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Kabam: Mobile Gaming Company IPOs after King and Zynga

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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

KLab: An Undervalued Japanese Mobile Gaming Company

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KLab (3656:TYO) is a Japanese-based gaming company that had been slow to switch from developing feature phone and browser-based games to developing native freemium app games for smartphones.

But, that all changed in April, 2013 when KLab released an innovative role-playing game called “Love Live! School Idol Festival”. The game’s name and theme was licensed from ASCII Media Works who has developed a multimedia franchise — music CDs, anime music videos, TV shows, and manga adaptions. According to a company press release

“School Idol Festival follows the story of the nine members of the μ’s (pronounced Muse) as they train to become the best school idols. In addition to the main story, the game features challenges in which players tap along to the rhythm of popular μ’s songs. Players will encounter and collect the different members of μ’s throughout the game and will be able to build a custom group composed of nine members. To progress in the story, players participate in musical challenges that feature popular songs by the members of μ’s. Players can also level up amassed members and unlock individual members’ sidestory.”

Love Live! the game is innovative in that it makes streaming music a central feature of game play.

According to charts developed by analytics company App Annie, the game has ranked around #15 in app store revenue for both iOS Apple and the Google Play in Japan. While not a megahit like GungHo Online’s (3765:TYO) (GUNGF) Puzzle and Dragons at #1 or #2, or Colopl’s (3668:TYO) Quiz RPG at #5, Love Live! has distinguished itself by relatively long and steady run at #15.

Klab from april 2013(Source: App Annie)

google revenue from beginning(Source: App Annie)

A more detailed look reveals an uptick in ranking to around #10 in the last month.

Klab ios from April revenue(Source: App Annie)

The purpose of this article is to present the case that KLab’s stock has not fully capitalized the future stream of revenue  from Love Live! The stock is a BUY now even with the 17% run-up on May 26, 2014 after KLab released its 1Q2014 earnings, which was only a confirmation of a guidance issued two weeks earlier.

The stock jumped about 20% when the game was first released on April 15, 2013 for iOS Apple store in Japan and it quickly shot up to #15 in revenue ranking.

But the real run-up started two months later going from 525 JPY a share on June 14, 2013 and peaking at 1,297 JPY on July 9, 2013 for 261% gain.

KLab Inc  3656.T  2 yrs

(Source:Reuters)

The cause is hard to pin down. It could have been the brief run-up in downloads  right after Love Live! was released for Google Play store beginning June 13, 2013.

google download june july 2013

(Source: App Annie)
It could have been a Reuters report that Microsoft had signed a deal with KLab to convert some of its franchise console games to native apps for smartphones.

But the downloads on Google Play quickly faded and the reported partnership with Microsoft was never confirmed. In any case, the stock plummeted to 854 JPY by August 2013 and continued its decline for the rest of 2013 even though the game’s revenue ranking remained steady at #15.

KLab’s stock continued its downward trend in the first four month of 2014. As reported by indie navie, KLab announced a lay-off of 22% of Japan-based employees and 7% of employees based in other countries when they reported full year’s losses on February 14, 2014..

But, based on continuing success of Love Live!, KLab announced three months later on May 13, 2014 an upward revision of its 1Q2014 (ending March 2014) revenue guidance by 10% from 4,050 M JPY to 4,425 M JPY and an upward revision in its operating profit guidance from a loss of 90 M JPY to a gain of 96 M JPY.

The stock responded the next day going from 568 JPY to 624 JPY a share for a 9.9% gain, but dropped back down the next two days.

It was the actual release of 1Q2014 financials before the open on May 26, 2014 that propelled the stock 17% that day. Surprisingly, the actual results were not that much different than the guidance revision issued just two weeks earlier.

KLab Inc  3656.T  5 days

(Source: Reuters)

Even with this 17% run-up, we believe that KLab’s stock has not fully capitalized the future returns from Love Live! based on a comparison of the KLab’s current forward price sales ratio (P/S) with that of GungHo Online.
Below is a calculation of the trailing and forward P/S of KLab and GungHo Online. We have used GungHo Online’s estimated forward P/S of 3.31 as a benchmark for a mobile gaming company with a hit game with long running, steady revenue rank.

We estimate KLab’s forward P/S ratio currently to be 1.29, far below GungHo Online’s 3.31. At a minimum, we think that a forward ratio of 2.50 is justified by the long running, steady revenue ranking of Love Live!.

