Glu Mobile Inc
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good day, ladies and gentlemen and welcome to the Glu Mobile first quarter 2018 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 at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Harman Singh serves as Vice President of Finance and Investor Relations Sir, you may [indiscernible].

[Harman Singh:]

Thank you operator. Good afternoon everyone and thank you for joining us on Glu Mobile's first quarter 2018 earnings conference call. On the call today are Nick Earl, President and Chief Executive Officer and Eric Ludwig, COO and Chief Financial Officer. During the course of 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 releases 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 our GAAP results and we encourage investors to consider all measures before making an investment decision. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a 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 for all of the information, aside from bookings or as otherwise stated, 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 totaled 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 have used in prior quarters. We are also providing a supplementary Excel file on our IR website to more easily aid in this reconciliation. Both the PowerPoint and Excel files 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 now like to turn the call over to Nick.

[Nick Earl:]

Thanks Harman. Good afternoon and thank you for joining us on today's call. The momentum we built in 2017 carried into the first quarter and 2018 is off to a great start. I will begin by reviewing our strong first quarter operating financial highlights. We will then provide an update on our pipeline development and growth strategies. Next, Eric will take a deeper dive into the quarter's financial results and provide color on our outlook for Q2 and the full year. Our strong first quarter financial results were driven by outperformance from Design Home and another quarter of growth from both Covet Fashion and Kim Kardashian Hollywood. Bookings exceeded our guidance by approximately $13 million into the midpoint and reached $86.3 million, an all time record quarter for Glu. The strong growth demonstrate the quality of our current growth and Evergreen portfolios as well as the successful execution of our strategy to drive monetization leading to increased LTV and bookings. The steps we took last year to streamline our operations and improve our operating efficiency allowed us to scale our bookings growth and generate significantly increased adjusted EBITDA profitability. Our outperformance in the quarter was a result of several initiatives we have implemented to optimize game performance as part of our overall live ops strategy. These initiatives include improved merchandising efforts which helped drive increasing monetization and conversion. We are also enhancing new user flow contributing to a better onboarding process and driving greater early user engagement and higher retention. Based on our strong top and bottom line results, we have raised our bookings guidance for the full year 2018 by $35 million to a range of $360 million to $370 million. This reflects the Q1 beat and the race for the balance of the year. We expect this will also result in meaningfully improved adjusted EBITDA for 2018. We expect steady sequential quarterly increases in both bookings and profitability on an adjusted EBITDA basis throughout the rest of the year. Eric will provide additional color around our guidance in his remarks. Moving to title highlights in the quarter. We saw a very healthy increase in our growth games on a year-over-year basis. They increased 84% reflecting the massive improvements we have been able to make to our live ops capabilities. Design Home bookings were $34.3 million in the quarter growing 131% year-over-year and 14% quarter-over-quarter in a seasonally soft Q1. This growth was driven by the successful execution of a strategy to invest in UA as well as implement features and systems to improve game plan performance. Some of the successful Design Home initiatives we launched in the quarter included adding a sixth daily event, improving new user flow, revamping our monthly series to include double bundle packs and improving end game merchandising. These initiatives led to new DAU high of 1.15 million. Moving forward we plan to continue with sixth daily events as well as a series and the bundle pack sale every month. We also intend to add localization, augmented reality and a deeper meta-game later this year. Turning to Covet. We revamped merchandising to include garment packs and improved accessibility and allowed users to participate in more content as well as season essentials. We also made significant early final improvements for the full revamp to new user flow. This has led to a 25% increase in day seven retention rates since the end of January. Covet's bookings grew sequentially for the second straight quarter reaching 12.2 million and we consider it a core growth game. Moving on to Tap Sports Baseball '18. Early results have been fantastic. This creative team is working the franchise for five years and the engine for two, fine tuning both their craft and the technology that drives the game. TSB'18's gameplay has improved metagame and is balanced and optimized in a way that we believe will increase monetization, conversion, retention and ultimately bookings. This title is a great example of our creative team's development process that optimizes the gameplay and drives top and bottom one results. Finally, Kim continued to outperform. Its bookings grew quarter-over-quarter to 10.5 million. Kim has been a shining star over the past several quarters and continues to be a model of what we expect from our Evergreen portfolio. Its performance exceeded our expectations as we focus on improving merchandising and the elder experience for our users. As you look at our pipeline, beta testing on WWE began late February and we expect a worldwide launch in the third quarter. We continue to use beta results and feedback for fine-tuning and optimizing title's core gameplay, meta-game and economy balance. The team is about to release the first update to our beta that will include significant enhancements to the title as we incorporate feedback from the initial beta release. Additionally, since the engine for WWE is the same as Tap Sports Baseball, we are leveraging our expertise from that franchise to help ensure that WWE has the highest quality experience for our users. More details will come as we get closer to launch but remain very optimistic. We also begin beta testing on Titan World in the quarter, an original IP, realtime, player versus player title with a CCG meta-game. Assuming the beta goes well, our time line for launch continues to be late summer 2018. Additionally, we are in development of Dash Town, an original IP game that brings together the best of the Dash franchise gameplay with a more accessible core mechanic. We expect to launch this title before the end of the year. Finally we are looking forward to the relaunch of Racing Rivals this summer with version 7.0. This will be a significant revamp of the design, experience and economy. We will have much more to discuss about the new version as we monitor its performance. Looking further ahead, as we announced last quarter, we are working with Disney to develop an exciting new game that will include characters and stories across the Disney and Pixar franchises and combines these iconic brands with Glu's approach to game development. Stay tuned for additional updates and details as we move through the development process. Our portfolio performance and strong results this quarter serves as another proof point that we are on an accelerated trajectory and our three pillar growth strategy is working. First, we made strong progress in cultivating our creative-led culture. This cultural change allows us to work collaboratively and able us to recruit All-Star talent to drive original license IP that we believe will lead to new growth games. Second, our improved live ops execution has allowed us to extend the revenue tails of our key Evergreen titles while also improving the KPIs and LTV of our growth games. Third, combining our consolidated footprint and streamlined operations with more disciplined financial management has helped us to drive a second consecutive quarter of profitability on an adjusted EBITDA basis. We believe we are well positioned for continued profitable growth going forward. In closing, I would like to thank the Glu team for another quarter of hard work and great execution. A few weeks ago, we had our Annual Glu University Retreat which reflected the creativity and new culture that we have built here. I continue to be inspired by our creative team's engagement, level of collaboration, ingenuity and talent. I will now hand things over to Eric who will go through in more detail on some of the financials for the quarter and our outlook for Q2 as well as the remainder of the year.

