OPXT was kinda fun, so I put in a COTP for 1,000 shares of GLUU that is expected to price tonight. I just hope I get filled on more than the lousy 100 shares they gave me for the last one. About the IPO (from ipohome.com): Glu Mobile (originally dubbed Sorrent) was founded in 2001 by Scott Orr, a leading designer of the hugely popular video game franchise Madden, to develop games in the burgeoning area of cell phones. With low penetration rates of only 5.5% in the US and Europe, the global market for mobile gaming is expected to grow 50% annually over the next few years to hit $10.5B in 2009 on the back of improving handset capabilities and increasing end-user awareness. By licensing popular brands and developing games that appeal to broad audiences, Glu has rapidly grown its revenue and market share and is now the third largest player in this crowded space. Gluâs strong growth potential and scalable business model help make it our featured IPO of the week. Downloading Dollars Glu is a leading global publisher of mobile games for cellular phones that markets to approximately 1 billion subscribers in the US (55% of sales) and abroad (45%) through 150 wireless carriers, including Verizon, Sprint Nextel, Cingular, Vodafone and T-Mobile. The majority of its 126 revenue-generating titles are based on licensed brands (88% of sales), including Monopoly, Sonic the Hedgehog, World Series of Poker and Who Wants to be a Millionaire? Glu also creates its own private label games (12%), such as Stranded and Super K.O. Boxing. Games are sold for one-time download fees ($5-$8 in the US) or monthly subscriptions ($2.50-$3.50 per month). Glu then collects a share of the revenue from carriers (typically 50%-70%) and pays royalties to brand owners for its licensed games (avg. royalty rate is 34%). Calling all Competitors Glu is currently the third largest mobile game developer in the US and Europe behind Electronic Arts (which acquired JAMDAT) and Gameloft (controlled by Ubisoft). There are a host of other players in this fragmented space, including Hands-On Mobile, I-play, Namco, Digital Chocolate and THQ. Profits Still on Hold Through increased end-user adoption, the development of several successful games and two acquisitions, Glu has been able to grow its revenue strongly from just $7 million in 2004 to $46 million in 2006. In the fourth quarter of 2006, Glu hit $14.3 million in sales for an annualized run rate of $57 million and its gross margin improved to 71.4% because of lower royalty rates. However, its large game development costs kept the firm in the red with a -7.9% operating margin. Long-term, Glu believes it can reach operating margins in the 20%-25% range on $23-$25 million in quarterly revenue as it improves its development costs by shifting resources to China and leveraging its marketing and overhead expenses. Other Obstacles Aside from its relatively unproven business model, Glu faces other operational risks. First, its licenses are up for renewal quite frequently, and in 2007, titles that generated 53% of its 2006 sales will be up for renegotiation. Additionally, its top four licensors accounted for 58% of its 2006 sales and its top four carriers accounted for 55%. Any pressure during the renewals of contracts with both its licensors and carriers could pressure margins and disrupt its progress toward profitability. Additionally, the firm must, of course, continue to develop games that appeal to broad audiences and make them compatible with the rapidly growing array of mobile handsets that are coming on the market. Looks like a Winner Despite the early stage of its business model, we believe the rapid growth of the mobile gaming market and Gluâs early successes make the deal attractive. This potential also helps to make the proposed valuation look compelling on an absolute basis and relative to the buyout price of the then leading independent mobile game operator JAMDAT (6x forward sales). For these reasons, we believe investors will be dialing up to play Gluâs IPO.