KLab is a BUY now for a potential near term price appreciation to 1,315 JPY per share for a 93% short term gain.

forward japan

forward us

Mixi: A Rare Undervalued Mobile Gaming Stock

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Mixi (2121:TYO) had been the Japan’s leading social network site until Facebook started to take over.

In January 2011, Facebook had 2 Million monthly average users. By September 2012, it had surpassed Mixi with 15 Million monthly users and Facebook never looked back.

As a result, Mixi’s stock has been in a 5 year tailspin falling 86% from 8,540 JPY in December 2009 to a low of 1,190 JPY in November 2013.

But, out of nowhere, this social network company developed internally a Monster (literally) mobile game hit called  Monster Strike (MS). And the stock started to move from November 19th at 1,190 JPY a share to close at 9,060 JPY a share on December 10th for a 661% gain.

Reuters chart

(Source:Reuters)

But, before the stock opened on December 11th, Reuters reported that Goldman Sachs cut its rating on Mixi’s stock to “sell” from “neutral”.

Since the Goldman downgrade, the stock has been rocky. There was a 19% move on February 13th when the company revised upward by 44% its FYE2014 (ending March) revenue guidance from 8,000 M JPY to 11,500 M JPY. But that did not last. The stock today sits at 5,550 JPY a share.

I believe that Mixi’s stock is undervalued because it does not fully reflect the FYE2015 revenue of Monster Strike.

Mixi will be reporting its FYE2014 (March ending) on May 15th. It will also give its first guidance for FY2015 revenue. I have derived my own estimate of FYE2015 revenue which fully takes into account the revenue implications of MS now a megahit at #3 on the app store charts.

Implied by my estimate of FYE2015 revenue is a forward price/sales (P/S) ratio is 2.51. At the very least, Mixi’s forward P/S ratio should be equivalent to GungHo (3765:TYO) which I have estimated at 3.50. This translates into a stock price for Mixi of 7,662 – a 39% gain over its current price of 5,550 .

Mixi is a buy now BEFORE its earnings and guidance report on May 15th, 2014.

I present below how I arrived at a forward P/S ratio for Mixi of 2.51 and why Mixi justifies at the very least forward P/S equal to GungHo’s 3.50.

Underlying my forward P/S estimate for Mixi is an estimate of the relation between app store revenue ranking and revenue. Data points on this graph are estimated game revenue associated with revenue rankings of the following 3 publicly held Japanese mobile game companies and their hit games:

(1) Mixi – Monster Strike (MS)
(2) GungHo Online – Puzzle and Dragons (P&D)
(3) Colopl (3668:TYO) – Quiz RPG:The World of Mystic Wiz

There has been publicly available data provided by analytics companies like App Annie that track daily app store downloads and in-app purchases of mobile gaming companies. (Disclosure: I have not received any remuneration from App Annie.)

With a free account, you cannot download any data. But, you can take screenshots of graphs of daily rankings (1-1000) of mobile games by downloads and revenue where revenue is the sum of download revenue + in-app purchases. These graphs can be filtered by app store – iOS Apple Store, Google Play, and Amazon – and by country.

App store data does not include revenue from advertising. But, mobile games created by professional studios tend to be free-to-play (ftp) with monetization via in-app purchases of addicted players. This is the case for all three games analyzed here.

In the 2013-2014 period examined, all three games derived almost all of their revenue from Japan. In Japan, app store revenue is roughly divided equally between iOS Apple and Google Play stores. We only show revenue ranking graphs from iOS Apple Store – Japan to save space because views of Google Play revenue rankings were about the same as iOS.

Mixi’s Monster Strike was released on September 27, 2013. Its early upward trajectory on App Annie revenue ranking charts was inauspicious, rising to a rank of # 93 on November 19th when investors first began buying Mixi’s stock in volume with the expectation that MS would continue to rise up the charts. (see first chart below).

An excellent blog post of how Monster Strike has saved Mixi has been writen by Dr Serkan Toto. Indie navi has also covered the Mixi story as extensively as any English language site.

Unlike P&D and Quiz RPG, MS was slow to become a megahit. MS started 2014 at #25 and took a run at megahit status in January, but then backed down in February. But, on March 1, 2014, a new release (2.2.0) coupled with 3 TV spots caused the game’s revenue rank to shoot up to #3 and MS has stayed there solidly since. (See second chart below).

