Tag Zynga

The tech trendy SF-based email newsletter The Hustle reported on July 11, 2017

“Last night, we received an internal email from an anonymous, verified source at Airbnb confirming that the company has officially signed a multi-year, 5-story lease at Zynga’s headquarters in San Francisco’s SOMA district.”

According to the email:

• • “Phase 1 will begin in 2018 and will deliver 3 floors of space ready to occupy by 2019.”

• “Phase 2 will commence in 2020, and by 2021, [Airbnb will] be the sole occupants of the east tower at 650 Townsend (the Landlord will continue to occupy the west tower).

According to The Hustle, Zynga declined to comment on their story, and Airbnb didn’t respond to their email requests.

The Hustle’s scoop comes on the heels of another scoop from The Information two month earlier on May 8th of an impending deal. The Information is known for its access to Silicon Valley insider information.

We believe that the lease has a material impact on Zynga’s financials and we believe Zynga will be required to file an official 8-K statement with the SEC once the lease is signed.  

Zynga’s stock has been on the rise in 2017.

Zynga stock (Nasdaq: ZNGA) jumped 14.3% on May 5, 2017 after its 1Q17 conference call where it increased its 2017 revenue and profit guidance due to the early success of its recently acquired game  

Since then, the stock has risen another 14% due to periodic reports by stock analysts upping their stock price targets. For example, CNBC Investing reported on May 30th that a Piper Jaffray analyst raised the stock’s rating to overweight from neutral with a price target of $4.00 a share.

The stock did not move on May 8th, the day of The Information scoop. It did not move on July 11th, the day of the Hustle scoop

Both scoops show up when you Google “ Zynga Airbnb.”

The question is why hasn’t the stock market reacted to these scoops?

We present the case below that lease has a material impact on Zynga’s financials.

According to a SF real estate publication The Registry, Zynga bought its 717,000 square foot HQs in 2012 for $228 Million or $ 318 per square foot.  Zynga was growing fast at the time and was flush with cash after raising  $1 Billion in a December 2011 IPO.

The building is a five story, high ceiling, open space structure located at 650 Townsend Street.  It is a block from Airbnb’s current headquarters.  See Link to Youtube Video below showing clearly the similarity between the two HQs

Video Of Interior of Zynga and Airbnb HQs

 Airbnb is no ordinary tenant. It is the second highest valued startup after Uber. Airbnb’s current valuation is at $31 Billion based on a $1 Billion funding round that closed March of 2017.  

In estimating the current value of Zynga’s building, you have to take into account the fact that Airbnb will become an obvious candidate to buy the building in a year or two after it has an a multi-billion dollar IPO. It would negotiate to take over the whole building with Zynga vacating to smaller quarters.

Zynga actually listed the building for sale briefly in 2016, but withdrew because the cost of the leaseback offered by potential buyers was too high.   At the time,  $800 per square feet was mentioned as the going rate for SoMa office building.

Due to the fact that this building is absolutely ideal for high tech, and that the SF office market is still booming,  and last, but not least, that Airbnb might be the buyer after its IPO, we would value Zynga’s HQ currently at closer to $1,000 per square feet or $717 Million.  

This works out to be a tripling of its investment initial purchase price of $218 Million.

Zynga’s market valuation as of July 11, 2017 was $3.11 Billion.  Its cash balance as of 1Q17 was $720 Million.  It has no long-term debt.

The combination of $720 Million in cash with another $717 Million in a readily marketable building totals half of its current valuation.  

Plus the financials of Zynga’s game operations show signs of returning to cash flow positive. In 2016, it turned operating cash flow positive at $60 Million for the first time in 3 years. While not profitable for quite some time, it has three straight quarters of increasing revenue.

Once the lease is made official,  the stock should pop certainly over $3.80 a share.

Zynga (NASDAQ:ZNGA) is a San Francisco-based mobile game company named in honor of Zinga, the deceased dog of its founder and former CEO Mark Pincus. It’s logo is a red dog. Its headquarters is known as “The Dog House,” which it owns and has been its most impressive acquisition to date.

This article is an update to our June 2014 article for SA, Zynga is a Dog Without a Top 10 Mobile Hit.

During its 1Q14 conference call, CEO Don Mattrick narrowed the FY14 booking guidance to between $770M-$810M. We said that was attainable only if Zynga had a Top 10 mobile hit.

