Glu Mobile Inc
Q2 2018 Earnings Call Transcript

Published: 1 Aug 2018

[Operator:]

Good day, ladies and gentlemen and welcome to the Q2 2018 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 for how to participate will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Harman Singh, Vice President of Finance and Investor Relations. Sir, you may begin.

[Harman Singh:]

Thank you, operator. Good afternoon everyone and thank you for joining us on Glu Mobile's second quarter 2018 earnings conference call. Please note that our webcast providers network is currently down. We ask that you please reference Q2 2018 slides that are posted on our IR website. 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 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 and 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’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 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’d like to turn the call over to Nick.

[Nick Earl:]

Thanks Harman. Hello everyone and thanks for joining us. I will begin the call today by reviewing our strong second quarter results and title highlights. I will then provide an update on our game development and growth strategies. Next, Eric will take a deep dive into the quarter's financial results and provide color on our outlook for Q3 and the full-year. Q2 was a record-breaking quarter in which we achieved double digit year-over-year growth in bookings, adjusted EBITDA, adjusted EBITDA margin and free cash flow. These accomplishments were driven by strength in Design Home, Tap Sports Baseball, and Covet Fashion. By continuing to optimize our titles to agile development, monetization, and live operation strategies we generated record quarterly bookings of 99.4 million, an increase of 20% year-over-year, significantly exceeding our guidance. We are also starting to scale our business with our adjusted EBITDA margin moving into the low double digits. Given our record first half results, we have raised our full-year outlook based on the second quarter guidance, our performance and our increased expectations for the remainder of the year. We entered the second half of the year with strong momentum driven by our current growth and Evergreen titles setting us up for a record year, while positioning us for what we believe will be strong bookings and adjusted EBITDA margin growth next fiscal year. As we have said, a few of our growth strategies are focused on developing and building a game portfolio of growth in Evergreen titles that are entertaining and engaging for our users and that deliver consistent repeatable bookings and provide strong operating leverage for our business. We believe our record second quarter results reflect this strategy. Let me highlight some of the significant achievements in Q2 of 2018. Starting with our growth games, these titles have made huge strides in just a years’ time as the three games in our growth portfolio Design Home, Tap Sports Baseball, and Covet Fashion represented 76% of our total bookings in Q2, compared to 60% in the same period a year ago. Design Home, our top performer continued its phenomenal growth with record quarterly bookings of 38.2 million, representing growth of 70% year-over-year and 11% quarter-over-quarter. The strength was driven by upgrades to in-game merchandising, new user flow, and a strong performance of our monthly series, daily events, and periodic bundle pack sales. Design Home is also producing at these levels without the full benefit of new features we are planning to roll-out, including collateralization, augmented reality, e-commerce, and a deep meta game. More specifically, as we improved the core loop and had an elder game, we expect to see a more social experience with improved game play sticking customer [ph] retention that we believe can take this title to an even higher base camp. Tap Sports Baseball 2018 also had its strongest quarter ever, posting record bookings of $23.4 million. The Tap Sports Baseball franchise saw tremendous growth of 48%, compared to the same period a year-ago that reflects the investments we made in improving the meta game and fine tuning our monetization engine. We have made progress in optimizing and improving this title every year and we believe that the trend can continue with each annual update going forward. Covet Fashion grew 7% quarter-over-quarter to $13 million in bookings and a seasonally slow quarter. The team behind the new creative leadership of Syracuse continue to make improvements to the new user flow, merchandizing features content, and season essentials. We also plan on upgrading this title as Elder and meta game and believe this is going to improve monetization engagement in retention over time. Our best-in-class live operations, user acquisitions, and marking efforts continue to drive steady results from our Evergreen titles. Kim Kardashian

[Eric Ludwig:]

