Glu Mobile Inc
Q3 2018 Earnings Call Transcript

Published: 7 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2018 Glu Mobile Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded for replay purposes. It is now my pleasure to turn the conference over to Harman Singh, Vice President of Finance and Investor Relations. Please go ahead.

[Harman Singh:]

Thank you, Operator. Good afternoon, everyone, and thank you for joining us on Glu Mobile's third 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 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 an investment decision. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures 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 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 non-GAAP operating expenses total in our financial tables. This data will provide 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'd like to turn the call over to Nick.

[Nick Earl:]

Thanks, Harman. Hello, and thank you for joining us for Glu's third quarter 2018 earnings call. I will review highlights from our strong Q3 financial results and then provide an update on our game development plans. Eric will then discuss our Q3 results in more detail, in addition to our fourth quarter and full year outlook. Glu continued the strong momentum established in the first half of the year as bookings reached a record level in the third quarter, along with another quarter of increased profitability on an adjusted EBITDA basis. These better-than-expected results are driven by continued strength in our Growth games. Bookings were $100.7 million, a 17.5% increase over last year's third quarter. We also reported our third consecutive quarter of improving adjusted EBITDA profitability, the highest result since 2014. This reflects double-digit adjusted EBITDA margins and demonstrates the benefit of scale in our business driven by top line growth. Free cash flow of $17.3 million in the quarter also reached a record level, providing financial flexibility to further grow our business. These significantly improved financial results support our longer-term growth strategy of creating titles that deliver repeatable annuity-like bookings and strong profitability over time. We are diligently following the playbook we created 2 years ago to transform Glu into a consistent and more profitable performer, and we remain committed to driving shareholder value. Design Home, Covet Fashion and Top Sports Baseball, our 3 Growth titles, collectively grew more than 46% year-over-year and contributed 79% of total bookings, up from 76% a quarter ago. This impressive performance was driven by our ability to add new game features and live operations in these titles, which help create a more compelling and engaging game experience that keeps players coming back. Design Home grew 37% year-over-year to $41.2 million bookings and was a clear standout in the quarter. Through the first 9 months of the year, Design Home has generated $114 million in bookings, already surpassing the $98 million in bookings for the full year 2017. Since its launch in November 2016, it has generated lifetime bookings of $215 million. We have successfully added updates and events that have deepened user engagement while contributing more flow-through to the bottom line. We released -- we recently launched our Midnight Masquerade theme series and saw fantastic results. It was the second-highest series in the title's history from a bookings per day standpoint. Covet Fashion grew bookings to $13.4 million, a 39% increase over last year's third quarter, demonstrating outstanding growth for a 5-year-old title. Additionally, we rolled out a series of Style Challenges in collaboration with Disney, featuring looks from various Disney franchises, including Cruella De Vil from 101 Dalmatians, the Queen from Snow White and the Seven Dwarfs, Maleficent from Sleeping Beauty and many more. In this style challenge, player reflects their creativity by utilizing exclusive Covet collection pieces to complete challenges and design recognizable looks inspired by their favorite Disney characters. As an early indicator of the series' potential success, we recently recorded the highest bookings per week for a Covet series. Looking ahead, we will continue this collaboration as we roll out additional character series seasonally over the next 9 months. The Tap Sports Baseball franchise reached a new record this year, with $24.7 million bookings growing slightly over the prior quarter's strong performance and 68% over last year's third quarter. Tap Sports Baseball has contributed $154 million in booking since its initial launched in 2014. We've been very effective in executing our live ops strategy resulting in significantly improved LTV for our Growth games. Average bookings per DAU increased 35% over last year's third quarter and 100% over the third quarter 2016, driven by improved user flow and better monetization. We are adding depth of play features to Covet Fashion and Design Home. For Design Home, we are also adding a full meta game, social features, augmented reality, internationalization and e-commerce that will support its growth next year. In addition to our three Growth titles, we have three new launches that are planned for 2019. Again, development strategy is to focus our creative talent and financial resources on building and adding Growth games, which we define as games that increase bookings year-over-year. This gives us significant upside potential from new games, augmented with a downside protection from our profitable annuity-like core business. As for WWE, we have redesigned its core mechanic as well as improved its Elder game. Our goal with the WWE title is to launch a perennial growth title that appeals to a large global audience year-round without seasonality. Beta testing in Diner DASH Town began a little more than 2 weeks ago, and the early results have been encouraging. Dash Town is our original IP that combines the best of our DASH franchise with a more accessible core mechanic to target a wider audience and a deep meta game to drive LTV. This game is expected to be tested in the Philippines for the next month as we continue to refine the user experience. Development also continues with our partners on the Disney games theme, Walt Disney Animation Studios and Pixar. We have made great progress in creating a game to combine these 2 iconic brands with Glu's strong development capabilities. Our current plan is to be in beta testing in early 2019. As we head into the end of the year, we believe we have taken huge strides in fostering creativity, simplifying operations and focusing on profitable growth and free cash flow. Our improved financial results and outlook for the full year put us on track for a record 2018 in terms of bookings and adjusted EBITDA profitability. We are tracking to this record performance for the company with no new game launches in 2018, a testament to the strength of our core business. We believe the best approach to increasing shareholder value is to continue to focus our resources on enhancing our live operations while developing new Growth games. In 2019, our goal is to stack bookings on top of our strong foundation with contributions from new Growth titles that we expect to enhance long-term value. Since our 3 planned launches for 2019 are in various stages of early testing, we are not in a position to comment on their expected bookings. However, we did want to share our preliminary outlook for our existing live games for next year. We expect our three Growth titles to continue to show strong year -- strong growth year-over-year with normal declines in our catalog titles. Based off the midpoint of our 2018 bookings guidance of $381.7 million, we anticipate a 9% to 11% year-over-year overall increase for the core business. Again, this does not include any bookings contribution from the 3 new games we expect to launch between May and September of 2019. I would like to thank our shareholders for their continued support as well as the Glu team for helping cultivate the company that is defined by creativity, hard work and dedication. In addition, I'd like to thank our players to whom we remain committed to providing rich, engaging and entertaining experiences for years to come. I'll now turn the call over to Eric.