Well, that has not happened. YTD bookings by quarter have been $163M, $174M and $175M for a total $512M.

During its 3Q14 conference call, Mattrick narrowed guidance for 4Q14 bookings to between $183 and $213 million.

Based on App Annie revenue ranking charts, we forecast that Zynga’s 4Q booking will be at the low end of guidance of $183M and full-year booking will be around $695M, a full 12% below FY mid-range guidance of $790M.

Our advice is to let this sleeping dog lie.

If you own this stock, hold. If you don’t own stock, stay away until this dog wakes up as evidenced by a new release with a Top 25 revenue rank.

Don’t be fooled into buying based on recently-released Looney Tunes Dash! sporting a Top 10 download rank. Monetization matters and the rabbit doesn’t have it. The bunny isn’t money.

Mattrick gave 4Q14 bookings guidance of between $183 and $213 million based on the following expectations:

• continued growth of casino slot games
• special events driving growth of FarmVille 2: Country Escape
• launch of New Words With Friends
• launch of Looney Tunes Dash!

Below is a table of App Annie revenue rankings for games on iOS Apple Store USA, by far Zynga’s biggest market, by quarter beginning dates.

When you combine all casino slot games, we would say that slots revenue was up in 4Q, but that it was wiped out by the downtrend in Zygna’s tentpole game FarmVille 2: Country Escape.

(click to enlarge)

However, the game has yet to crack the Top 50 in revenue rank.

(click to enlarge)

Below is the download rank chart for New Words with Friends. Notice the impressive early Top 5 download ranking during the period before December 2, 2014 when the game was totally free without ads or freemium elements.

(click to enlarge)

Here is the revenue rank chart which began with a December 2, 2014 update that added freemium elements. Monetization has been poor to say the least.

(click to enlarge)

In sum, we rate Zynga a hold, optimistic that this sleeping dog will awake eventually with vigor that lasts long enough to reward patient investors.

There are a few things that might awake this dog: (1) a release from recent acquisition NaturalMotion that is a hit; (2) better monetization from casino slot games, possibly with redeemable perks at Vegas gaming establishments; (3) reconsideration by CEO of real money gaming; (4) purchase of company that makes Trivia Crack.

Machine Zone [MZ] is a Palo Alto-based, mobile gaming start-up with a massively popular Top 3 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 chat-speak 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.”

What makes this building simulation and war strategy game so innovative is the real-time play among the massive number of players (100,000+) online around the globe at the same time.

The other innovative feature is its messaging system featuring a 40+ language real-time translator, including a crowd-sourced library of game jargon. It’s like real-time SnapChat run through Google Translate finely tuned by an incentivized, crowd-sourced library of gamer jargon.

From a NYT review of GoW,

“The game’s most impressive feature is an instantaneous translation of text-based online chat. If someone writes “MDR” in French (for “mort de rire,” or “dying of laughter”), an English-speaking player sees it as “LOL.””

The game is also very social and hard to put down. Once a player joins a GoW “alliance” – similar to a “clan” in Clash of Clans — there is considerable peer pressure to continue playing for sake of the alliance. MZ’s early estimates were that players averaged 2 hours a day 7 days a week playing the game.

We estimate that the GoW’s current revenue run rate is $831M. The company is very profitable, with  a reported head-count of only 150.

Compare this with Zynga who manages a score of mobile and browser games none of which have cracked the Top 10, a headcount of 2,000 (but falling), and a similar revenue run rate (but falling).

Yet, MZ’s prospects for a 2014 IPO are dim because it is viewed as a “one hit wonder”.

This is in contrast to Kabam, the other US mobile gaming start-up most likely to do an IPO in the next year.  Kabam’s interviews with press are peppered with the quotes about how diversified they are with 3 hit games with lifetime revenue over $100M and three more potential hits on the way based on the blockbuster movies The Hunger Games, Lord of the Rings, and Mad Max.

There is also investor wariness of mobile gaming IPOs due to the post-IPO stock performances of Zynga (ZNGA) and King Digital (KING). However, as we write this, King has climbed back finally to its opening price three months after its IPO, so the bad feelings about King have diminished.