Thank you, Nick, and good afternoon to everyone on the call. I will provide further details on our strong financial results for the second quarter, and then discuss our guidance for the third quarter and full-year 2018. Our topline results for the second quarter were as follows. Revenue was $90.2 million for the quarter, a 31% increase over last year's second quarter. Second quarter bookings were a record $99.4 million, a 20% increase over last year's second quarter. I would highlight that this is our second quarter in a row where bookings was a Glu overall record. 63% of bookings came from original IP titles with no royalties due. Ads and offers grew to $13 million or 13.1% of bookings, which is up 230 basis points from last quarter, due to robust ad placements in Tap Sports Baseball 2018. For the remainder of 2018, we believe that this level of ads as a percent of total bookings is the floor and there is the potential for our performance. Heading into the first quarter of 2019, however, I would expect to pull back from these levels due to the seasonally weak first quarter. When we talk about our games we have two types of games. Growth games and catalogue games. Growth games are titles that we believe will grow bookings on a year-over-year basis. We currently have three growth games

[Operator:]

Thank you. [Operator Instructions] First question comes from Darren Aftahi with Roth Capital Partners. Your line is now open.

[Dillon Heslin:]

Hi this is Dillon on for Darren. Thanks for taking my question. I guess the first one is with the new guidance not really including any of the new [indiscernible] now included new games in timeline for WWE, and other new games are scheduled being pushed back a bit, could you talk a little bit about some of the updates to maybe design home or the live ops in the meta games, and where do you see those starting to ramp to get you to that growth that you are forecasting year-over-year in those three growth games?

[Nick Earl:]

Yes, hi Dillon, thanks for the question. We are very focused on Design Home, it remains the most important title for us, and probably the greatest opportunity to grow and beat our numbers going forward. We are incredibly focused on its potential. In terms of what has worked so far this year that’s end game merchandising, we continue to improve the new user flow, we've added these monthly series that seem to do better every single month. They kind of get us to a new base camp for doing daily events, for doing these periodic bundle pack sales. So, that has really been the driver so far. Those will all continue for the back half of the year and hopefully we get better and better at all of them, including the way that we are getting ads into the game. In terms of going forward after that, there are things that we talked about on a couple of the calls that we’re still working on that are complex ads to the experience and they just take a little while to get in there, get tuned, and we want to make sure we do this very carefully and thoughtfully. So, we are definitely being methodical about that and that’s the things like the augmented reality and the meta game that we talked about a lot. So, we will start to hit those things in this year. I’m just not sure when we’re going to start to move the needle from the revenue and KPI perspective. Like I said, we will be very methodical and careful about adding these in because we have something really magical with Design Home we don't want to mess it up. So, that is the reason why we are being sort of slow in delivery here.

[Dillon Heslin:]

Got it. And then if I could ask a follow-up related to updated guidance, if you sort of use the midpoint's for 3Q and then the updated 4Q full-year guidance, it sort of implies a sequential decline into 3Q and 4Q being flat in comparison to 3Q, and then like you talked about giving Tap Sports Baseball seasonality in the second half being a little bit weaker, could you sort of help us out into how you get to sort of your implied guidance for 4Q, and maybe some of the, go ahead.

[Eric Ludwig:]

Yes, sure Dillion. This is Eric. Yes, our guidance for Q2 to Q3 implies about $3 million of degradation as shown in the backs of Design Home and Covet growing. Our Evergreen’s and Tap Sports Baseball declining in the net number being about down three, we will have continued baseball degradation in Q4, given this is a very seasonal title that Q2 is always the highest and the decline is Q1 and this next season starts. So, we will have continued declines in baseball in Q4, but we typically see strength in Design Home and Covet Fashion in the fourth quarter and so that will really be kind of flat overall revenue with the baseball declines and some further increases on Design Home and Covet Fashion. And then I think if you look at the profit margin, we are guiding at the high-end of kind of flat from Q2 to Q3 and Q3 to Q4. So, the good thing there is, we have got a little bit extra margin flow-through even though you've got $3 billion of slightly less bookings.

[Dillon Heslin:]

Thank you.

[Nick Earl:]

Thanks Dillon.

[Operator:]

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

[Mike Hickey:]

Hi Nick, Eric. Great job on the quarter guys. Congratulations.

[Nick Earl:]

Yes.