[Eric Ludwig:]

Great. Thank you Nick and good afternoon to everyone the call. I will provide further details on our strong financial results for the first quarter and then discuss our increased guidance for the second quarter and full year 2018. Our topline results for the first quarter were as follows. Revenue was $81.4 million for the quarter, a 43% increase over last year's first quarter with our five largest titles representing 80.8%. First quarter bookings were a record $86.3 million, a 25% increase over last year's first quarter. I would highlight that our record first quarter bookings only included $1.2 million in Tap Sports Baseball 2018 which launched on March 27 and was the only new title in the quarter. As Nick mentioned, this quarter's bookings upside was driven by Design Home which generated bookings of $34.3 million, a 14% increase over the prior quarter, Covet Fashion, which generated bookings of $12.2 million, a 22% increase over the prior quarter. And outperformance by our Evergreen title, Kim Kardashian Hollywood, which increased bookings for the third straight quarter to $10.5 million. Evergreen titles outperformed in the quarter and contributed 32% of total bookings. 69% of total bookings came from original IP titles with no royalties due. Advertising and offers were $9.4 million or 11% of total bookings. Ads and offers were down on a quarter-over-quarter basis due to seasonality following the strong holiday season, coupled with the removal of certain offerable ad units on one platform during the quarter. On the expense side, adjusted platform commissions were $23.2 million. Adjusted royalties came in at $5.5 million. Hosting costs were $1.8 million and UA and marketing spend during the first quarter was $22.2 million, or 25.8% for the quarter. Adjusted OpEx excluding UA and marketing cost totaled $28 million compared to $29.7 million in the prior quarter. This was down on a quarter-over-quarter basis due to the divestiture of our Moscow games studio in December 2017. The incremental bookings increase drove improved high margin flow-through resulting in a second straight quarter of adjusted EBITDA profitability and improved adjusted EBITDA margins. We ended the first quarter with a cash balance of $48.3 million compared with $63.8 million in the prior quarter. During the first quarter, we used $12.4 million in operations excluding royalty advances. Additionally, we used $4.1 million for cash advances for minimum royalty guarantees. As we said last quarter, we have no cash overhang from our prior celebrity strategy. This quarter's license advances were related to payments to the Major League Baseball, WWE and Disney. In the first quarter of every year, we payout annual variable cash compensation, if earned. In February 2018, we paid $14.8 million in bonuses. Thus, all of the cash used in operations excluding royalty advances plus some was related to this annual timing. 2017 cash bonus payment were higher than 2016 largely due to onetime performance incentives we put in place for the Crowdstar team to support the transition year of acquisition as well as reflecting the outstanding performance that this studio contributed in 2017. Turning to guidance. As Nick stated earlier, our Q1 results were exceptional and we expect continued strong year-over-year bookings growth along with sequential quarterly increases throughout the year. For the second quarter, we expect bookings to increase year-over-year to a range of $90 million to $92 million. We are very pleased with our guidance for another record quarterly bookings. The $4.7 million increase at the midpoint has both puts and takes in arriving at this figure. We expect Design Home to have moderate quarter-over-quarter growth and is tempered due to an expected summer slowdown in June. We expect that Tap Sports Baseball franchise, which includes all five annual SKUs from 2014 to 2018, to slightly more than double from the first quarter's $9 million due to the launch of Tap Sports Baseball 2018 at the in the March. Covet Fashion is expected to decline modestly quarter-over-quarter due to the female centric customer base having less gameplay time as a result of summer vacation starting. Our shooter titles, Deer Hunter Classic, Deer Hunter 2018 and Dino Hunter have all seen weakness late in the first quarter and into the second quarter due to, we believe, entrants in the Battle Royale market such as Fortnite and PUBG. This softness in installs and engagement has resulted in our dialing back user acquisition on those titles and thus for the reducing the bookings potential. Lastly, Racing Rivals has experienced a significant decrease in bookings in the first quarter and we have factored a decline in our second quarter and full year guidance. In February, we informed