ was seeking $500 Million at an unstated valuation — not the Bloomberg figures.  Takahashi’s source also said that  “the pitch has met with skepticism.”  Takahashi emailed Leydon for a comment and received this response:

“We do not comment on rumors and speculation about fundraising or valuation, but [Machine Zone] does not need additional investment. We are 100 percent focused on [Game of War] and expanding on the technology that powers it.”

What struck a chord with Takahashi was Leydon’s explicit statement about no need for additional funding.  For us, it was his explicit separation of gaming from technology as two distinct areas of focus.  For us, we see Leydon suggesting that MZ’s future includes a technology business separate from a mobile games business.

What follows is our attempt to flesh out where Machine Zone is headed. It is obviously speculative given the dearth of official pronouncement from the company.  (BTW, we have had no contact, received no remuneration, no free meal, etc. from the company or anyone remotely related to MZ.)

But, it is clear to us that there is concrete evidence of these intentions — pitch decks, written strategic plans, lists of customer inquiries, etc.  After all,  VC investors must have seen something beyond gaming to value the company at a reportedly $6 Billion in 2015 and $3 billion in 2014 versus what we think are our methodical valuations for their gaming business alone of $2.75 Billion in 2015 and $2 Billion in 2014.

We start our effort to flesh out where MZ is headed with Leydon’s March 2015 Bloomberg interview.  Here is quote in which he identifies the “Wow”  factor of their hit game  — its the low latency.

“…Game of War accommodates about 3 million users in simultaneous play, with what the company clocked as a 0.2-second response time…. This is the largest real-time concurrent interactive application ever built. There’s nothing even close to it.”

Later, the Bloomberg interviewer relays Leydon’s comments on the marketability of MZ’s technology outside of gaming:

“Leydon, meanwhile, intends to focus on what his new networking technology can accomplish outside the gaming world. He says dozens of companies have asked to license Machine Zone’s translation engine. Its applications, he says, span beyond gaming and into finance, logistics, social networking, and data analysis.”

In our prior 2015 papers, we focused on the marketability of MZ’s real time chat translator. We identified two well known, highly successful companies where chat is core — Facebook’s WhatsApp and Slack, the fastest growing SaaS startup of all time.  We mentioned that both companies would benefit greatly by adding real time translation to their chat.  But, we offered no insight then as to the business model MZ might adopt.

The market for a chat translator is a vertical market limited to a handful of social / business communication companies like Facebook and Slack, and come to think of it, Microsoft.  Given the limited list of potential customers and the fact that MZ doesn’t need cash, a SaaS model doesn’t seem right. What feels right is that MZ should offer a single exclusive perpetual license in return for stock.

In an earlier article, we “slapped” an addition $1.25 Billion valuation for the chat translator business on top of a methodical estimate of $2.75 Billion for the gaming business to arrive at a nice round valuation of $4 Billion for MZ in mid-2015.

Facebook could pay this amount. Slack probably cannot afford the dilution at this time. But, the more intriguing choice would be Slack because MZ’s history is a inversion of Slack’s.

Slack started out as Tiny Speck, a startup attempting to build a massive multiplayer online (MMO) game. The game was never completed, but a better way for a team to communicate became the motivation to start Slack as a side project.

MZ produced the hit MMO game that Slack could not complete. As a side-project, MZ built a chat translation engine that would make Slack invaluable as a communication platform for multinational companies. You could argue that MZ is a doppelgänger of Slack and so a union (reunion?) between these doppelgängers would be intriguing to say the least.

We now turn our attention to fleshing out the rest of Leydon’s comment about the  marketability of MZ’s technology outside of gaming.

Unlike us, it would be obvious to most software engineers what marketable technology MZ might have considering the description of their game: a real-time mobile massively-multiplayer online game accommodating about 3 million users in simultaneous play with 0.2-second response time.

It would have to be a cloud-based DATABASE.

And, unlike us, those familiar with databases and real-time MMO games would know instantly that it would have to be a particular type of database, as MMO games essentially are about transactions, defined as logical operations on structured data.

Making that connection only occurred to us after viewing a Michael Stonebraker YouTube video when he mentioned that the database requirements for real time MMO games are the same as modern, cloud-based online transaction processing (OLTP) databases required by banks, airline reservations, order entry systems, etc.