[Mike Hickey:]

I guess, first just curious if you can give us a little bit more color on WWE, I think that was game sort of stood out I think in terms of your excitement level Nick, and I think you are leveraging the Tap Sports Baseball in June so it seemed like everything was in alignment here, just wondering sort of how much rework it needs and why, and then on racing rivals the 7.0 doesn't look like it’s getting the trash, and I think you mentioned before that I could maybe give you some upside to your numbers, but just curious, how that update is impacting the franchise fan base and I have a follow-up.

[Nick Earl:]

Alright. I will take both of those. So, WWE, yes this is a really strong global franchise and property that we were building on top of our Tap Sports engine with our very experienced Tap Sports Baseball team. All those three factors made me in particular feel very confident that we're going to hit the numbers we wanted to on the time that we had. Now, the time was always aggressive, but I felt because given the three factors that we were going to get there. As you've got through beta testing, it was becoming clear that we were not going to get there. And one of the situations, you know the situations we are in Mike is that we sort of have the luxury here of being able to move things out in order to get the optimal quality. We just don't want to launch anything unless it truly has an opportunity to be a growth game. We’re seeing these growth games as so important to the business. They are about 76% of the revenue this quarter, so you can see they are really commanding the lion’s share of our bookings. So, we just don't want to add anything to that mix unless it really is something that could help us push the company further and further. So, what was happening with WWE is that the kind of the core loop is just not getting traction. We just didn’t have the fun factor and the meta game, the elder game, in other words what you do weeks or months into the experience was just probably not tuned to where it needed to be a little complex. So, we're really going to work on both the core loop, which is what you do second-to-second, right, when you start playing the game, as well as fine tuning the elder experience, and we think the two of those together is going to get this game to where it needs to be. We just want to be cautious here and so we’ve got lots of work going on, the team is really dedicated to make this work. We believe all the facts that we said earlier still come into play. We just want some time to get this thing to where we believe it can be and we will update once we get that back in the beta and we see the results. In terms of racing rivals, there is a little slightly different situation, but definitely some parallels. This is a very complex economy. It’s a very complex piece of code and the team is a very talented team by the way. They have been working hard on it, but they’re still trying to russell it to the ground a little bit. In similar vein to WWE, they’ve got some work to do on board the core loop and the elder game, I think there is probably more work to do on the elder game here to get that balance to the right place. So, we remain conservatively confident about its future. We haven't modelled anything in our numbers because we just don't know where this is going or it is going to be able to rebound to its numbers it used to be at but believe me we’re giving it our full effort to make that happen. So, this will be one of those things that we will just have to watch in beta and see or watch actually as the latest update gives us the KPIs, which watches us closely and we will sort of see when hopefully it is ready to move into the next level.

[Eric Ludwig:]

If I could add to that Mike. Even without new titles this year, we’ve increased our year-over-year high-end guidance to last year. We’re increasing $58 million of top-line and over 60% of that is flowing to the bottom line, and this is without new titles. So, what I'm very excited about is, as we get these two titles, these two or three titles to fruition early next year, we will see a stacking effect because everything that we’re planning to launch should be a growth game. Our current growth game should also grow into 2019 and that combination of the stacking effect of our current three growth titles, plus the new titles next year of WWE, Dash Town, Disney Pixar should be a stacking effect and really help us get expanded margins and get to higher base camp and another record of full-year adjusted EBITDA next year.

[Mike Hickey:]

Thanks guys. Second question, just curious on sort of, I guess your expansion opportunities from your growth games, maybe this was a licensing thing, I don't know, but your Tap Sports Baseball seems like you only have sort of a handful of countries, maybe I am not looking at the right channels, but it looks like just four or five countries, missing sort of big international markets like Japan, just how you're thinking about maybe expanding that game internationally? And similar with Design Home and Covet Fashion, I don't know if these games make sense for China, but obviously you have your relationship with Tencent, who is was also an owner. So, just wondering if those games are sort of opportune for international expansion?