the Racing Rivals community about the upcoming 7.0 update. This will be the largest update we have ever implemented to Racing Rivals which will change the economy and sunset cars that have been previously purchased. This has caused players to dial back their spending post our announcement last quarter in anticipation of the 7.0 launch. I would point out that several of the Carbonated team members working on Racing Rivals were also on the EA Madden Mobile football team when they successfully reset the economy several years ago. Racing rivals 7.0 is following a similar playbook and we believe we can see upside to our guidance for Q2 and 2018 if this update proves successful. On the expense side for the second quarter at the midpoint of our guidance range, adjusted platform commissions are expected to be $24.2 million, adjusted royalties are expected to be $6.8 million, hosting costs are expected to be $1.7 million, user acquisition and marketing expenses are forecasted at $21.7 million or approximately 24% of bookings and all other operating expenses are forecasted at $29.5 million. Our updated guidance for the full year puts bookings at a range of $360 million to $370 million, representing a $35 million increase from the prior guidance and a significant increase over last year's $320 million. We have added the $30 million beat from Q1 and are increasing the balance of the full year by an additional $22 million. Additionally, this guidance assumes less than 10% of bookings comes from yet to be launched new titles, specifically WWE, Dash Town and Titan World. On the expense side for the full year at the midpoint of guidance, adjusted platform commissions are expected to be $96.7 million, adjusted royalties are expected to be $27.4 million, hosting cost are expected to be $6.9 million, user acquisition and marketing expenses are forecasted to be $85.9 million or approximately 23.5% of bookings and all other operating expenses are forecasted $119.1 million. We expect adjusted EBITDA profitability to continue to grow throughout the year and our bottomline profitability is not meaningfully dependent upon the yet to be launched titles. In 2018, we expect to pay $5.1 million for minimum royalty commitments or only $1 million remaining to be paid cumulatively over the next three quarters. This compares to $50.2 million in license advances paid over 2016 and 2017 combined. Given our adjusted EBITDA outlook for 2018 as well as the much lower minimum guarantee obligations, we expect our cash position at the end of the year to be approximately $85 million as a result of the significant free cash flow generation in 2018. The success we saw in the first quarter and our confidence in updating our forward-looking guidance is extremely encouraging and has helped us gain some additional perspective on our three year path that tracks back to last year. 2017 was an investment year including hiring a new creative team led by Mike Olsen. Additionally, we significantly increased UA in Design Home, which ultimately led us to essentially breakeven for the year on an adjusted EBITDA basis, excluding royalty impairments. Strengthened by the tremendous results we have announced today, we believe 2018 will be incrementally profitable on an adjusted EBITDA basis throughout the year. This performance is supported by our robust new title pipeline, including Tap Sports Baseball 2018, WWE and Dash Town. In 2019, we see the business scaling to the next level as we expect to have a full year of growth on Design Home, Covet Fashion and the Tap Sports Baseball franchise as well as the full year of contribution from WWE and Dash Town. Additionally in 2019, we have expected the launch of our Disney title from Mike Olsen's team and an original IP title that we will announce before the end of the year. We expect adjusted EBITDA margins to meaningfully improve and anticipate significant free cash flow generation in 2019. Looking ahead, we believe we are firmly on track to achieve our longer term financial targets of an adjusted EBITDA margin of between 15% and 20% when we achieve bookings of $500 million and additional margin expansion potential as bookings scale above the $750 million level. We have made outstanding progress implementing our new growth strategy since the beginning of last year and a significant improvement in our year-to-date financial results and our updated guidance reflects our strategic objective the producing creative IP and a more efficient operating environment while generating sustained and growing profitability. I look forward to updating you on our progress next quarter. And with that, I will open the call for questions. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from Doug Creutz with Cowen and Company. Your line is now open.

