Glu Mobile Inc
Q1 2019 Earnings Call Transcript

Published: 7 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2019 Glu Mobile Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to host, Harman Singh, Vice President, Finance and Investor Relations. You may begin, sir.

[Harman Singh:]

Thank you, operator. Good afternoon everyone and thank you for joining us on Glu Mobile's first quarter 2019 earnings conference call. On the call today are Nick Earl, President and Chief Executive Officer, and Eric Ludwig, COO and Chief Financial Officer. During this call, we will be making forward-looking statements regarding future events and the future financial performance of the company. Any forward-looking statements that we make today are based on assumptions that the company believes to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements, in the press release, and during this conference call. These risk factors are described more fully in our documents filed with the SEC, specifically the most recent reports on Forms 10-K and 10-Q. During this call, we will present both GAAP and non-GAAP financial measures. The non-GAAP financial measures are not intended to be considered in isolation from, a substitute for, or superior to GAAP results and we encourage investors to consider all measures before making any investment decisions. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measure, and quantitative reconciliation of those figures, please refer to the supplemental presentation accompanying today's earnings call that can be accessed via our Investor website, www.glu.com/investors. As a reminder, consistent with our financial presentation and for all the information aside from bookings or as otherwise stated below, we will discuss results on a GAAP basis and refer you to changes in deferred revenue, the deferred cost of revenue, and the non-GAAP operating expenses totals in our financial tables. This data will provide a GAAP to non-GAAP reconciliation of the quarter's financial results based on the same methodology we've used in prior quarters. We're also providing a supplementary Excel file on our IR website to more easily aid in this reconciliation. Both the PowerPoint and Excel file are now accessible on the website. We encourage you to follow along with the slides during this earnings conference call. And with that, I would like to turn the call over to Nick.

[Nick Earl:]

