Naughty Is Looking Nicer At Mandalay Media

It's been just over a month since mobile porn & games holding company Mandalay Media (parent of Twistbox & AMV) reported it's fiscal Q4 and full year 2009 earnings and we're already seeing fiscal Q1 2010 (quarter ended June 30, 2009). Perhaps this indicates that the company is moving towards a more traditional reporting cycle...which would be nice. Anyway, the company actually had a decent quarter, considering the state of the World and the typical seasonality trends in the mobile content industry. They saw a little quarter-over-quarter revenue growth (2%), showed solid (89%) growth over the same period last year (thanks mostly to their Oct 2008 acquisition of UK-based AMV) and came within $1mil of (real) net profitability. Twistbox CEO (the guy running the whole show) Ian Aron is now guiding revenues to $40mil for FY 2010 (period ending March 31, 2010), which would represent 28% growth over FY 2009 ($31mil) and put them into my top 25 mobile entertainment companies.

What's becoming clear, if you look beyond their press release and into their 10-Q, is that Mandalay's adult business is working and that their games business is not. Adult now accounts for a whopping 87% of revenue (up from 82% in FY 2009). This is an area where the company has been (from back in the WAAT days), and still is, a legitimate market leader. If they can maintain their licensing/distribution relationships for high quality content, they should be able to realize meaningful, sustained growth as more distribution platforms open up to spicier fare. The games business, which is basically the Play for Prizes platform it acquired from Infospace in 2007, has never made money for the company. Mobile games is a saturated, over-crowded space with a few established power players and myriad nimble startups...Mandalay (Twistbox) is neither of these. I think the company should begin to seriously consider, if it isn't already, selling this business (and their unique platform) to a more established player like EA Mobile.

Selling the games business may help Mandalay with its biggest issue of the moment...which is a serious lack of cash. I expressed concern about this in my last post about their earnings, and things have gone from bad to worse. During the quarter they used another $1.7mil and currently only have about $4.2mil in the bank. That's not enough for a company that relies on expensive licenses, has a global operation with almost 200 employees and has monthly operating costs of about $2.5mil. The other lingering concern (which I also mentioned in July) is ongoing litigation with licensor Penthouse, which is seeking $4mil from the company for breach of contract. Mandalay is vigorously defending and has accrued for its estimated liability...but even if they win, a public squabble with a powerful player in a small licensing community can give a company a reputation (whether warranted or not) that's difficult to overcome.