Monster strike from release                                                   (Source: App Annie)

MS Jan - May                                                (Source: App Annie)

It is important to note that MS’s megahit status at #3 contributed only to one month of its FYE2014 financials. It has contributed only two months to what FY2015 might look like. This is in contrast to the understanding of what P&D has, or will mean, to GungHo’s financials and to what Quiz RPG has, or will mean, to Colopl’s financials.

GungHo’s Puzzle and Dragons raced up to #1 within days of release on February 20th 2012 and has remained #1 or #2 on the Japanese charts now for 24 months and counting. It joined Western chart-topping megahit  Candy Crush Saga as the only mobile games in 2013 qualifying for the “Billion Dollar Club”.

Puzzle and Dragon From Release                                                   (Source App Annie)

The rise of Colopl’s hit game Quiz RPG was slower that P&D, but faster than MS. It was released on April 22nd, 2013 and 5 months later in September, it cracked the Top 5. It remained a Top 5 game another 5 months, but now has slipped to a Top 10 game in March and April 2014.

colopl app annie                                                      (Source: App Annie)

colopl jan thru may 6(Source: App Annie)

Now that we have established each game’s revenue ranking and the duration of each game’s megahit status, the next step in our analysis is to make the connection between quarterly revenue ranking and revenue.

The easiest is GungHo’s Puzzle & Dragons. It has been an unwavering #1 for the Jan-March 2014 period  and GungHo has reported that in April 2014, P&D generated 11,526 M JPY ($113 M USD) or 46,104 M JPY for a quarter.  For our graph, we use 45,000 M JPY as the January-March quarterly revenue associated with this #1 app store revenue ranking game.

Next is Colopl’s Quiz RPG. Its revenue ranking has wavered in Jan-Mar 2014. It was a solid #3 in January, but has slipped in February and March to between #5 and #10. We give it a quarterly average of #5. Colopl’s mobile gaming revenue is more diversified, benefiting from another Top 10 hit called Professional Baseball – PRIDE. Roughly, Quiz RPG contributed 65% to its latest quarter revenue of 12,359 M JPY. Thus, a #5 app store revenue ranking in Japan is associated roughly with quarterly revenue of 9,000 M JPY.

Finally, based on where Monster Strike now stands in comparison to P&D and Quiz RPG, I present an estimate of Monster Strike’s contribution to Mixi’s 1Q2015 (Apr-June) revenue before it reports FYE2015 guidance next week.

I think that the relation between Japan app store revenue rank and revenue is not just a long-tail relation, but a “double long-tail” relation. There are wide differences in revenue between games with revenue rank #1 and #3.

MS as a solid #3 for a full quarter should contribute more that Colopl’s Quiz RPG estimated 9,000 M JPY and less than GungHo’s #1 P&D at 45,000 M JPY. I peg MS’ next quarter revenue at 11,250 M JPY — it closer to Quiz RPG as the data suggest “half-life” relation and we modeled it that way: #1=45,000 M JPY; #2=22,500 M JPY; #3=11,250 M JPY..

Graph between Revenue Ranking and Revenue

The final two steps are to present a comparison of the trailing and foreward P/S rations for Mixi, Colopl, and GungHo.

Trailing PS

 (Source: Reuters)

I think that 4 times last quarter’s sales is justified for GungHo by the fact there seem to be no near term upside potential. P&D has been #1 for 24 months and counting and can generate no additional revenue from its core market in Japan. GungHo has no other games in the Top 10.

P&D’s only upside is a successful introduction in China, but iOS Store and Google Play generate app revenue nowhere near the revenue generated by app stores in Japan and the United States.

Estimate of Forward PS

Of the three, Colopl is a most prolific internal developer and the most aggressive dealmaker with announced tie-ins with Glu Mobile and TenCent. Quiz RPG had been a solid #3 for five months until February 2014.

It has another Top 10 game in Professional Baseball – PRIDE. I think that the combination of a slipping Quiz RPG and a rising PRIDE will keep Colopl’s revenue flat for the next 3 quarters so using 4 times last quarter’s revenue as an estimate of forward P/S again seems justified.