Thanks, Harman. Hello and thank you for joining us for Glu's first quarter 2019 earnings call. I'll review highlights from a strong Q1 financial results and provide an update on our game development plans. Eric will then discuss our Q1 financial results in more detail as well as our second quarter and full-year guidance. Following a record year for bookings and adjusted EBITDA profitability, Glu is off to a strong start in 2019. Total bookings were $92.6 million, 7% over last year's first quarter. The solid topline performance drove the fifth consecutive quarter of increased adjusted EBITDA profitability year-over-year. In addition to reporting solid bookings increases in our three growth games, we have made great progress with WWE Universe, Diner DASH Adventures and Disney Sorcerer's Area and we expect all three to be globally live by August. Design Home, Covet Fashion and the Tap Sports Baseball franchise collectively grew 30% year-over-year and contributed 78% to total bookings, up from 64% a year ago. This consistent performance reflects our solid execution against Glu's long-term strategy to build a more predictable business based on titles that grow bookings year-over-year. Let's take a closer look at each game's performance compared to last year's first quarter. Design Home grew bookings 23% to $42.2 million. We introduce meta-features in April; and while still in the early stages, we're off to a fantastic start. The strong KPIs that we saw for these features in beta testing indicate that the meta-game is likely to drive increased long-term retention and, in turn, higher LTV. We are confident that the meta-game rollout, combined with our internationalization efforts and e-commerce partnership will energize our player base and drive monetization. In addition, Roomage, an international version of Design Home, developed by Cocone in Japan will launch this quarter. More to come as we see its performance in the coming months. Covet Fashion had an outstanding quarter, which included the top three grossing days of its almost six-year life. Bookings grew 38% to $16.8 million, setting a new record. This growth was driven by a strong spring season launch, combined with several new merchandising strategies. We are enhancing the game experience with a new user flow and increased depth of play with the launch of the prop shop this quarter. Later this year, we will be adding subscriptions, merchandising improvements and an enhanced social layer. Tap Sports Baseball produced better-than-expected results in a seasonally soft quarter as bookings grew 49% to $13.4 million. We launched Tap Sports Baseball '19 on March 27 with Mookie Betts as the new cover athlete. Updated features include new legends, more club events and subscriptions as well as improved technology to protect against exploits. We're seeing positive momentum through the first six weeks of the MLB season and on track to outperform last year's title. Turning toward 2019 slate, WWE Universe, Diner DASH Adventures and Disney Sorcerer's Area are all scheduled to launch globally in the May to August timeframe as we previously announced. WWE Universe launched its fourth beta iteration with exceptionally encouraging CPIs, monetization and conversion metrics. In short, we believe we have found the fun with a new core mechanic and a rebalancing of the meta-game. WWE is a great reflection of our successful creative process led by our studio heads, continually fine-tuning a game till it meets the potential of a growth game. We have increased confidence that WWE has all the elements to attract and retain a global audience year-round. We expect this title to globally launch in late May with a strong marketing campaign in conjunction with WWE set to take off this summer. Diner DASH Adventure is the latest addition to our original IP franchise, has shown very positive KPIs in all territories including two key ones, Australia and Canada. Early metrics support our confidence as retention, monetization, CPIs and LTV have all been strong. We are particularly excited about this title given the accretive economics that original Glu IP provides. So, we expect this title to launch globally in July. We continue to be extremely optimistic about Disney Sorcerer's Area based on positive user rception and feedback. This title has a complex elder game with a deep economy, key systems that require sophisticated tuning, but systems that we believe will drive long-term engagement and retention. We have a high degree of confidence in our proven team as we move towards an expected worldwide launch in August. Now that I've discussed our current live games and near-term launches, let me provide some context to our future development plans. Looking back, we made two transformative acquisitions that we have nurtured into our three growth franchises, through Glu's discipline investment and creative process ultimately delivering increasing profitability and significant ROI. The first was an acquire of a four-person studio that has built our Tap Sports Baseball franchise and, since joining Glu, delivered lifetime bookings of 185 million. The second acquisition was Crowdstar, included a live version of Covet Fashion and a beta version of Design Home. The studio was acquired for $45 million in November 2016 and has generated $422 million in lifetime bookings following the acquisition. Over the last two-and-a-half years, our focus has been on growing these franchises through new feature development, the introduction of deeper elder systems, more sophisticated monetization and applying our live ops best practices. In parallel, we have diligently followed our development and prototyping processes and greenlit three internally developed titles for 2019, all with growth game potential. We believe these next three titles put us in a great position to stack our bookings and scaler our business. We're extremely excited to continue the Glu growth story with this next phase. Looking into 2020 and beyond, we have further strengthened our pipeline with three additional titles that are currently in different phases of development. Our Toronto studio, the creators of our very successful Kim Kardashian

[Eric Ludwig:]

Thank you, Nick. And good afternoon to everyone on the call. I will provide a closer look at our financial results for the first quarter and then discuss guidance for the second quarter and full-year 2019. We delivered strong results that exceeded guidance in the first quarter. Revenue was $95.9 million, an 18% increase over the comparable quarter last year. Bookings reached $92.6 million, a 7% increase over last year's first quarter. 74% of bookings came from royalty-free Glu IP titles. Bookings from ads came in at $12.3 million or 13% of total bookings. Ad bookings grew 32% over the same quarter last year, driven by strong performance in Covet Fashion in a seasonally weak ad quarter. We reported a GAAP profit of $663,000. This was the first quarterly GAAP profit since Q1 2015 and reflects the execution on our growth game strategy in conjunction with disciplined OpEx management. The bookings outperformance was led by our three growth games, which contributed 78% total bookings. On a year-over-year basis, Design Home bookings rose to $42.2 million, a 23% increase. Covet Fashion grew bookings 38% to $16.8 million and the Tap Sports Baseball was up 49% to $13.4 million. This quarter's bookings included only five days of Tap Sports Baseball 2019, which launched on March 27. The baseball studio team did an outstanding job in maintaining a large user base in the 2018 version and converting them to 2019 version without having to reacquire the users. On the expense side, adjusted platform commissions were $24 million, adjusted royalties were $6 million with hosting costs at $1.5 million. UA and marketing spend was $23 million compared to $22.2 million last year. UA and marketing as a percent of bookings declined from 26% last Q1 to 25% this quarter. Operating expenses, excluding $23 million of UA marketing costs, were $30.5 million, up $2.5 million on a year-over-year basis. The bookings outperformance resulted in higher adjusted EBITDA profitability than guidance. As we discussed on our last call, in the fourth quarter, we received four monthly payments from one of our platform partners and, as such, we expected the first quarter would only have two monthly payments. Additionally, the first quarter is when we make our annual employee cash bonus payments. As a result, we used to $2.9 million of cash from operations. We ended the first quarter with a cash balance of $92.7 million. As the year progresses, we'll generate free cash flow and expect to end the year with approximately $145 million of cash. Turning to guidance, over the last two quarters, as we provided our preliminary view on 2019, we broke out our bookings guidance between our core business and new titles. With all three new titles scheduled to globally launch between May and August and our visibility into the full year improves, we think is prudent to revert to our historical philosophy and provide a single bookings guidance figure. I wanted to provide color on some competitive UA pressure that we saw in the first quarter. Starting in early February, we saw a significant uptick in aggressive UA campaigns from two casual game publishers. This had the effect of driving up CPI costs for Design Home, Covet Fashion and Kim Kardashian