[Nick Earl:]

Yes, it is a great question. We talk about this a lot internally. Currently, our bookings by geography is 84% in North America’s. So, we’ve had a long way to go, but I should view that as good news because I think there is tremendous upside and it’s relatively low hanging fruit as we certainly go after Western Europe and potentially Eastern Europe and other territories. I think Asia is much harder, even though baseball is obviously hugely possible in Japan, it is a tough game for us to take over and make kind of closely relevant in Japan. So, I think that there is probably not going to be a lot of international expansion for baseball. I think the expansion for baseball is going to really happen here in its current territories with obviously North America or the U.S., they are number 1 by far. And what we’re expanding there is really the monetization not the audience. And that is where the team has been so talented, and that is one of the reasons why I sure remain optimistic about WWE. They have really figured how to drive the average bookings per TAU in a way that’s been enormously positive on the bookings line for that game. So, I think that’s where we see the growth for baseball. It’s not really going to be in Asia or obviously in the European territories. With regards to Design Home and Covet Fashion, we are absolutely looking at international opportunities for both, and we’ve got nothing to announce today, but we are working on a few things and we believe there is significant upside opportunity in the future. We just haven’t expected – we don't expect anything to happen this year. This is more like of fiscal 2019 thing. So, we’ll keep you updated, but without doubt our partnership with Tencent, as well as other channels and opportunities are going to present growth opportunity for both Design Home and Covet Fashion, and that means that we're going to have to culturize the games in the appropriate way. We certainly know how to localize and we have already done some work there, but we got a lot of work to do on the acculturalization and then we’ve got to look at local live ops and local UA and things like that. So, expect that to be a news worthy item for a couple earnings calls from now.

[Mike Hickey:]

Awesome. Thanks guys.

[Nick Earl:]

Thanks Mike.

[Operator:]

Thank you. And our next question comes from Doug Creutz with Cowen and Company. Your line is now open.

[Doug Creutz:]

Hi, thanks. Facebook has been a historically really important marketing channel for you guys, I was just wondering, they’ve been making some changes to their policy as a result of pressures what they are feeling, are they doing anything or do you think they might do anything that could impact your ability to effectively use them as a marketing channel? Thanks.

[Eric Ludwig:]

Yes, hi Doug. We're not seeing anything right now. We have worked, obviously worked very close with them and we’ve had to make some adjustments here and there, but it’s been fairly minor, and obviously if we take all this very seriously the privacy issues, right through the GDPR and all this kind of regulatory issues that we have to be on top of, but one does not see anything effect the business in any meaningful way right now. We will certainly like I announced that if it does happen, but right now the future does not look murky or, kind of, nerve-racking to what's with regards to our relationship with Facebook. It is noteworthy that we have kind of expanded our channels a little bit. So, we’re sort of, we're mostly relying on Facebook, but we’ve got a lot of other channels that we use on for all the user acquisition. So, Facebook as a mix has actually dropped over the last few months.

[Doug Creutz:]

Okay great. Thank you.

[Nick Earl:]

Thanks Doug.

[Operator:]

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

[Drew Crum:]

Okay, thanks. Good afternoon guys. So, trailing 12-month growth titles represented about 67% of bookings with 76% this quarter. I think Eric you said that you thought that was going to continue to grow, what are the implications to margins or profitability? Next, I would think that with the new games you're going to incur a higher user acquisition costs, marketing, and royalty, so just want to understand how you're thinking about that.

[Eric Ludwig:]

