BUY OR SELL-Gameloft, Glu gun for 'freemium' gaming market

Mon Jun 6, 2011 8:25am EDT

* Shift to smartphones; better monetization

* Glu has been quicker, but loss-making

* Gameloft growing profits, but shares have fallen

* 'Freemium' model, and M&A potential, boost valuations

By Tarmo Virki and Supantha Mukherjee

HELSINKI/BANGALORE, June 6 (Reuters) - Under pressure in a fast-paced mobile world, Gameloft and Glu Mobile , the two largest listed, pure-play mobile gaming firms, are shifting focus to making games for smartphones and free-to-play online games.

The $3.4 billion mobile gaming industry is attracting a host of small, garage-based developers, who can easily reach millions of gamers through Apple Inc's and Google Inc's application stores. A prime example is the hit game Angry Birds from Finnish developer Rovio Mobile.

There has also been a flurry of deals among big gaming companies like Electronic Arts and privately-held Zynga, which makes Facebook games such as the popular FarmVille.

Putting games on cellphones took off in the late-1990s when Nokia added Snake as a standard feature. The 2007 launch of Apple's iPhone brought fresh impetus.

Most cellphone users play simple games -- Snake alone was on some 350 million phones -- but revenues were limited before the recent boom in applications.

GLU JUMPS

Glu has been quicker to transition its business model from pay-to-play to a so-called 'freemium' business model -- where games are downloaded free, but can be monetized via advertising or charging gamers for additional features. This attracts higher multiples, said Northland Securities analyst Darren Aftahi.

At the same time Glu -- which brings in a quarter of its revenues from free-of-charge games -- is set to report another loss this year on shrinking sales.

It's Gameloft that is reporting growing sales and profits.

Yet Glu's shares have more than doubled this year, valuing the firm at 3.7 times forecast annual sales, while Gameloft shares are down 8 percent, valuing the company at 2.6 times expected sales.

Glu's January-March revenue from smartphone games rose almost three-fold to $5.9 million, or 36 percent of total sales.

"The next event that will drive the stock higher will be when their smartphone revenue base eclipses their legacy revenue base," said Northland's Aftahi.

Gameloft's sales from smartphones grew 56 percent from a year ago to nearly $16 million, or 28 percent of its total. It had a 12.1 percent operating profit margin last year and expects that to increase as sales top last year's 141 million euros ($201.45 million).

Glu has forecast its sales will shrink from last year's $64.3 million. The 10-year-old San Francisco-based company, which went public in 2007, has never made a profit and has accumulated losses of $194 million.

Analysts predict Glu could break even next year, helped by cost cuts and growing revenues from smartphone and free-to-play games.

GAMELOFT TO FOLLOW?

"Always, when we have compared the two, the result has been clear: Gameloft is the better company by all metrics," said a former executive at a rival company.

"We couldn't find any other reason than that one of them is listed in the United States and the other in Europe."

Gameloft hopes a similar shift to smartphones and to offering free access to its games on Facebook will boost its shares.

"Gameloft has the potential to leverage a number of growth sources and its shares boast attractive ratios once again," said Paris-based Natixis analyst Richard-Maxime Beaudoux.

Gameloft, which listed in Paris in 2000, has considered a U.S. listing, its Chief Financial Officer Alexandre de Rochefort told a recent Reuters Technology Summit. [ID:nLDE74H220]

"Lots of our U.S. shareholders advise us to list on Nasdaq as we'd get a share (price) boost of about 50 percent," he said. "But I wonder how long this upside can last."

Heiko Hubertz, founder of German online gaming firm Bigpoint, said his company -- which has more than 200 million registered players -- could be valued at more than $1 billion in the United States. Earlier this year, a majority stake in the firm was sold to venture companies for just $350 million. [ID:nLDE73P124]

Northland's Aftahi said target companies in recent social gaming deals were valued at 6-10 times sales, suggesting some potential upside for Glu stock.

"If you look at some of the recent M&A activity and new IPOs, it helps support or justify a valuation above where it currently trades," said Roth Capital Partners analyst Adam Krejcik.

"There are limited opportunities for investors who want to own a pure-play mobile-social gaming publisher. There really aren't many options." (Reporting by Tarmo Virki in HELSINKI, Supantha Mukherjee in BANGALORE and Leila Abboud in PARIS, Editing by Ian Geoghegan)

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