KLab: An Undervalued Japanese Mobile Gaming Company

Click here to download the permalink

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

See Version published by SeekingAlpha

Click Here to Bookmark the Permalink. 

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.


Monument Valley: Artistic Success and Business Model Failure

MV Pix from MV Blog   MV pix from MV Blos 2
(Source: ustwo)

Click here to download the Permalink

On April 3, 2014, the design studio ustwo released a much anticipated paid puzzle game called Monument Valley (MV) for iOS  Apple app stores worldwide.

“Ecstatic” is the best word I can think of to describe the response to the game’s visuals.

But, based on initial download and revenue ranking data provided app store data analytics company App Annie, I believe that the game will not generate enough app store revenue to be profitable.

As a result of the wide gap between the game’s critical and financial success, I question ustwo’s choice of a paid, rather than a tasteful freemium, business model. In fact, I question why any mobile game developer today still would use a paid business model over a free-to-play (ftp) with in-app purchases.

When ustwo began development of the game 10 months ago, the choice between paid and ftp for a mobile game might have been a debatable question. But, since a widely quoted App Annie and IDC report that came out in March 2014, the debate seems over. They found that in 2013 in-app purchases based on a ftp model accounted for 92% of purchases, while 4% came from paid apps and 4% from a blend of ftp and paid.

A blog post by the lead designer and visionary, Ken Wong, in the weeks before release of Monument Valley communicated clearly the design aesthetics behind the game:

“My hope for Monument Valley is that it might contribute to the argument that the medium of entertainment we call video games is in fact art.

What does it mean for video games to be described as art? It means recognizing games as a medium of expression, a medium through which we can deliver moving experiences and convey ideas to each another. It means games have cultural significance – that through them we can understand some small part of what it means to be a living, loving, dying, feeling, and thinking being.”

Even MV’s tag line smacked of high art:

An illusionary adventure of impossible architecture and forgiveness

The game has been an overwhelming critical success. The influential Wired magazine blog said:

“The easiest way to describe Monument Valley released today on iOS for $4.00 (with an Android version coming soon) is as something like an interactive version of an M.C. Escher print.”

“The temples are bedecked with arcades, corridors, parapets and onion domes. They’re beautiful, like a good piece of graphic design, and exquisitely constructed, like a Swiss watch. It’s a case where the aesthetic pleasure of how the game looks and the visceral feeling of how it operates are not just in perfect agreement but one in the same.”

The trailer for this game on YouTube quickly registered over 200,000 views with glowing comments.

There was a 5 star rating and game of the week by TouchArcade; Polygon gave it a 9/10; PocketGamer gave it 9/10 and Gold Award. There were glowing write-ups in The Verge, Tech Crunch, Buzzfeed, Kotaku and more.

The game even elicited an approving nod from my favorite Big Picture blogger, venture capitalist Benedict Evans of a16z.

The only serious criticism of the game was that the full run-time experience  was too short at 1 to 1 1/2 hours.

In April, I wrote several articles for Seeking Alpha on the financial prospects of King Digital (KING) and Glu Mobile (GLUU) based on App Annie download and revenue ranking data. Given MV’s pre-release hype,  I thought I would be interesting to do a post-release follow-up look at how it did according to App Annie.

For about a year now, there has been publicly available data provided by 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 – Apple Store, Google Play, and Amazon – by mobile game type, and by country.

App store data does not include revenue from advertising. But, mobile games created by professional studios tend to be paid or free-to-play (ftp) with monetization via in-app purchases of addicted players. Hit Indie games created by individuals like Dong Nguyen’s Flappy Bird or Wen Zeng’s Piano Tiles still tend to be ad supported. But I noticed that even ad=supported Piano Tiles offered a simple opt-out-of-ads option for $.99.

App Annie tracks 400,000+ apps, mostly mobile games, for developers who allow their app store data to be tracked. The graph between revenue (Y-axis) and App Annie revenue ranking (X-axis) is a very, very long tail.

Below is our first attempt at estimating this relation  based on pairing 4Q2014 disclosures by King Digital and Glu Mobile of individual game revenue against App Annie revenue rankings during the same quarter.

Map of Q Final

Below are screen shots of the App Annie charts for Monument Valley on iOS Apple store in the U.S, the dominant market for the game. Similar charts for other countries, some better some worse, could be shown, but no country other than Japan could offset any result from the US.

The game was released on April 3, 2014 and for the first 3 days, the results were great. So, much so that Gamasutra titled a blog on April 10th Designing the Surprise Mobile Game Hit: Monument Valley.

But the game’s stats quickly faded. Monument Valley was the #1 downloaded game on April 3rd, 2014, but fell during the month and sits at #82 on April 28th. As far as revenue ranking–via paid only at time of download  — the game debuted at #30, but, fell in parallel with downloads and now sits at #293.

mv download ios update

(Source: App Annie)

mv revenue rank ios update

(Source: App Annie)

For comparison purposes, I would like to present the charts of two other games, one paid and one ftp with in-app purchases.   The chart of the paid game, which was also a critical success, show the same quick decline in revenue ranking as MV.  The ftp game with an-app purchases has enduring  strength in revenue ranking — 6 months and counting – due to an addictive design even as new downloads show a pattern of decline similar to paid games.

In April 2014, Square Enix released a paid ($4.99) mobile game Hitman GO, named after the Western console “stealth action” franchise Hitman. The game was produced by SE’s Eidos- Montreal studio. Rather than a watered down version of an action console game, the studio created a “diorama-style turn-based strategy” game, perfectly suited for mobile.

hitmango2

Here are the App Annie iOS Apple Store – U.S. charts.