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from Michael Olson from Piper Jaffray. Your line is open.

[Michael Olson:]

Hey, good afternoon. Just regarding the pipeline, I have a good understanding, I think, of your three titles for 2019 and 2020 that you described, but could you clarify the three internally developed titles, I think, you said you green lit this year? Are those an additional three titles beyond the three for 2019 and three for 2020? And if so, what's the expected timing of those three additional titles, if there are additional? And then, second, you talked about the importance of some of the acquisitions you've done and the success of those deals. Just given that track record, would you say you're actively looking to add more through acquisition or more focused primarily on what you currently have in the portfolio or in development today? Thanks.

[Nick Earl:]

Thanks, Mike. Yeah. So, just to be clear, we're launching three games this year that we've been talking about for quite a while. And those launch in the May to August timeframe. And we have, in parallel, been working on three other games that will loosely launch around 2020. We'll have a couple of those in beta this year. We've talked about that. That's Deer Hunter. And we just talked about a new original title coming out of our Toronto studio where Kim was developed. We'll actually have that, believe it or not, in beta before the next earnings call. And then, the third which, I guess, look at it, is three this year and sort of three next year. The third of the three next year is the one we just talked about, which is still in the early stages, but that will come from Crowdstar and is really a natural evolution of the lifestyle games that they've delivered with Covet and Design Home. We haven't said anything more about that and we'll leave it at that for now. But we're very excited about those – all three of the next ones because they're all IP that we own. So, very accretive for margins and it allows the team to really develop the game they want to develop, which has been great for us. In terms of the second question, M&A is something we take very seriously. The company was effectively built on really strong acquisitions. I talked about that in my remarks and it's something that we continue to monitor. And if and when we find something that is both culturally and financially accretive to the company, we'll absolutely pull the trigger. With that said, and I've said this several times before, we really like the internal model and we're really pursuing the internally-built games model just because we feel like it is a great use of our resources, it gives us control over what we're building, we kind of can capture all the upside and we just think the ROI is higher on these internally-built games. It's just a better use of capital in terms of how much we spend and what we have to gain in the long run. So, we'll, for the short-term, be focused on these internally-built games. We'll be looking for opportunities on the outside, but we view those as nice-to-haves, not must-haves.

[Eric Ludwig:]

And, Mike, if I can just add there, if you want to call it phase 1 and phase 2, as I talked about in my script, phase one, when Nick got hired as CEO, promoted as CEO, was really harvesting the three growth titles that came from our acquisitions and that we combined with the acquisitions, really nurture them into becoming what they are today. We've heard from investors a lot that they really want to see whether we can launch new titles from the ground up and we're really entering now phase two, which is launching three games that have been green lit from the ground up under Nick's tutelage in the next four months. May to August, we'll have WWE, Diner DASH Adventures and Disney Sorcerer's Area. So, we're very excited about being able to take a lower shot on goal. We'll spend less than $10 million to get our Disney Sorcerer's Area title from ideation to global launch, excluding marketing and UA cost. If you compare that to what would we get for spending $10 million on an M&A transaction, you would not get a lot. You would not be adding a lot of revenue potential from a $10 million M&A transaction. And we think that that use of capital and the way that we are now building our creative process internally really sets us up for being able to prove out both the historical acquisition shops and integration, coupled with now our ability to launch – greenlight and launch from the ground up new titles. And what's great about next year's three titles is they are all Glu IP – royalty-free Glu IP. So, we can do a lot more things with our own IP and have a better marginal flow through.