[Eric Ludwig:]

Thank you, Nick, and good afternoon to everyone in the call. I will provide a closer look at the record financial results for the quarter and then discuss guidance for the fourth quarter and full year 2018. I will then provide a retrospective on the last two years as well as provide some further preliminary comments on 2019. As Nick said, we delivered strong financial results for the quarter. Revenue was $99.3 million for the quarter, a 22% increase over the comparable quarter last year. For the third straight quarter, bookings had a new record, reaching $100.7 million, a 17.5% increase over last year's third quarter. 64% of bookings came from original IP titles with no royalties due. Bookings from ads were $14.2 million or 14.1% of total bookings. Ad bookings grew 9% quarter-over-quarter, driven by strong performance in all 3 of our Growth games. The strong bookings performance was led by our 3 Growth titles, which contributed 79% of total bookings. Design Home bookings rose to $41.2 million, a 37% increase over last year and a $3 million sequential increase. The Tap Sports Baseball franchise was up 68% over the same quarter last year to $24.7 million. This was the first time in 5 years for this title that bookings grew from the second quarter to the third quarter. The team implemented a robust merchandising program in July and August, which drove this growth. Covet Fashion grew bookings 39% to $13.4 million compared with last year's third quarter. One housekeeping item. Beginning in next year's first quarter, we will present bookings in our Investor Presentation pie chart from 2 categories

[Operator:]

[Operator Instructions]. And our first question comes from Mike Hickey of Benchmark.

[Michael Hickey:]

I guess on your '19 guide on Growth games, Eric, the 21% to 25%, can you give us any more granularity, I guess, on maybe the respective growth profile from each game?

[Eric Ludwig:]

Probably not in great -- yes, sorry, what was the second question, Mike?

[Michael Hickey:]

And also curious if that growth also includes any international development from maybe Covet or Design Home.

[Eric Ludwig:]

Yes, great question. So probably not going to go much further in the details as to the breakdown of the 21% to 25%. I would highlight that we will see seasonality in Tap Sports Baseball in the first quarter, so that will be expected to decline Q4 to Q1 until the new title launches in the end of March. Certainly, our guidance of 21% to 25% does reflect some assumption of rollout of things like meta in both Covet and Design Home, which today there is 0 meta, as well as other programs like internationalization and some e-commerce. But we're not willing to break out within the 3 titles which ones have relative growth above or below the 21% to 25%.

[Nick Earl:]

Yes. And, Mike, I'll just add one thing kind of more qualitatively. As we add these things like meta and social and e-commerce and try to create more of an international business, the augmented reality, things we've talked about a lot in the last few calls, we were definitely going to be very thoughtful and careful because, as I talked about before, the metaphor here is that we're flying a plane across an ocean and trying to work on the engines at the same time, so we have to be very, very careful. So that's why these things have moved into next year and why we're just not really giving a lot of guidance around how they're going to work out. There's going to be a lot of experiment here. We think, overall, in aggregate, they're going to supply a lot of growth for the titles, but we're just being very methodical about how we talk about them and how we actually introduce them into the code.