Mixi’s revenue over the next year has the most upside potential of the 3 companies. MS has only been at #3 for two months and it looks solid. I estimated earlier a full quarter at #3 translated into approximately 11,250 M JPY. Couple that with Mixi’s existing jobs listing business, and I estimate next quarter’s (Apr-June) QoQ revenue increase of 140%.

Even if MS begins to fade in the second half, I have estimated Mixi’s full FYE15 revenue at 36,425 M JPY, a YoY increase of 200%. This implies a forward P/S ratio of 2.51, below that of GungHo’s 3.34. At the very least, Mixi’s P/S should be on par with GungHo.

That would imply a stock price value of 7,662 JPY, a 39% appreciation over its current (5-4-14) price of 5,550 JPY.

Mixi is a buy now BEFORE its earnings and guidance report a week from now.

Glu Mobile Will Beat Guidance Based on App Store Data

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Article 0riginally published in Seeking Alpha on April 1, 2014

http://seekingalpha.com/article/2121433-glu-mobile-will-beat-guidance-based-on-app-store-data

First quarter 2014 has just closed as I write this article about GLU Mobile (GLUU), a pure play mobile gaming company. With access to daily app store revenue rankings for the past 3 months, I believe that GLU’s revenue will exceed guidance a full month ahead of its 10-Q release and conference call scheduled for April 28, 2014. However, it won’t be a blowout like last quarter.

Freely available app store data represents a new step up in the democratization of investor data. It builds on the strides made by internet access to real time stock prices, live conference calls (albeit with scripted questioning by Wall Street analysts), and live blogging of major new tech releases. It is part of the same trend toward equal access to investor data that famed Fidelity fund manager Peter Lynch wrote about after realizing that any shopper could see the disruptiveness of L’eggs hosiery sold through grocery stores in the early 1970s.

Had I been following app store data 3 months ago, I could have made a killing buying GLU before it announced 4Q 2013 results on February 6, 2014. On that day, the company disclosed a 60% Q/Q revenue explosion due to the successful release of Deer Hunter 2014. The share price shot up from $3.87 to $4.94 for a one day gain of 28%.

I know, “shoulda, woulda, coulda.” But let me walk you through the charts of GLU ex post to pique your interest before proceeding on to an ex anteanalysis of the chart of GLU’s franchise game, Deer Hunter 2014 (DH14), plus the charts of FIVE new releases: Eternity Warrior 3, RoboCop ™, Motocross Meltdown, Front Line Commando 2, and Pirates of Everseas.

I present first a spreadsheet of trailing 4 quarters of revenue for 3 of the most followed publicly held pure play mobile gaming stocks listed on US stock exchanges.

Glue Sales Trend

New mobile game releases can create a 50% or move Q/Q revenue pop like Deer Hunter 2014 for GLU and the Saga series for King Digital Entertainment (KING). But, my reading of data derived from app stores suggests that even mega-hits like Candy Crush Saga plateau and fade after 3 quarters. You will get killed playing these stocks if you rely only on 10-Qs or interim sale data released by Wall Street analysts at their convenience.

Fortunately, there are several data analytics companies that track daily app store downloads and in-app purchases of mobile gaming companies. We have a limited access, free account at App Annie. (Disclosure: I have not received any remuneration from App Annie.) Another sources is Distimo.

With a free account, you cannot download any data. But you can take screenshots of graphs of daily rankings (1-1000) of mobile games by revenue, where revenue is the sum of download revenue + in-app purchases. These graphs can be filtered by app store – Apple Store, Google Play, and Amazon – by mobile game type, and by country. App store data does not include revenue from advertising. But most mobile games these days are free-to-play with monetization via in-app purchases.

Below is a graph of GLU’s stock price, showing the 28% pop on February 6, 2014 based on a 60% Q/Q revenue growth for 4Q 2013.

GLU Stock
Source: Reuters

The chart above was foreshadowed by App Annie data. On September 18, 2013, GLU released Dear Hunter 2014 (DH14). It immediately shot up to an App Annie Top 10 revenue ranking and remained there during October and November. During December, the game slowly slipped down to a Top 15 ranking.

Deer Hunter 4Q

A more granular view of the above:

deer hunter Oct-Dec 2013

As a space saver, we show only App Annie data derived from the U.S. Apple Store, believing that this sample is reflective for GLU games as a whole. For other games with a significant following in Asia, data derived from Google Play store should be included, as Android is the primary smartphone OS there.