[Michael Olson:]

Thank you.

[Nick Earl:]

Thanks, Mike. Operator' Thank you. And our next question comes from Doug Creutz from Cowen. Your line is now open.

[Doug Creutz:]

Hey, thanks. You talked about the difficult UA environment a bit in your commentary. I just wonder if you could maybe elaborate on what you think is driving that and to what extent do you think it's a temporary market condition versus potentially a more permanent market condition? Thanks.

[Eric Ludwig:]

Yeah, great. So, what happened is, in early February, there were two private company –very large private company mobile game publishers that were really focused on casual games that spent very, very aggressively on UA. And we believe they may be have been spending at non-profitable campaigns just to drive user growth. We spent a lot of time and we've talked about our philosophy of being ROI focused. There's a separation of church and state insight the Glu. The studios do not own the budget for UA and we drive UA based on ROI. Whether it's a one-year or two-year ROI, we really work to make sure we are driving that competitive UA. The two publishers, they were also using ad creative that I would say was taking some liberal approaches to what you saw on the video ads on Facebook and elsewhere. Really was not exactly what the gameplay looked like within the game, but there was that bit of a disconnect. And we witnessed – we saw CPIs going up and then the quality of users because of that confusion around what was happening in the space. And this largely hit Design Home more than any of our other titles, but because of that disparity, higher CPI, a lower bit of quality of users because of this market confusion, it impacted the title. I did talk about our guidance. It's obviously taking out $10-plus million dollars for the impact that this had on Design Home and Covet Fashion, but we just don't think it makes sense in our interest or the shareholders' interest to spend on an ROI base that's negative. And the good thing is, as we now get into launching three new games, we now have six games that are potential – three growth games and three potential growth games that we can spend against. And our games are in a much more broadly diversified portfolio when you now look at our games amongst four core genres, whereas before we were maybe under three or two. And we now think that, as one genre may have pressure on something like this competitive UA campaign, this headwind, the others may not. And as I said in my prepared remarks, the great thing about our new launches is we're already in beta today and the beta territories that we're in, we're spending on UA. So, we are not seeing this UA pressure on WWE, on Diner DASH Adventures, on Disney. And then, with the marketing machines that are both the WWE and Disney, we think the coupled nature of our spend on UA coupled with what we're going to be doing comarketing-wise for those two titles will be another accelerant as well to help us on the user acquisition side.

[Nick Earl:]

Yeah. And, Dough, one thing I'd add is that the new games we've got in development, all started under the growth games strategy. So, the way we build them is really focused very much on the elder game, on social, on things really drive LTV. And if there is one strategy to take on CPIs, even in the short term they're up, is higher LTV. So, we're very focused on that with these next three products and the three after that. so, that should be a good hedge against any future activities you see in the CPI front.

[Eric Ludwig:]

Yeah. And just to finalize that, when I talked about those four core genres, kind of speaking left to right, more female to male focused, the core genres that we talked about are lifestyle which are Design Home and Covet Fashion, very female centric. And the new title from Crowdstar would also fall in that bucket. Then you've got casual, which is more female, but also skews a bit male. And this would be our Diner DASH Adventures title and the new title coming from our folks up in Toronto. And then, we've got mid-core which is really our Disney title. And then, sports and outdoor which is our Baseball, our WWE and our Deer Hunter game as well.

[Doug Creutz:]

Okay, great. Thank you.

[Nick Earl:]

Thanks, Doug.

[Operator:]

Thank you. And our next question comes from Jeff Cohen from Stephens. Your line is open.

[Jeff Cohen:]

Hey, guys. Thanks for taking my question. So, Tap Sports Baseball had a really strong quarter. Has that been driven more by monetization or have you seen an uptick in installs as well?

