Jam City SPAC Listing: Following Zynga's Success

Jam City to Merge with DPCM Capital: A SPAC Deal Overview

Despite a preference for covering broader startup trends, the continuous flow of SPAC deals necessitates a focus on these transactions. Consequently, our regular coverage of startup trends will be paused for at least another day.

Today’s focus is on the agreement between Jam City and DPCM Capital. Jam City operates in a similar space to Zynga, though it may not be widely recognized outside of mobile gaming circles.

Understanding the Players

DPCM Capital is likely unfamiliar to many, yet its leadership is noteworthy. The SPAC is spearheaded by Emil Michael.

Michael previously held the position of chief business officer at Uber. His departure from Uber followed a board-initiated “investigation into [the company’s] culture and business practices,” ultimately resulting in a recommendation for his exit, as reported by The New York Times in 2014.

He gained notoriety for proposing the funding of a team to investigate and gather information on Uber’s media critics, as detailed by BuzzFeed News in 2014.

Analyzing Jam City’s Potential

Our primary objective is to assess whether Jam City mirrors the success of Zynga. This comparison is crucial because Zynga has demonstrated strong performance recently, achieving record revenue and bookings in the first quarter of 2021.

The gaming industry, as a whole, has benefited from increased engagement during the past year, with a significant portion of this growth occurring within the mobile gaming sector.

The significance of Jam City’s SPAC transaction lies in the substantial funding the company has secured – exceeding $300 million, including a $145 million round in 2019, as previously covered by TechCrunch.

Investment and Valuation

Jam City has attracted investment from prominent firms such as Austin Ventures, Netmarble, Bank of America Merrill Lynch, and JP Morgan Chase. This raises the question of whether Jam City has experienced a similar period of growth to Zynga and how this is reflected in the SPAC deal’s valuation.

We will now delve into the details of the Jam City SPAC deck to determine the answers.

Jam City’s Acquisition Through a SPAC

Following a substantial funding round in 2019, Jam City’s co-founder and CEO, Chris DeWolfe, observed a trend of consolidation within the global mobile gaming market. The company’s stated intention at that time was to leverage its new capital for the acquisition of other mobile game developers.

Now, with Jam City pursuing a public listing via a Special Purpose Acquisition Company (SPAC), the company plans to allocate a portion of the proceeds to acquire another competitor in the mobile gaming space. This time, the target is Ludia, a studio expected to introduce “compelling new intellectual property and gaming genres” to Jam City’s portfolio.

The Significance of Intellectual Property

The acquisition of intellectual property (IP) is a crucial element of this strategy. Strong IP can serve as the foundation for successful and long-lasting mobile games.

The popularity of Pokemon Go exemplifies this principle, but the concept extends to numerous other games and franchises. Zynga, for instance, designates titles like Zynga Poker and Words with Friends as “forever franchises” due to their sustained success.

Jam City employs similar terminology in its investor presentation for the SPAC deal, referring to its most enduring games – those generating over $100 million in Lifetime Bookings (LTB) – as receiving continued investment.

Understanding Lifetime Bookings and Growth

LTB, naturally, represents lifetime bookings. Acquiring strong IP can potentially lead to the creation of additional “forever franchises” and, consequently, facilitate long-term growth for the company.

Financial Details of the Transaction

DPCM Capital is contributing $300 million to the deal. This is supplemented by $100 million in PIPE (Private Investment in Public Equity) funding.

Of this capital, $175 million will be distributed to Ludia’s shareholders, while $88 million will go to Austin Ventures, a venture capital firm that previously invested in Ludia. An additional $88 million is allocated to cover existing debts.

Upon completion of the transaction, Jam City will maintain $115 million in cash reserves and will have an enterprise value of approximately $1.2 billion. The question then becomes: is this valuation justified?

A thorough assessment requires a careful examination of the available information, and a clear understanding of what remains unknown.

Understanding Limited Disclosures from Jam City

Following a review of the Jam City investor deck (available here), the Jam City-DPCM press release (available here), and the associated investor call (audio, transcript), a clear picture of the company’s GAAP revenue for 2020 and prior years remains elusive. Similarly, projections for GAAP revenue in 2021 are currently unavailable. However, substantial information regarding Jam City’s bookings and projected growth is readily accessible – assuming no details were overlooked in our analysis.

The company presents a historical and forecasted bookings chart within its investor presentation, which offers some insight. Jam City defines its quarterly bookings as the product of monthly paying users (MPU), average bookings per monthly paying user (ABMPU), and three. More comprehensively, bookings are defined as “revenue recognized during the period, excluding revenue from related parties and acquired deferred revenue, plus any change in deferred revenue during that period.”

Therefore, the focus is on bookings rather than revenue, despite Jam City’s definition closely linking the two concepts. The following chart illustrates these results:

These results have yielded, and are projected to generate, the following non-GAAP, adjusted earnings before accounting for various expenses:

Jam City’s investor deck also reveals “net losses of $4.6 million and $4.0 million for the years ending December 31, 2019 and 2020, respectively.” The anticipated adjusted EBITDA for 2021 is comparable to the 2019 result, a year characterized by a net loss. Consequently, relying on the company to achieve GAAP net income this year would be speculative.

Shifting attention from the general lack of concrete data, the Jam City SPAC transaction fundamentally relies on the company’s capacity to stimulate growth within Ludia. Referencing the revenue chart, note the extent of growth Jam City anticipates from Ludia in 2022. The company’s deck projects a “2.5x” increase in bookings from 2020 to 2022.

It is worth noting that Jam City possesses a track record of enhancing bookings at acquired entities. However, investors are being asked to foresee substantial operational improvements from Ludia as a component of its 2022 valuation. Independent verification of this expectation is advised.

In conclusion, the Jam City SPAC deal presents a potentially favorable opportunity. Zynga’s strong Q1 performance has created a positive market environment for its competitor to potentially gain traction. However, rather than concluding that Jam City is robust and thriving, we are primarily frustrated by the limited transparency provided. A review of recent SEC filings from DPCM did not resolve these concerns.

It is perhaps unsurprising, given Emil Michael’s known predisposition against the press, that a reluctance to share detailed information is evident.