MZ is not a “one hit wonder”. We believe CEO Gabe Leydon’s claim that MZ has developed a “game engine” that can be “re-skinned” to create other genres of games with the same underlying play and communications innovations.

MZ, along with with Kabam and the mobile division of Electronic Arts [EA], are in the running  to become the preeminent US-based mobile gaming company – “The Pixar of Mobile Gaming”.

MZ just needs diversification that will come with a second hit, preferably in a different genre, that boosts its revenue run rate over $1,500M.

It would be a shame for MZ to sell out now as it has enough cash for working capital and new development teams. Their total venture capital to date is reportedly only $16M so there is no urgency on the part of VC’s to cash out.

This is in contrast to Kabam with over $125M in VC money and higher cash burn rate from a reported headcount now of 800.  No wonder it is Kabam, and not MZ, who is always talking to the press about IPO plans and the damage caused by the Zynga and King IPO debacle.

But, MZ could use additional investment in 2014 to pay a dividend or to buy some of the shares of existing employees as shareholders. This would take the edge off the IPO wait.

King did something similar by paying out $504M in dividends over the two quarters before it went public. However, the taxation of dividend income might be quite a bit less in the UK than in the US.

What follows is an estimate of MZ’s current revenue run rate and valuation. We are doing this to quantify the outstanding financial performance of this company and to place it along side the elite companies in the mobile gaming world.

We use the same methodology to value MZ as we have employed in previous papers to value King, Zynga, and the start-up Kabam. We have used it also to make prescient buy recommendations of two undervalued Japanese mobile game companies – Mixi and Klab.

There are two pieces of data used in our analysis: (1) app store download and revenue ranking charts provided by data analytics company App Annie; (2) a mapping of App Annie revenue rankings to current revenue run rates.

Launched in July 2013 on iOS Apple store, GoW took only one month to become a Top 20 revenue ranking game on the App Annie charts. By September 2013, it cracked the Top 10 and remained there for the rest of 2013. In 2014, GoW has remained a Top 3 game on the App Annie charts.

Launched 9 months later on Google Play in May 2014, GoW shot up quickly to #6 on the revenue ranking charts and has remained there since.

(Source: App Annie)

(Source: App Annie)

(Source: Appie Annie)

GoW seems destined to join the elite “Billionaire Game Club” along with Supercell’s Clash of Clans, King’s Candy Crush Saga and GungHo’s Puzzle and Dragons. The first two games have remained a #1 or #2 revenue ranking game in the US now for a 1 ½ years and counting. However, Candy Crush’s downloads have been in decline for a year even though its revenue rank remains at #2.

The next step in valuing MZ is a mapping of app store revenue rank to revenue dollar run rate. GoW is a free to play game with in-app purchases. Downloads and purchases are primarily made via iOS Apple store and Google Play.

VC firm Andreessen-Horowitz’s mobile guru, Benedict Evans, has estimated that the current global ratio of monthly active users (MAU) of Android to Apple iOS is 1,000M to 470M or 2:1.

The reverse is the case for app store purchases. Evans has estimated that the trailing 12 month Apple iOS to Google Play app store revenue, which excludes presumably Apple’s and Google’s 30% cut, is $10B to $5B, or 2:1

According to App Annie, 75% of app store revenue is mobile games or $11.3B. So, roughly the trailing 12 month revenue for mobile game app store revenue is $7.5B for iOS and $3.8B for Android.

Combine this with MAU numbers results in an average iOS to Android yearly spend per MAU of $15.96 to $3.80 or 4:1.

However, this is an average of “whales” and “zeroes” who spend nothing. According to a Swrve report, “zeroes” make up 98.5% of mobile game users. Disaggregating the weighted average of 1.5% “whales” and 98.5% “zeroes”, yields an average of $1,333 mobile game spend per MAU on iOS for those who spend at all.

Obviously, the Swvre number is based on all users not MAUs. Assuming MAUs are only 10% of Swrve’s number still yields an iOS average of $133 yearly mobile game spend per MAU who spends at all. Wow!

Getting back to valuation of MZ, we use the macro numbers above to scale up a “power function” relation developed by Think Gaming, Inc. between revenue and revenue rank for iOS Apple Store in the US.

We then test the relationship for reasonableness by comparing points on the curve with game-specific revenue disclosures by King for its three Top 15 hits.