[Doug Creutz:]

Hi. Thanks. Obviously the strong performance does give you some leeway in terms of releasing new titles and you don't have a lot of pressure to get them out on any specific date. Can you talk a little about where your philosophy is in terms of when to launch a title? When do you think it's ready? Other considerations that you guys might be thinking of when you choose a release date? Thanks.

[Nick Earl:]

Yes. Hi Doug. Yes, listen, we talk about this a lot and we are grateful that we are now in the position to not have to launch things in order to make numbers. This is a situation that gives the opportunity to really optimize the gameplay, the economy and as we are learning, I think a lot of the players in this market have learned that it just takes a long time to kind of get these things right. So we don't have a specific set of numbers that we have to kind of clear, but we definitely look at early retention. We definitely look at kind of medium term retention, day seven, day 14 and we want to make sure that those above a certain number, certain height. We are less about revenue when it's sitting in beta because we view that as much more of kind of a lagging indicator and look for more of leading indicators. But I would say, retention is the thing we look most closely at and we will pair it up with opportunities deciding a market to launch. For example, WWE would be a good candidate to match with something that's happening out there. So it's really a bunch of variables that, I would say, we are now in a position where we just don't have to release before its time. And even if we are going to take six months or longer, we will.

[Doug Creutz:]

Okay. Thank you.

[Operator:]

Our next question comes from Darren Aftahi with ROTH. Your line is now open.