[Nick Earl:]

Yeah. Hi, Jeff. So, this is definitely the former. This is really monetization. We think we've probably found the audience. It may grow a little bit here and there, but for the most part, we've really found this audience over the last couple of years. And what's really been driving the success, the growth that we've had and the growth that we think we'll have this year with 2019 is just improvements in the elder game, improvements in the live operations, things like the new legends, club events, we're definitely diving into subscriptions more this year, we've got technology to really reduce the amount of exploits. So, those sorts of things are really driving retention engagement and monetization. But like I said, I think we've probably hit our DAU ceiling at least for the time being.

[Jeff Cohen:]

Got you. And then, I was wondering if there was any incremental color you can give around what kind of metrics you're seeing in soft launch for the Disney game. Is it downloading as well as you had anticipated?

[Nick Earl:]

Yeah. It's a little early to talk more broadly about it, what I said in my prepared remarks. We're definitely seeing strong engagement, strong retention, we're seeing people getting through the user flow. So, they're getting into the experience and we're really happy with those numbers. This is a game that is incredibly deep. It is really, really deep game with lots of tune and lots of balance and that's what the team is doing now and they're really focused on that for these last few months before we launch it. Yeah, no real specifics on the KPIs, but we will be talking a lot about that once we launch that in the August timeframe.

[Jeff Cohen:]

Thanks, guys.

[Nick Earl:]

All right. Thanks, Jeff.

[Operator:]

Thank you. And our next question comes from Drew Crum from Stifel Nicolaus. Your line is open.

[Drew Crum:]

Okay, thanks. Hey, guys. Good afternoon. Just a follow-up on the question on Tap Sports Baseball. I just want to make sure I heard you correctly. You expect Tap Sports 2019 to grow over 2018 or is it you expect the franchise to be up year-on-year? Just want to clarify that.

[Nick Earl:]

It's really the franchise. Hi, Drew. We really kind of look at the entire franchise as being up and we'll be up moderately. I don't know if we'll see the same growth we've seen in the previous years. As you know, it's been growing incredibly well. So, we like where we're tracking to right now. We think it will be ahead of last year. And like I was just saying to Jeff a second ago, it's really based on what we're doing inside the game and the live operations and how we balance the elder game, and that's really where the growth is coming from.

[Drew Crum:]

Okay. And then, just listening to some of your public commentary during 1Q, a little more cautious on WWE. And today, the tone seems a lot more positive. Is there one or two things you can point to that's really changed your view on the game and the launch?

[Nick Earl:]

Yeah. There's two things actually. There is the core mechanic. And as we have talked about before, we just could not find the actual core mechanic that was engaging the users in a way that kept a large enough amount in the top of the funnels, as we say. We just did not find the fun with the rest of the mechanic. And the team, just based on their dedication and their focus and their ingenuity, have found that. They're actually really core wresting fans, WWE fans. And they just really took this to heart to rise to the challenge of finding something that will be really fun. So, that was the first part. The second part is they really went for a rebalancing exercise with the meta-game. They moved a lot of the social and the competitive PvP up closer to the beginning of the game. And with that rebalancing of the elder experience, it's just making an enormous difference. So, this is just one of those ones that you don't expect to have such a turnaround, but it really has. And I think it's really testament to not only the team's energy, passion and just their expertise, but also to the fact that we allow teams and the products' breathing room to find their potential before we launch it. And, thankfully, we've got the environment here financially with which to do that and that's how we've approached WWE.

[Drew Crum:]

Got it. Okay. Thanks, guys.

[Nick Earl:]

Thanks, Drew.

[Operator:]

Thank you. And our next question comes from Mike Hickey from Benchmark. Your line is now open.

[Mike Hickey:]

Hey, guys. Great quarter. Thanks for taking my questions. I've got a few. I guess, first on the Disney game, as it relates to your guidance for the year, which I think you raised by $10 million, I think your prior guidance did not have the Disney game. And so, I think you said there's a headwind on Design Home, Covet Fashion of $10 million. So, I'm guessing Disney is in your guidance at this point and now you're sort of sizing your $120 million [ph].

