* 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 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 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
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
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
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
"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.
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
"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)