[Eric Ludwig:]

But I would just add to that, that we feel very comfortable with the base business. Our core business is going to have overall growth with EBITDA margins -- adjusted EBITDA margins on par with the second half of 2018. I think that high end of our guidance range is about where consensus is today, and that assumes no contribution from new titles. So we're very, very happy that we've gotten to where we've gotten to with the core business. And if we have some success with our 3 new titles, they become Growth games, that should be a stacking effect in 2019 when we do have better visibility.

[Michael Hickey:]

Yes, okay. Looks good. Sounds good. The -- I guess the last question, the -- looks like you're sort of experiencing some sequential declines in your MAU, DAU, your aggregate, obviously. Just curious your thoughts on that and maybe if you could give us some perspective on those metrics within your growth and your catalog categories.

[Eric Ludwig:]

Yes. I mean, I think most of our declines in the MAU and the DAU over the last 12 months have come from the degradation of the catalog titles, catalog being both the Evergreens and the legacy titles, which, if you look at our average bookings per daily active user, we're at $0.32 this quarter. All of our 3 Growth games are above that average. All of our Evergreen and catalog titles are kind of below that average, and it really is a declining titles from the catalog titles on DAU and MAU. I believe we are about up 100,000 daily actives from the core Growth games on a year-over-year basis. So it really is a tale of 2 halves.

[Operator:]

Our next question comes from Doug Creutz of Cowen.

[Douglas Creutz:]

At the beginning of the year, you talked about you're feeling that building an Elder game into Design Home could really help. Obviously, it's continued to grow on the call. Today, you kind of mentioned still things you want to do. Can you kind of benchmark where you were at the beginning of the year and where you sort of see the Elder game being in, let's say, a year? How far down that path do you think you are?

[Nick Earl:]

Yes. I was just saying in answering Mike's question, we know that the things we're adding or we strongly believe they're really going to add the experience. We're sort of continually amazed that this game has grown so much and done so well when you really consider that there's not really strong and deep meta game and they're not really deep Elder experience. It really speaks to just how great the core mechanic and that core loop really works. We have been working diligently. It's a very talented development team that's working on this, and they are experimenting with lots of different componentry that will ultimately make up the Elder game. We are -- we will be going live early next year with a few things, then we'll just sort of keep adding over time. I actually don't expect that the Elder game was ever going to be complete. I view it more as a journey as opposed to destination. With that said, we believe we will start to see material benefits and contributions starting -- why don't we say like late in the first half of next year, I think, is when we start to see them.

[Douglas Creutz:]

Okay. And then just talking about your margins for next year being in line with sort of second half of '18. I assume that, that sort of reflects the need to invest in the new titles. Is there -- in terms of UA. Is there any reason to think that UA spend on the new games would be kind of out of line with what we saw, say, when you're investing on Design Home and the early part of that plus cycle?

[Eric Ludwig:]

Yes. So great question, Doug. So let me just repeat what I said. So our core business, which we just gave guidance of $415 million to $425 million, includes all of our current games, the Growth games, the catalog games. It also includes all of the OpEx for the titles -- the studio OpEx, not UA, but all of the studio OpEx for our 3 Growth games in 2019 as well as 8 teams that are already hired as of today for 2020 titles. So what we'll be missing in the upside will be new Growth game revenue and then any royalties that are royalties and then any UA costs. And as we've said in prior quarters, we launch -- when we launch a new title, and this will apply to Diner DASH Town, Disney/Pixar and WWE when we launch them, in [indiscernible] of the first 2 weeks of launch, I would call it we spend kind of a non-ROI escape velocity money of about $1 million to $2 million per title in that 1 or 2 weeks to help kind of get the game into orbit. After that, after featuring is done and that escape philosophy marketing is done, then we are spending ROI-based driven dollars based on whatever time horizon we feel, whether it's a 1-year payback or 1.5-year payback. And historically, that has ranged between 20% and 27% of gross revenue. I would not expect next year to see anything abnormal outside of that range for our new titles. In addition, I would say 2 of our titles are with licensed brand partners who are world-class at brand marketing and co-marketing with their partners. WWE and Disney/Pixar are both fantastic. So I would expect you won't see that maybe in the reduction of the 20% to 27% that I talked about, but actually hopefully be an accelerant and/or an additive benefit with more organic downloading from those brand partners given their co-marketing dollars. So kind of -- so with that, the marginal flow-through of an incremental dollar of revenue on the new Growth games next year, assuming they are Growth games, will be significantly higher than the second half of 2018 EBITDA margins for the whole business, which includes both the core business and the investment in new titles and G&A and sales and marketing headcount costs as well.