Hitman Go was the #8 most downloaded game on release day April 17, 2014, but has steadily fallen since and sits at #56 on April 28th. As far as revenue – only paid at time of download like MV—the game debuted at #55, but has fallen in parallel to downloads and now sits at #168.

hitman go ldownloads update

(Source: App Annie)

hitman go revenue rank update

(Source: App Annie)

As a contrast to the chart of the two paid game presented above,  we present the chart for a hit game with a ftp + in-app purchases business model. The game is The Hobbit: The Kingdoms of Middle-earth, a strategy/RPG, developed by the U.S. start-up Kabam in partnership with Warner Bros. Interactive Entertainment, whose parent company owns the film rights for the J.R.R. Tolkien works.

The game has never been a download hit, reaching its highest download rank of #372 on December 16th, 2013 and now stands at #796.

But, what an addictive game! The in-app purchases have kept the game’s revenue rank for a full six months between #10 and #15.  Glu Mobile disclosed that it’s first person shooter release Deer Hunter – 2014 with a similar revenue ranking contributed $25M in  4Q2013.  So we, believe that Kabam’s revenue for The Hobbit has been the same — $25M a quarter now for 2 quarters and counting.

kabam download

(Source: App Annie)

kabam revenue rank

(Source: App Annie)

But, there is a long tail relation between revenue and App Annie revenue ranking.  We have estimated that an App Annie ranking of #10-15  is associated with $25M for the quarter but MV’s #298 revenue ranking one month after release probably means that this critically acclaimed game will not exceed $1M in revenue for the quarter.

Furthermore, we estimate ustwo’s development costs –direct labor+benefits+overhead application rate– for  MV to be around $2M based on reports of a development team of 8 highly paid engineers working 10 months.

The game is been a failure financially for ustwo.

 In responds to criticism that the game is too short, the company has stated that they are developing additional levels.

This is not the first time ustwo has released a game that was a critical hit but a financial failure. In October, 2011 they released children’s game Whale Tale which went on to garner 3.68 Million downloads but only broke even financially with $455,000 USD in revenue according to TechCrunch report. The company has been looking to leverage the now established brand “Willows, the flying whale” via an e-book and children’s TV show.

Would designing in-app purchases into Monument Valley kill its mission of creating “an illusionary adventure of impossible architecture and forgiveness.”  Can you produce an “ecstatic” experience and still make money?

If any mobile gaming company can successfully mesh art with commerce, we think it is ustwo.  We are rooting for them.


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.


“Flappy Bird” Investing Requires Daily App Store Tracking

By Larry Abrams, published by Seeking Alpha 3/24/13

http://seekingalpha.com/article/2106973-flappy-bird-investing-requires-daily-app-store-data

Investing in publicly-held mobile gaming companies like KING, ZNGA, GLUU, and a host of other companies around the world, is the purest play ever on the hit-making business. It is momentum investing on steroids. Investors, 99% of which have never played a mobile game in their life, have been drawn to the industry lately by press reports of the success of “Flappy Bird” and of “Candy Crush Saga.”

The magnitude of success of “Flappy Bird” first came to light in a month ago in an interview in The Verge. Dong Nguyen, the game’s sole creator, revealed that, while the free-to-play game was earning an average of $50,000 a day from advertising. It was truly amazing that a single person could produce a piece of software, upload it to an app store, and receive 50 million downloads within months of release solely on the basis of social media chat.

Another example comes 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 thantenfold 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.

The speed of success of mobile games suggests that you can’t wait for quarterly 10-Qs and conference calls to give you buy and sell indicators. Revenue streams can explode in a matter in days not months. But, it is no sure thing that a quick rise to the top of an app store bestseller list is sustainable. Again, you need to follow sales weekly at least.

And even if a game is so addicting that players keep paying for add-in purchases for months, it’s not heroin. Game addiction eventually wears off. And you will get killed if you wait for some CEO in a conference call to give you the bad news.

To invest with success here, you need something equivalent to weekend box office figures followed closely by investors in pure play movie studios like Lions Gate (LGF) during the release of movies with blockbuster potential.

Fortunately, there are several data analytics companies that we are aware of which 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, or will not ever, receive monetary 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 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, mobile gaming companies, led by the Japanese, seem to be headed toward a free-to-play business model with monetization via in-app purchases of addicted players.

What follows is a sample pairing of time series app store data alongside daily stock prices of a “franchise game” of a pure play mobile game company over a period of months. It will give you an ex-post view of how daily app store data might have been used to signal a buy or sell ahead of the next 10-Q.

The example is COLOPL’s franchise game, “Quiz RPG: The World of Mystic Wiz.” COLOPL went public in December 2012 and the stock languished until Quiz RPG was launched in late April of 2013. Upon release, the game quickly rose to #5 on the Apple Store-Japan revenue list and has stayed in the Top 20 since. At launch, COLOPL’s stock was at 479¥/share. The stock peaked on January 20th at 4,110¥/share, a 9-bagger in 9 months.

Rather than wait until a July or August conference call when the CEO mentions the potential of Quiz RPG, you could have tracked the game’s app store data enough to convince you go all at around 1,000¥/ share in June.

This is daily sales data that you can get firsthand. You are not dependent on when some Wall Street analyst chooses to release interim sales data – good or bad — from a polling of customers.

colopl

 

 

stock colopl