[Dillon Heslin:]

Hi guys. Thanks for taking my questions. This is Dillon, on for Darren. And congratulation on the bookings beat. Two for me. On Design Home, with some of the updates out in the future, I know you talked a little bit about augmented reality and sort of local languages. But what would be some of the metagame updates you would provide for Design Home? And then with the expected launch of WWE and that new beta update, since its developed by the same team as Tap Sports Baseball, are some of those newer features that you talked about with user acquisition and live events that you have been rolling out on Tap Sports Baseball, should those be expected on WWE as well? Thank you.

[Nick Earl:]

Yes. Hi Dillon. Thanks. So yes, the Design Home metagame, we can't really talk too much about the details of what that is. Honestly we are still experimenting around with different ideas. We have got a lot of stuff moving in the right direction, but it's really complex to kind of add a meaningful metagame in to an existing game. So this is not easy to do. Although I think we have got such a talented team that they will get to it. But we are just not ready to talk about the kind of the specifics of what are in that. But I think you can look at other metagames in lifestyle apps and you kind to get a sense for how to create community, certainly a sense of community, some social aspects and reasons to keep coming back month-after-month-after-month even greater than what exists today. With regard to WWE, yes, it is the Tap Sports Baseball team, same studio, same engine and you are absolutely right, there is a lot of elements to kind of the elder game design in Tap Sports Baseball that will look familiar in WWE, but it is definitely customized for the audience and the characters and just that the whole different feeling that WWE has relative to Tap Sports Baseball. So there will definitely be parallels but there will be new things as well. But we look forward to the world getting to know it as we release those, especially in the new beta.

[Dillon Heslin:]

Very good. Thanks guys.

[Nick Earl:]

All right. Thanks Dillon

[Operator:]

Our next question comes from Drew Crum with Stifel. Your line is now open.

[Drew Crum:]

Okay. Thanks. Hi guys. First question for teams. So the contributions you are expecting from the new titles, I think last quarter you suggested that probably about 15% of bookings in 2018 would come from those new titles. You have moved guidance up but now you are saying 10% from the new titles. Is there something you have seen in the beta testing that's taken that number down? Or is it timing related? Or something else?

[Eric Ludwig:]

Drew, this is Eric. Thanks for that question. I would say, given the last two years of our celebrity scenarios of having an overabundance of our forecasting guidance coming from new titles, I would say it's more out of an abundance of caution that we are trying to de-risk our forward-looking guidance in terms of how much we park against new titles. So that is the lion share of the downgrading, although we have increased the guidance, but going from 15% to 10% and really around conservancy and our legacy and history of what we learned with celebrity scenarios.

[Drew Crum:]

Okay. Fair enough. And then can you guys talk about the planned marketing and UA spend for 2Q? The range implies something lower versus what was expanded during 1Q. Are you ratcheting down the UA spend on Design Home? Or is there something else that may be a seasonality? Is there something else that's taking that number lower?

[Eric Ludwig:]

Yes. I would say what we saw in Q1 was, we call it, are the golden buying window right after Christmas when a lot of brands, big brands were spending significant amounts going into Christmas around the Christmas holiday, e-commerce brands and that really drove up CPI costs. And right after the Christmas holidays, there was this massive void of demand and CPIs plummeted and we really plowed a lot of money into UA in January when the ROIs were just phenomenal. So I would say, there is more around that dynamic as to why Q1 is higher, slightly higher in terms of absolute dollars on UA versus our guidance for Q2. And we are very ROI driven. If we find those buying windows ever again, our UA team is constantly looking every day, week at each of our titles and the ROI, both the CPI and the LTV, the expected LTV and when we find it in balance and find some arbitrage, we will turn on incremental UA spend if we think it's going to be incrementally positive to the title.

[Drew Crum:]

Got it. Okay. Thanks guys.

[Nick Earl:]

Thanks Drew.

[Operator:]

[Operator Instructions]. Our next question comes from Mike Hickey with Benchmark. Your line is now open.