[Eric Ludwig:]

Yeah. I won't give you by-title guidance, but, certainly, the puts and takes that we had, Mike, was, first, so we beat Q1 by $2.8 million. We added that. We've raised the overall remainder of the year by $7.2 million, so a total of $10 million. But I did say in my prepared remarks because of the headwinds we saw on those UA, creative, even though Design Home will be flat from Q1 to Q2, we expected more out of Design Home and Covet Fashion in Q1 and more in Q2. So, there is definitely a double-digit million – more than $10 million effect from this UA creative negatively impacting those titles. So, that was kind of one thing, but we more than offset that by being more confident in WWE and then adding guidance for Disney. So, a lot of puts and takes, but overall a net positive and a net add to the full-year guide.

[Mike Hickey:]

Okay. Thanks. I guess, on Design Home, you mentioned the meta – the change in meta looks to be working in terms of driving long-term retention – player retention and monetization. So, I guess, in that sort of scenario, doesn't that give you more justification to increase your UA spend even if the environment is more difficult than it has been? You mentioned about Japan release. Can you please give a little bit more color on that game?

[Eric Ludwig:]

Sure. I'll take the first question, Mike, and then Nick can talk about Japan and Cocone. So, right now, the elder game retention, it reveals itself about 15 days in and we're about 30 days into launching the meta. We certainly know that if you can improve long-term elder retention, you will have more dayparts, so to speak, to make more revenue off users. So, over time, yes, we do believe that the users that play this game will be generating more revenue overall. However, our current short-term belief was that the CPI costs were rising faster than that elder retention was driving the LTV. And out of an abundance of caution, we just felt that we would want to a bit de-risk – even though we are raising the full-year numbers, a bit de-risk the full-year guide from this competitive headwinds. And as we look to launching three new titles in the back half of the year, we'll have six titles to spend against and we can reallocate dollars to the highest ROI. In some cases, that will be a licensed IP. In other cases, it will be a new launching original IP. In other cases, it will be an old growth game that has original IP as well. So, we will have more titles to play against, but under an abundance of caution, what we saw this quarter. We want to be prudent.

[Nick Earl:]

Yeah. And, Mike, with regards to the Japanese version of Design Home, it's called Roomage and it's being developed and published by a company called Cocone. And this is a version that is still in beta. It's actually in soft launch to be technical. They have not – they've not started spending against it. We expect that to happen in the next few weeks or certainly couple of months and then we will report out what we learned. But they are very happy with what they're seeing and their numbers are meeting their standards. So, they're well on track to do that. And, for us, it's just going to be very interesting to see how this materializes in an Asian territory, Japan to be specific, because it opens up the door for us to have other partnerships with other games in Asia and allows us to start stepping towards that territorial opportunity.

[Mike Hickey:]

Good. So, you're just collecting a royalty on that game then? And is that in your guidance [indiscernible]?

[Eric Ludwig:]

Yeah, there's very minimal in our guidance from Cocone. But, yes, what we would capture would be a percentage that we would recognize that – the top line. There would be no cost of sales for us because it would be – net to us would be our top line revenue, whatever that number is and then would flow direct to the bottom line.

[Mike Hickey:]

Okay. Good. All right. Last question from me. Sorry for taking so much time here.

[Nick Earl:]

It's all right.

[Mike Hickey:]

On your slide deck, your longer-term margin guidance, sort of thinking 15% to 20% EBITDA margin, you're at a bookings level of $500 million. I think, historically, the next step was over $750 million, you would see additional margin improvement. I think that's changed now. Correct me if I'm wrong. I think you're now saying over $500 million. So, just wondering if anything has changed there in terms of how you see your longer-term margin opportunity. I'm also curious, maybe more specific, how you think about the next step up, sort of 25% to 30% margins? Thank you.

[Eric Ludwig:]

I think I'm going to rename you, Eagle Eye Hickey. Great analysis of looking at the last slide deck to this slide deck. Yeah, we certainly – when we looked at our prior – we have not spent a lot of time talking about long-term guidance, but we had said, at $500 million, 15% to 20%, and then above $750 million. And that kind of implied that there is possibility for $250 million of bookings. We might not have any margin expansion above the current baseline and we felt that that's not how we're going to operate the business. We're not yet talking about what the next step functions will be and what step level it will be above 15% to 20%. But I think some of our competitors are out there in about the 20-ish percentile even at numbers that are double or triple us today. I think our goal was to try to be more profitable than our competitors at similar size levels. But I think, for now, there will be margin expansion. We're not yet to call the pocket until we hit $500 million. And then, at that point, I think we'll lay out a new set of longer-term targets. But we did want to get message across that it's not going to be $250 million of a plateauness. There will be margin expansion above $500 million.