[Operator:]

Our next question comes from Drew Crum of Stifel.

[Andrew Crum:]

So on Tap Sports Baseball, can you talk about what's inside your guidance for 4Q in terms of the sequential decline you're anticipating? As I look at last year, 3Q to 4Q, the franchise declined by mid-teens on a sequential basis. Should we expect a similar decline? Or you're coming off a higher base this year, should we expect something more severe than that?

[Eric Ludwig:]

Yes. I mean, I'm not going to give you a specific number. However, what we did see if you look at the $0.005 charge from July and August, we grew -- and I mentioned this in my prepared remarks, we grew from the second quarter to the third quarter for the first time in the franchise history. 5 years, 4 years, usually that declines. We did some pretty outstanding merchandising in July and August around both the All-Star Game, bringing out some legacy player packs and some other merchandising. So I think we -- I don't know if we pulled revenue in from the fourth quarter into the third quarter or that we really got a lot of the wallet share. But I would probably expect to see a more accelerated decline in November, December than last year's October, November to December declines just because we are coming off from a higher Q3 base. And then those declines will continue into Q1 as they have every year, and then we will launch the new title right as baseball season starts, March 20, 6, 7 days, something to that effect.

[Operator:]

[Operator Instructions]. Our next question comes from Darren Aftahi of Roth Capital Partners.

[Dillon Heslin:]

This is Dillon on for Darren. I wanted to touch a little bit on sort of your 4Q advertising plans. I know you mentioned in your prepared remarks, I think, they're up 9% quarter-over-quarter. How could you see that maybe impacting some of the bookings growth that you -- given the 4Q implied bookings, is added advertising built into that? Like where if you can spend a little bit more or some of the trends can lead to a little bit higher advertising revenue?

[Eric Ludwig:]

Yes, sure. Thanks, Dillon. Yes. So last quarter, I said that the third and fourth quarters of this year, I would expect a floor for advertising revenue as a percentage of bookings to be about 13.1%. In Q3, that came in at 14.1%, really due to the strength of both baseball and Design Home and Covet Fashion. And baseball kind of over-indexes that average. Baseball is higher than 14.1% given the merchandising we did within that game. Given that baseball is going to decline, there's going to be some sequential pressure on that from baseball declining slightly or almost all offset but not completely offset by higher CPI costs. On the UA side, higher CPI costs are negative. On the advertising, higher CPI costs are positive. But those positive higher CPI costs in Q4 will slightly not offset the declines of baseball. So I would expect that Q4, that we're going to be around that 13.1% floor. And we'll probably come from getting there from the baseball declines, the higher CPI, and then you will see a bit of Design Home and Covet Fashion doing a better job of their advertising. So that's what we expect there. But into Q1, you might see a little bit of pressure on ad revenue as we always see in Q1, with the opposite happening on UA where UA will see lower CPIs and will have this golden buying opportunity to buy lower-cost UA dollars in the first quarter.

[Dillon Heslin:]

Got it. And then sort of related to a lot of the new features you talked about that you're going to roll out and/or buy just maybe potentially 1Q of '19 for some of the Growth games, like the e-commerce and the meta game, do you expect those to all come out at once or to be sort of a whole event for fiscal year '19 where they rolled out in a steady process?

[Nick Earl:]

Yes. Actually, we have them back and forth in this. But I think where it's going to work out is it's going to be kind of a steady rollout. There will be a major release with regards to the meta game for Design Home. And then we'll start to roll out other things like we talked about a lot as we look at things like e-commerce and augmented reality, and obviously, we're always improving the live operations. With Covet, we've got things like progression and story mode and social and other things we're adding in there. Yes, that will roll out. I would assume that they will roll out over the first half of the year. And of course, we'll still be enhancing and adding into the second half of 2019 as well. And that really goes for '20 and beyond.

[Operator:]

Ladies and gentlemen, at this time, that concludes our question-and-answer session. I would like to turn the call back over to Nick Earl, Chief Executive Officer, for any closing comments.

[Nick Earl:]

Thanks. I just want to thank everyone for joining today's call, and we very much looking forward to the call next quarter.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect, and everyone, have a great day.