Yes, sure. So, first off what I would look at is, which games have licenses that we have to pay for. So, today of our three top games, our three growth games Design Home and Covet Fashion are completely original IP free, and baseball has a royalty. That’s our point number one. Next year the ones we're talking about WWE and Disney Pixar will have licenses and Dash Town will be royalty free. So, that’s kind of one thing to look at. Number two, as we've proven the last year, we’ve increased our monetization by 50% from $0.20, average bookings per daily active user, Q2 of last year to $0.30 average bookings per daily active users today. If we are able to improve monetization and lifetime value, the flow through our that on the current user is super high margins. We don't need to do reacquire that user. We are able to just extract more money out of the user. So, the flow through is quite dramatic. And then lastly yes, you talked about the last piece of the mix is new titles will require UA dollars, but we’ve been spending about 24% to 25% of bookings on UA. And when we’ve launched titles in the past you might see a burst window around the first month or two, but then we really – once we're past that, you know the featuring in the first month of launch, everything becomes an ROI focused exercise internally where we look at the ROI dollars we have, we look at which titles have what kind of payback, and what ROI we are targeting and then we shift our budget accordingly. So, it is not that we spend around the launch because we have to. We spend around ROI. So that’s kind of how to think about growing EBITDA margin, but as I mentioned this past quarter, we have grown our top line $58 million this last year and we’ve done that with $4 million less operating expenses. Overall, this is excluding UA dollars. So, we’ve been really able to focus the business, you know fewer, bigger, better and I think as we get into 2019, we will have more of that to come. And I think the last thing is to highlight, you know I talked a lot about our growth games that we have, our new titles will be growth games and our Evergreen’s by definition are declining, and until we have one of our three growth games today, and or one of the new titles stop growing, we will not have any new Evergreen titles going into that Evergreen bucket. So, it’s going to be a while until we have an increasing Evergreen bucket because we don't have any titles that are going from growth to Evergreen For possibly another 18 months to 24 months. So, I think it’s important to look at the percentage of revenue from growth. That’s a healthy metric, not a negative metrics because we – by definition our titles are growing. Five in the last six quarters we’ve seen sequential growth from these core basket of growth gains, and we believe that’s going to continue and then when you add new titles in the mix, if they are growth gains, we will have a diversified bucket of number of growth titles, but hopefully growing every quarter or growing year-over-year for sure.

[Drew Crum:]

Okay, got it. Thank you. And then just a housekeeping item. Did I hear correctly, you are not anticipating any contribution for new titles this year and if so where does Titan World fit into that? Is that a 2019 launch or is that going to launch this year?

[Nick Earl:]

Yes, you did hear that right. So, everything from this year is from existing live operations of our existing games. On Titan World it still is in beta. We are still monitoring. We just don't really have any updates on it. So, we will have to wait until next call before we say anything in terms of where it’s out we're so monitoring and looking to see what the possibilities are. But yes, this year [indiscernible] is all about existing games with existing live operations, which I think we're getting better and better at quarter-over-quarter.

[Drew Crum:]

Okay. And then just one last question from me. You mentioned the advertising as a percentage of bookings in the quarter and you expected to stay in that rate in the second half, it sounds like Tap Sports Baseball was the key driver for growth this quarter, but given the seasonality that you discuss, what would – I guess what would be the driver behind sustaining that mix or the percentage of the bookings coming from advertising in the second half?

[Eric Ludwig:]

Yes, so the 13% that we had for this last quarter comes from a range of, you know some of our titles have 5% to 8%. Other titles have 20% plus. So, really there is a wide range and as baseball declines, and baseball is at that higher end of that level, but as baseball absolute dollar’s declines we see some compression there. However, if you follow Design Home and Covet Fashion recently you’ll notice that we’ve been ramping up in Covet Fashion more recently, access to video ads. Design home has some other things we're working on. So, I think the two other growth titles that are growing the back half of the year should seem more ad revenue and Design Home is a much bigger dollar revenue than baseball. And so, the declines of baseball will be offset on the growth of advertising on Design Home and Covet Fashion.

[Drew Crum:]

Got it. Okay, thanks guys.

[Nick Earl:]

All right. Thanks Drew.

[Operator:]

Thank you. [Operator Instructions] And speakers, I am showing no questions in the queue at this time. I would like to turn the call back over to CEO, Nick Earl for any closing remarks.

[Nick Earl:]

Great. Thanks, operator. I want to thank everyone for joining today, and we look forward to speaking with you all in the next call. Thanks.

[Operator:]

Ladies and gentlemen, this does conclude your program and you may all disconnect. Everyone, have a great day.