[Mike Hickey:]

Hi guys. Thanks for taking my questions. And congratulations on an awesome quarter, great guide. You have certainly given some performance swagger here. So well deserved. Curious on M&A, maybe your strategy. You have had a lot of success with Crowdstar. Obviously it's been a phenomenal success in terms of your ability to orchestrate the right deals and it seems like some of your peers are also looking at some deals that can be fairly constructive in terms of driving EBITDA margin growth. So just hoping you could sort of, of course you are driving a lot of cash flow as well, but sort of where you are at, I guess and your thinking on M&A and how that could be a piece of the puzzle as we think more medium to long-term?

[Nick Earl:]

Yes. Hi Mike. So I will take this and then Eric can kind of chime in. Again, another thing we talk about a lot and we are spending energy against looking at the landscape to see what is out there. We kind of break it down into two classes. The first would be single-game acquisitions. They are opportunistic and would potentially bring in a creative leader and/or franchise or even like an entire studio that could really kind of move us ahead the way that Crowdstar did. We also look at the opportunity to bring in small bets and things that can provide a high reward for ultimately what is a fairly low risk, but maybe not have such a great chance of hitting it out of the park. So we are looking at both and we definitely see this as a great opportunity over the next 36 months. We view this as more of a buyer's market. So this is a great opportunity with a company like ours that has kind of the scale to be able to integrate and significant kind cash growth that happens over the course of years is going to give us another currency to be able to go out and complete deals.

[Eric Ludwig:]

Yes. I would add to that, from a capital allocation strategy perspective, we are going to be generating free cash flow the last three quarters of this year and 2019 and we have a very good track record of doing targeted M&A. So I think Nick talked about the big M&A. I think I know smaller deals that Nick talked about. We have now done four transactions, two that have turned into acquisitions that invariably those people out there that have either a title that is in prototype or a title ready for beta launch and they don't have the funds to actually get that to fruition, whether it's fruition of launching and doing the maybe $1 million, $2 million $3 million of UA spend to launch a title successfully or they don't have the venture money to actually get their titles from prototype to launch. And we have now done this transaction four times. A multi-contract transaction of, we are the venture investor where we invest 19.9%, maybe $0.5 million to $2 million and we are venture investor. Secondly, we will do a publishing arrangement with the company at the same time, where we will launch a title for them. We will put our capital at risk on the UA side and will help them get that title to fruition. And then lastly, because we are helping them become successful and putting our capital at risk to do that, we want a call option to buy them at a preset price upfront. So if we are successful, they are successful, but somebody can't swoop in. So we have now done that transaction and it translated into acquisition with both Dairy Free as well as with Plain Vanilla, the maker of QuizUp. And then we have done two others that we had not announced what they are but we have actually done those first two or three contracts and we will be launching those titles with those partners at some point in the next 12 months. So I think in a market where venture is dried up, there are folks out there that have great ideas that are creative leaders, we would love the higher but we just can't get them and this is one way to efficiently use our capital to then bring more shots on goal to the table.

[Nick Earl:]

Yes. And the last comment I would made, Mike, is that before we would integrate or even consider integrating or acquiring any studio, we are really going to do, not only a scrub on the financials and look at the title that they are working on or the potential, the possibilities of that title, but make sure there is a really strong cultural fit. That's really important to us. We have got that right over the last 12 months and we absolutely do not want to mess that up by integrating a group that just doesn't fit into our core values and our purpose.

[Mike Hickey:]

Yes. No doubt. Thanks guys. I guess, thinking back over the years, thinking about Glu, you know you had really good exposure, I think, in the shooter category and obviously Deer Hunter back in the day was your number one title. Certainly it's not any more. But curious, with core gaming now, I guess with Fortnite and PUBG bringing the core gaming on to the mobile shooter category, how do you think about or if you can evolve your strategy there, obviously it's a layer of expertise maybe you don't have internally, I am not sure. But how do you think about, I guess, the shooter category moving forward? And if there is ways that you can still find success again with Deer Hunter, whether it's augmented reality or maybe some different positioning?