Below is our latest effort at mapping Global app store revenue rank to estimated 2014 revenue run rate in $ Millions.

When we plot the log of both numbers, the relation is not linear, but kinked up at #3. Hence, it is not a pure power function. Mobile game revenue is very concentrated at the top and the long tail is very thin after game ranked 10,000.

This is in contrast to the original “long tail” work using bookstore data which came to the conclusion that excluding the book “long tail” from a store – books with revenue rank >10,000 — meant excluding 30%+ of sales.

For mobile games, it might turn out that excluding the mobile game “long tail” – mobile games with revenue rank >10,000 — might mean excluding only 5% of sales. By removing these games, mostly IP rip-offs, you lose only 5% of revenue but improve app discovery. Take note of that Apple and Google.

Because of a “power function” relation between revenue and revenue rank, a GoW at #3 is not really knocking on the door of the “Billionaire Game Club” but is still hundreds of millions of dollars away from #2.

The one well known example of a power function is the half-life relation. Another less well known example is the Zipf function named after a 1930’s linguist who mapped out word count in literature as a function of rank.

I like to characterize the top three global ranking games – Clash of Clans, Puzzle and Dragons, and Candy Crush Saga –as the “the-of-and” of mobile game revenue ranking. BTW, the last phrase is meta-Zipfian.

The final step in valuing MZ is to pick an appropriate price/sales (P/S) ratio. Below is a spreadsheet of the pre-IPO and current P/S ratio of King and Zynga.

Given the disappointing post-IPO stock performance of these two companies, we believe that investors in mobile gaming companies would never again pay the pre-IPO P/S ratio of King at 3.76 or Zynga at 6.82. We believe that the current P/S ratio of King today at 2.46 is an appropriate number to use in valuing a US mobile game company today.

Valuing MZ at a P/S ratio of 2.46 and a run rate of $831M produces a current valuation of $2.04B.

A year from now with the launch of a second hit and a run rate of $1.5B, we would up the P/S ratio to 3.0 and value MZ at $4.5B. An investment now in MZ has the potential to double in a year.

We estimate that MZ must be sitting on between $200M and $300M in cash, given its run rate and relatively small headcount, and the fact that mobile gaming companies have little cash tied up in receivables and inventory.

And MZ’s venture capitalists have no immediate need to recover its investments as total venture capital in MZ is reportedly around $16M with Y Combinator as seed investor, Anthos and Baseline in the Series A, and Menlo in the Series B.

The only need for MZ to seek outside investment in the neighborhood of, say $200M, would be to take the edge off the IPO wait of employees/shareholders by paying them a dividend or by buying some of their shares.

The best option would be to finance this through a Series C venture capital round.

A less preferred source would be a minority stake from a strategic partner like Softbank or TenCent who could open doors in the Asian market. But, Softbank is the majority owner now of both GungHo Online and Softcell, both of whom compete with MZ for gamers. A majority investment by Softcell could raise all sorts of conflict of interests.

The least preferred would be an outright acquisition by another publicly held gaming company.  Zynga is drowning since the tepid response to “FarmVille 2: Country Escape”. CEO Don Mattrick has admitted that Supercell’s similar  farming game Hay Day has “eaten our lunch”.

There is a single intriguing buy-out candidate in Electronic Arts [EA], with its mobile division on the rise. It now has “The Simpson: Tapped Out” at #7 and  “The Sims: Free Play” at #18. GoW would double that division’s revenue and boost mobile’s share of EA revenue to between 20% and 30%.

There could be some really interesting synergies between these two companies with MZ’s strength is massively global real-time play and communication and EA’s yet untapped ability to “put petal to the metal” .

That is, EA should be the early leader in porting graphics intensive games via its Frostbite 3D engine to the soon to be released iOS 8 featuring a new graphics API called Metal that taps directly into “metal”  — the 64-bit A7 CPU — achieving a reportedly 10-fold speed increase in 3D graphics rendering over the previous iOS graphics API called OpenGL.

 

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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.

(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:

(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:

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

The Hobbit: 2013

 Kingdoms of Camelot: January – May 2014

 The Hobbit: January – January – May 2014

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.

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.

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.

A more granular view of the above:

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.

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.

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.

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.

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.

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

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.

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

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.