GameFly Continues Growing, But IPO Hopeful's Deficit Persists

  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; [e-mail]