[Nick Earl:]

Yes. Great question. This has obviously been topical as we watch the rise of the Battle Royale category and we are certainly happy it's happening. We love the fact that we are getting core games like really taking off in mobile. I think it just adds legitimacy to the format and it expands the market. You are absolutely right. It is kind of ironic that our number one title used to be Deer Hunter. And yet we are not really sort of well positioned in this in this subcategory. We will look at any and everything and being a portfolio company, we will certainly play as much we can in the core market. With that said, most of our market right now is more on the "casual side" with games Kim and Covet and Design Home. So again like this whole expansion of this subcategory, we think, is a positive overall for the market and it certainly presents an opportunity for some long-term growth for us given that we do have somewhat of a head start, at least with stationary shooter mechanics. So we will look at it and we will see where we end up.

[Mike Hickey:]

Thank you. I guess the last question, the social casino, I think you have zero exposure now. It was in your pipeline. I don't see if it's still in your pipeline for 2018 or not, you are going to have a game in that genre. There is recently some Washington State, some regulatory issues on slots games saying that they are gambling and that's caused obviously a pretty big disruption in that market. So just kind of wondering what you think the opportunity risk if you are still going to do a game in that genre?

[Eric Ludwig:]

Yes. Mike, that's a great question. First off, the rulings, the preliminary rulings of the Washington State, we don't expect to have any impact on any of our current live titles nor any of our titles in development. We have not said specifically the partner company that we are working with nor what title that is in the social casino space, though as you heard me speak in the guidance for 2018, the overall guidance for all of our unlaunched new titles is less than 10%. So I think we are already de-risked there. And then lastly, I would say that this is really limited to Washington State's gambling laws and it's not a settled matter yet. And we know that Big Fish's parent company, Aristocrat, is appealing the ruling. So I think there is a lot of wood to be chopped before this thing becomes a reality. And then we will see whether and if and how that plays out for the social casino title that we partner with that may or may not be under this ruling's purview.

[Mike Hickey:]

All right. Thanks guys. Appreciate it. Good luck.

[Nick Earl:]

All right. Thanks Mike.

[Eric Ludwig:]

Thanks Mike.

[Operator:]

Your next question comes from Brian Peganoff from Deutsche Bank. Your line is now open.

[Brian Peganoff:]

Hi guys. Thanks for the question. I just had a quick one here on rapid prototyping stuff. I mean brought it up last quarter and a bit this quarter as well, especially in the context of pulling in the Disney and Pixar license last time around. So I wondered if you can give a little bit more color to us around that aspect of your business? is that just one specific team? What's the size of it? And how active are they in spinning up new models for potential developments?

[Nick Earl:]

Yes. Hi Brian. Good to have you on the call. Yes, this is something that is well beyond just the team working on Disney and Pixar. In fact, I was speaking with one of the studio heads last week and she was telling me how the entire culture of her studio has, you know, kind of mutated and evolved over the years that she has been involved and they view themselves as rapid prototyping culture now. So it's happening in all of the studios in different ways, obviously. But it is now integrated into live ops and new development and new features as well as new game development. So it is something that very much the fabric of the company and something we really believe in. There is no punishment for failure here when you are trying to create something new and interesting and I just think the ingenuity of the teams along with this process is combining for really good results. In terms of like what you will see, the results that you and our players will see, Disney will obviously be the big one, but virtually anything new that we are coming up with in live operations as well as the continued franchise of Tap Sports Baseball and then obviously in WWE and Dash Town, these are all items or many of the new things or items that have been rapid prototyped with small teams that are really casting things out and failing and then sort of ultimately succeeding in integrating. So definitely beyond Disney Pixar and like I said, very much kind of the culture of the entire company now.

[Brian Peganoff:]

Thanks guys. Congrats on the quarter.

[Nick Earl:]

All right. Thanks so much, Brian. Good to have you on.

[Operator:]

At this time, I am showing no further questions. I would like to turn the call back over Nick Earl, CEO, for closing remarks.

[Nick Earl:]

Great. Thank you everyone for joining today's call. Q1 was a great result for Glu. We very much look forward to continue the momentum for the rest of the year. Thank you.

[Operator:]

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