In hindsight, I know now that a Top 15 game was unprecedented for GLU. Based on recent disclosures by KING and GLU, I now have a rough map of App Annie revenue ranking to quarterly $ revenue.

Map of Q Final

The long-tail of this graph will come into play when analyzing GLU game revenue ranking charts for 1Q2014. In sum, the data above signaled a month before GLU’s 10-Q release in February 2014 that DH14 was a hit and that GLU would blow through guidance.

Now we turn to an ex ante analysis of whether GLU will beat revenue guidance for 1Q. Here is the guidance from an SA transcript of GLU’s 4Q conference call on February 5, 2014:

“Turning to the first quarter of 2014, we currently expect our total non-GAAP revenues to be in the range of $38 million to $40 million, an increase of 54% to 62% compared to the first quarter of last year and slightly down compared to Q4. This guidance assumes Deer Hunter 2014 to contribute approximately one-third of total non-GAAP revenues during the quarter. We are also seeing solid initial traction from EW3, RoboCop and Motocross Meltdown, which will lead to broader revenue diversity in Q1 as compared to Q4.”

In sum, GLU’s guidance is for a slight down Q/Q. Based on the charts below, I believe that GLU will have an up Q/Q in the 10% range, enough to push the stock up from its current depressed level. But, none of the new releases came close to the Top 15 hit of DH14.

GLU Launch Dates

First, we present the revenue ranking chart of DH14 for 1Q. The “half empty” view is that DH14’s revenue continued to slide from a Top 15 game to a nadir ranking of 31 on January 31st. The “half full” view was that GLU made two important release updates that reversed the slide and DH14 ended the quarter at 13.

Deer Hunter 1Q

On January 31st, version 1.2.2 was released boosting revenue ranking from 31 to 14 in a day. On March 18th, version 2.0.0 was released again boosting revenue ranking from 40 to 13 in a day. I don’t see this reversal pattern in charts of games put out by other companies. The usual game revenue pattern is up, plateau, then steady decline. I believe the above chart is a reflection of GLU’s ability to manage a game post-release and to make frequent updates that boost in-app revenue.

Also, not too much should be made in revenue ranking swings of games ranked below 15. There is a long tail relation between revenue ranking and $ revenue – see the graph above again. Ten point ranking swings below 15 are associated with modest $ revenue swings.

We are still in the very early stages – with only 4 actual data points – of fleshing this relation out, but roughly, we estimate that a 5 point drop in DH14’s ranking over the course of 1Q resulted in a quarterly revenue drop in the $5M range. The science of mapping app store rankings to $ revenue is evolving rapidly. We have found another attempt made by Think Gaming based on estimates of daily active users multiplied by estimates of average revenue per user.

Based on comments of an earlier article of mine on SA, I want clarify what I mean by a Top 10 or Top 15 rank on “the charts.” My rankings come from App Annie, not directly from Apple Store charts. There have been a number ofarticles published lately warning about “gaming” the Apple Store charts by using bots to create download spikes. There is even a report of a developer spending thousands of dollars to spike in-app revenue of his game. In response, Apple (AAPL) has altered its chart algorithm to reduce fraud.

So with these caveats in mind, the question becomes, can the release of FIVE new GLU games in 1Q overcome DH14’s decline? Here are the charts and insight a full month before the 10-Q comes out. First up was Eternity Warrior 3 released on December 31, 2013. The game barely cracked the top 100 initially and has faded since then.

EW3

Next up was RoboCop™ released on January 7th. It got as high as 89 on January 16th, but has faded. While affixing a hit movie name to a game generates downloads, it is quality that generates revenue. The RoboCop™ chart is a warning to GLU as it moves forward with releases of other branded games.

RoboCop

Next up was Motocross Meltdown released on January 21th. It never cracked the Top 100.

MC meltdown

Next was Front Line Commando 2 released on March 5th. This was probably GLU’s biggest hope for a hit as it is a franchise game with some name recognition. The game was the best of the 1Q lot, but never cracked the Top 50. An update is warranted here.

FLC2

Last was Pirates of Everseas released just two weeks ago on March 18th. It never cracked the Top 200.