What MZ has is what banks, airlines reservations systems and real-time ad auction exchanges require in a database today.  Behind a game with annoying Kate Upton ads is a state-of the-art scalable, globally distributed online transaction processing (OLTP) database.

The rest of the database development world is coming around to what MZ set out to do from day one.

The original “purpose built” databases of the likes of Facebook, Google, and Yahoo were designed to be massively scalable and globally distributed. They did not have to handle transactions.  Requirements were relaxed for structure and consistency, defined as “all nodes see the same data at the same time”.

As a result, semi-structured “NoSQL” databases like Yahoo’s Hadoop, and Google’s BigTable, now open-sourced as HBase, became state-of the art.  Startups like MongoHQ and now publicly traded Hortonworks arose to offer NoSQL databases as a service (DBaaS).  IBM bought Cloudant and Apple bought FoundationDB to gain access to NoSQL technology.

Database design involves tradeoffs. As the online world’s need for monetization increased, especially real-time ad auction exchanges, a reversal in trade-offs has occurred.

The database world follows Google.   In 2012, Google made the now often quoted declaration that if it had to choose between a NoSQL and a “NewSQL” database to handle OLTP, it would choose the latter:

“We believe it is better to have application programmers deal with performance problems due to overuse of transactions as bottlenecks arise, rather than always coding around the lack of transactions”

So, Google has scrapped its “NoSQL” BigTable in favor of a “NewSQL” Spanner, which it now uses for its mission-critical Ad platform.

MZ’s focus has been “NewSQL” from day one.  It didn’t waste 4-5 year before coming around to what Google finally concluded in 2012.  Obviously, there are questions about the specifics of MZ’s stack and the degree of ACID compliancy.

We can only offer a non-scientific sample of job requirements posted on its website: a combination of MySQL, HBase, Hadoop and Vertica where Verica is now a Hewlett-Packard piece of software allowing SQL-like queries of NoSQL databases like Cloudera’s Impala.

Other than hiring and retaining world class database talent, the DBaaS industry has low barriers to entry.  The basic software components — MySQL, HBase, etc. —  are open sourced.  The computer power needed to scale this service offering can be incrementally purchased from Amazon’s AWS.

We think that MZ has significant competitive advantages over other NewSQL competitors. First, is the location of its new HQ in Palo Alto which is the epicenter of U.S.’s database talent pool.   The HQ is located on Page Mill Road across the street from Stanford University in the storied Stanford Research Park that used to be Facebook’s old headquarters.  There would be little relocation friction for new MZ hires from Stanford, nearby Facebook in Palo Alto, or Google in Mountain View.

We also think it was fortuitous that MZ never considered moving to some trendy area of San Francisco city like some of the largest mobile game companies in the U.S. — Zynga,  GLU Mobile, and Kabam.  Our view is that the gentrified, more cerebral San Francisco peninsula is better suited for enterprise software developers and their families than the manic, hipster environment of the city, which is better suited for consumer and e-commerce startups.

The San Jose Business Journal reported in September 2014 that MZ had leased an estimated 140,000 square foot space for this new HQ. Furthermore, there is an adjacent 140,000 square foot space now leased short term by Nest, now owned by Google, that may be available to MZ later.  At 250 square feet / employee, this new HQ could accommodate up to 1,000 employees, plenty of room to expand considering MZ’s current headcount is reportedly only 300.

It has also been reported that MZ will  be spending $50 Million to configure a dedicated 4,000 server data center within a larger server farm complex south of Las Vegas. This investment also might set itself apart from less well-funded competitors as it will provide MZ with a dedicated server farm to experiment with various software/hardware configurations.

But, the most important advantage MZ has over other NewSQL competitors is that its database is literally “battle tested.”  Remember Leydon’s claim in the Bloomberg interview  — 3 million globally distributed users in simultaneous play with a 0.2 second response time.

MZ’s pitch deck to prospective investors now probably includes more references to Google and its Spanner AdTech platform than Supercell and Clash of Clans.

Will VCs now fork over cash at an implied $6 Billion valuation for a recognized (finally) Unicorn comfortably feeding off a $1.1 Billion game cash cow and who is positioning itself to offer a Google-like Spanner-as-a-Service?

You bet they will.

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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?

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