By Christopher Zinsli
Of DOW JONES VENTUREWIRE
GameFly Inc. is collecting more money than ever from its
videogame rental service, but the company's on-again, off-again
relationship with profitability has left it with a lingering
deficit as it prepares to go public.
The Santa Monica, Calif., company said in an amended regulatory
filing last week that it generated $27.9 million in revenue in the
first three months of the year, continuing a long and steady string
of improving quarters. But it operated at a net loss of nearly $1
million, bringing its accumulated deficit to more than $8.7
million.
GameFly's consistent revenue growth is primarily due to its
ability to continue signing customers for its rental-by-mail
service, where nearly all of its money is earned. It said it had
422,000 subscribers as of March 31, up from 380,000 three months
earlier.
But operating expenses also have grown, to nearly $13.7 million
in the first three months of the year, as the company adds
technology and development employees and increases its marketing
efforts.
GameFly had made progress for several years in reducing its
deficit, which shrunk to $8.8 million in 2009 from $14.1 million in
2006. But over the past year, two profitable quarters followed by
two money-losing ones have left the company in about the same
place. Also working against it is a slowing rate of revenue growth
in recent years.
The company has tapped venture capital firms for four rounds of
funding since 2002 to keep operations going. Sequoia Capital is its
largest backer, holding a majority of shares. Tenaya Capital also
holds a small stake.
The company also faces a pair of long-term obstacles that it
says could hurt its profitability. It says it has no plans to offer
alternative means of delivery--such as downloads--to its
subscribers, so it relies on the U.S. Postal Service to get games
to its customers. The Postal Service, meanwhile, is expected to
raise its rates in the future, which would directly increase
GameFly's costs.
GameFly registered for an initial public offering in February
and plans to apply for a listing on the Nasdaq Global Market under
the symbol GFLY. The company has not set the terms of the offering.
Underwriters for the offering are Bank of America Merrill Lynch,
Piper Jaffray, Cowen & Co. and William Blair & Co.
(This story originally appeared in VentureWire, a daily email
newsletter published by Dow Jones & Co. that covers venture
capital and start-up companies.)
-By Christopher Zinsli, Dow Jones VentureWire; 212-416-2034;
christopher.zinsli@dowjones.com