PE

While there are no new releases that have come close to DH14’s success, GLU has demonstrated clearly that it can deliver a number of new games on time. We believe that the sum total revenue from five new releases was sufficient to offset a decline from DH14. GLU will beat its 1Q revenue guidance, but not by much.
Obviously, there is room for improvement here. The positive take-away from 1Q is that GLU has proven that it can deliver a slew of new games on or before the date promised. Not many gaming companies have proven that. With its engagement management platform, GluOn, now in place, it has the capability of boosting revenue of games post-release.

Price-Sales Ratios of Mobile Gaming Companies

Lawrence Abrams No Comments

Published by Seeking Alpha 3-20-14

http://seekingalpha.com/article/2100903-price-sales-ratios-of-mobile-gaming-companies

Investing in publicly-held mobile gaming companies is the purest play ever on the hit-making business. It is momentum investing on steroids. To paraphrase the Sean Parker character played by Justin Timberlake in the movie The Social Network, “A doubling of sales isn’t cool. You know what’s cool? A tenfold increase is cool.”

As an example of the new cool, consider the following numbers from a Wall Street Journal article on the upcoming IPO of King Digital Entertainment (KING), the creator of the smash hit “Candy Crush Saga”,

“In its filings with the U.S. Securities and Exchange Commission on Tuesday, the game developer said it saw a more than tenfold revenue increase in 2013, as sales skyrocketed to $1.88 billion from $164 million in 2012… King said its net profit last year was $568 million, up from $7.8 million.

Jim Cramer thinks KING is cool, saying it is a better value now that Zynga (ZNGA), given the IPO’s price-earnings (P/E) ratio of 13 and a trailing twelve month price-sales (P/S) ratio of 3.7, both of which are better than ZNGA.

But, when it comes to momentum investing, trailing P/E and P/S ratios fail to capture growth potential and value. With traditional momentum investing, forward ratios are developed by projecting metrics forward, often linearly, from results of the past 3 to 8 quarters. But, coming up with a good forward ratio is problematic for mobile gaming companies where growth is hyperbolic, but can stop on a dime.

PriceSales vs Growth

Investing in publicly-held mobile gaming companies is the purest play ever on the hit-making business. It is momentum investing on steroids.

Ignoring the possibility of stagnation, Pamela Peerce-Landers published an article in SA last week which did project out KING’s financials a few years based on the full 2013 results. The result was that Pierce-Landers values KING between $128 and $142 a share.

Multi-year projections like this based on full year results might be fine for momentum companies with moats like IP, network effects, brands, etc. But is this kind of projections valid for mobile gaming companies?  In her article, Pierce-Landers makes the argument that KING has a “formula” or “platform” that can replicate hits.  We shall see.

What follows is an analysis representing a middle ground between trailing ratios and forward ratios based on full year results.  Basically, we are saying that with mobile gaming companies, you can only look at one quarter back and one quarter forward.

What follows in an analysis of P/S ratios of 6 publicly-held mobile gaming companies plus pre-IPO KING. We also calculate
the latest quarterly sequential sales growth rate and map this against trailing P/S as a reasonable projector for companies whose growth can, and have, stopped on a dime

Several things are notable for us: (1) the sudden stagnation of KING in the latest quarter after 2 previous quarters of 50% plus sequential growth; (2) the breakout of GLUU in its latest quarter after 2 previous quarters of stagnation; (3) the lack of visibility still for a ZNGA turnaround; and (4) last, but not least, the amazing, unabated growth of the Colopl which makes KING’s growth seem pedestrian by comparison.

Next we calculate the P/S ratios for these 7 companies and plot P/S ratios against last quarter’s sequential growth rates.

The analysis suggests a positive correlation between P/S ratios and the latest quarter’s sequential growth rate.
PriceSales vs Growth

Graph

You cannot say that a company is overvalued or undervalued based solely on its trailing P/S ratio. You must look at both P/S ratios and recent sales growth figures. You cannot say that companies like DeNA or GREE are undervalued just because their P/S ratios are less than 2 because their sales are in decline.

Similarly, you cannot say that Colopl is overvalued with a P/S ratio of 13 because its sales have been growing at 50% plus sequentially for not one quarter, but three quarters. Indeed, even with a P/S of 13, we think that Colopl is undervalued.

In the case of KING vs ZNGA, our analysis supports Jim Cramer’s assessment that KING is a better play than ZNGA. But, GLUU bests both as it has about the same P/S ratio, but sports a breakout quarter of 60% sequential sales growth rate.