[Mike Hickey:]

All right. Good. Best of luck guys. Thank you.

[Nick Earl:]

All right. Thanks, Mike.

[Eric Ludwig:]

Thanks, Mike.

[Operator:]

Thank you. And our last question comes from Darren Aftahi from ROTH Capital Partners. Your line is now open.

[Darren Aftahi:]

Hey, guys. Thanks for taking my questions. Nick, I wanted ask you on the meta game launch with Design Home. So, you said you're encouraged by it. I'm just kind of curious if you could share, relative to what's called the control group of the prior game, what you're seeing with seven day, maybe even 30-day retention, why you're kind of encouraged by that? Second point, you had mentioned e-commerce in the past. I think you had kind of glanced over that this quarter. Just kind of curious an update there. And then, Eric, a housekeeping thing. I saw your accrued liabilities long-term jumped up quarter to quarter. I'm just kind of curious what's going on there. Thank you.

[Nick Earl:]

Hey, Darren. Okay. I'll do to the first. Eric will do the last one. So, DH meta – Design Home meta has been very encouraging. The two areas we've been mostly encouraged is the engagement, how many times people come back to the game and how long they stay in the game with the meta. And that's what really we were going after in creating the meta game, is to give more reason to be in the game and to be in it longer and just more things to do. We're also seeing longer-term retention. I can't give you the numbers on that; I won't break that out. But we're definitely seeing positive signs that this is a long-term strategy that is really going to pay off. And the other thing, Darren, to keep in mind is that this is just like the opening salvo in meta. This is not a binary event we've launched and we're going to move on. We're going to keep adding to this and keep building it out and deepening it. It's very clear to us that our players really like that and they get way more value out of having depth in a game. It's not for everyone, but it's for a large number. And we'll keep building that out. In terms of e-commerce, it's still a bit early, but the interesting thing about e-commerce from our perspective is that there are a lot of e-commerce apps out there and there are a lot of games. There's just not a lot of games with e-commerce at least at scale. So, this is really going to be one of the first opportunities to see what kind of activity will happen in a game with e-commerce. We've really worked to make it a frictionless experience. So, we're excited about what the potential is. But as we've talked about before, this is real blue ocean and we just don't know how this is going to pan out in the long run. We feel like we are logistically set. We think it's – like we've talked about, a great opportunity, but we've just been very careful in terms of guidance. It's negligible in terms of what the numbers we've put in until we actually see results, which will happen in the back half of the year. And then if it works, we'll really lean into it.

[Eric Ludwig:]

Yeah. And, Darren, on the liability side, we jumped up about a little less than $40 million in liabilities really coming from two things. One, with the new lease accounting standards that came into effect on January 1, 2019 and we've got to go through and look at all of our leases across the company, building leases as well as phone leases and copiers. And really, we determined that only the building leases that are operating leases would fall under this new lease accounting. That caused us to gross up the balance sheet. Us and every other company that's public is doing this year as well. And that added about $34 million on the asset and liability side to gross us up. And then, as we go throughout the year, we'll deduct – it's a 10-year lease overall. So, this will be eaten through over the next nine-year time frame as we have rent expense and we'll reduce – hit the OpEx for rent expense and then reduce the prepaid and the liability. And then, secondly, in addition to that, we also did a five-year extension with the MLBPA or the Major League Baseball for our Tap Sports Baseball. And so, we also had some minimum guarantees that we owe them each year in advance over the five-year time frame. That was the balance of the increment to the balance sheet as well.

[Darren Aftahi:]

Great. Thank you.

[Nick Earl:]

Thanks, Darren.

[Operator:]

Thank you. And there are no further questions at this time. I would now turn the call back to Nick Earl, CEO, for any further remarks.

[Nick Earl:]

Thanks, operator. Thank you everyone for joining for today's call and we look forward to seeing you in the next one.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.