Glu Mobile Inc
Q4 2017 Earnings Call Transcript

Published: 9 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Glu Mobile Fourth Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I'd now like to introduce your host for today's conference, Mr. Bob Jones, Investor Relations. Sir, please go ahead.

[Bob Jones:]

Thank you, Liz. Good afternoon, everyone, and thank you for joining us on the Glu Mobile Fourth quarter and year-end 2017 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'll be making forward-looking statements regarding future events and future financial performance of the company. Any future - 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 Form 10-K and Form 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 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 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. And finally, we encourage you to follow along with the slides during this conference call. And with that, I would now like to turn the call over to Nick.

[Nick Earl:]

Thanks, Bob. Good afternoon, everyone, and thank you for joining us today. Our fourth quarter operating performance and strong financial results capped off a tremendous year for Glu and our shareholders. On today's call, I will go through the fourth quarter and full year's highlights and discuss our growth strategies as we head into the new year. Then Eric will dive deeper into our financial results to provide color on our outlook for Q1 and the full year 2018. For the past 15 months, Glu has been laser-focused on executing the 3 pillars of our growth strategy that we outlined last year

[Eric Ludwig:]

Great. Thank you, Nick, and good afternoon to everyone. On today's call, I will provide further details on our final - financial results for the fourth quarter and full year 2017 and then discuss our guidance for 2018. Our top line results for 2017 are as follows, revenue was $80.2 million for the quarter, a 73% increase over last year's fourth quarter, with our 5 largest titles representing 78%. For the full year, revenue was $286.8 million, a 43% increase over the full year last year. Fourth quarter bookings were $83.2 million, a 44% increase over last year. And for the full year, bookings were a record $320.4 million, a 50% growth over 2016. As Nick mentioned, the quarter and full year booking strength was driven by Design Home, which generated bookings of $30.1 million in Q4 and $97.7 million in 2017. Design Home and Covet Fashion, from the Crowdstar acquisition, contributed 44% combined bookings for the full year. Tap Sports Baseball 2017 outperformed the steeper seasonal decline we saw in 2016 and generated $12.1 million in Q4. For the full year, Baseball bookings were $42.1 million, which was 56% higher than Tap Sports Baseball 2016 generated during the prior year. In addition, we saw outperformance from key Evergreen titles, most notably Kim Kardashian

[Operator:]

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

[Doug Creutz:]

Hey. Thank you. Eric, could you talk a little bit about, within the context of your '18 guide, how much is coming from titles you're already operating versus how much you're assuming that's coming from the 4 new launches that you talked about? Thanks.

[Eric Ludwig:]

Yes, sure. So we pretty much regard Baseball us an Evergreen franchise. So I'll really talk to the 3 other titles of WWE, Titan World and Dash Town. And we have about 15% of our 2018 guidance is coming from those 3 new titles, with the balance coming from either Growth titles or Evergreen titles.

[Doug Creutz:]

Is - what about social casino?

[Eric Ludwig:]

Social casino has got a very, very small amount given both the timing and it's a brand-new category for us.

[Nick Earl:]

Yes, Doug. When we think about a couple of the sort of side bets, we're looking at them. We'll get them into beta. We'll judge them accordingly. I know we kind of update - we'll update The Street on how we think they're going to do. But right now, we're very focused on the Evergreens and Growth games that are currently live. And that's the vast majority of our revenue. And then, of course, we've got like good bets with WWE and Tap Sports Baseball. We feel really good about Dash Town. And if there's little upside from these kind of side games, wonderful. If not, it's not going to be a hit at all.

[Doug Creutz:]

Okay. And also given Mike Olsen's pedigree, I mean, he worked on Star Wars

[Nick Earl:]

Yes, we haven't announced it, but I'd say - how I'd answer that, Doug, is that we really here believe in the creative leaders, figure out what they want to do. And the smart ones always kind of go to what they know really well. So I'll kind of leave it at that. And like Mike - and this is somebody I've worked with for almost 20 years. He's a smart, smart leader. And I feel like he knows exactly what he's doing and the team knows what they're doing.

[Doug Creutz:]

Okay. Thanks a lot.

[Nick Earl:]

Thanks, Doug.

[Operator:]

Our next question comes from the line of Darren Aftahi with Roth Capital Partners. Your line is now open.

[Darren Aftahi:]

Thanks for taking the questions. A couple, if I may. Just, Nick, could you talk a little bit about Design Home? I know you talked about localization strategy in the last call. I'm just kind of curious what the update is on that, maybe just timing on anything with the reality endeavors. And then secondly, just curious how kind of the Disney partnership kind of came about. And can we expect you guys to approach or work with more media conglomerates like that, that may have film titles, et cetera?

[Nick Earl:]

Sure. Great. So yes, Design Home had an absolutely fantastic year. We [made] close to $98 million, as I just said. And we do expect pretty significant growth this year. And that growth really comes from the addition of these added features that will drive engagement, retention and some will drive monetization. In terms of timing, we haven't talked a lot about it, with the exception of the sixth daily event. That is really happening right now. So sort of expect that in the next kind of week or so, maybe a couple of weeks. Localization will follow pretty soon after. Then we'll get to the deep matter - deeper meta game kind of towards the middle of the year. And augmented reality will probably be late summer or early in kind of Q4. So we felt like that's on a really nice path. There's also attention to the new user flow and their continual focus on how we optimize and improve the live ops and events. And this game is all about live events. So we've got a team that is highly motivated. They are really energized by this year and the plan they have, and we feel really good about kind of its value to Glu over the course of 2018. In terms of the Disney partnership, that really came about because of this new kind of style of rapid prototyping we do, which allows us to actually build something that's playable and then work with our partners or potential partners. So we took an early prototype down to Disney because we thought it was just a perfect IP for this type of game and presented to them, and they just absolutely fell in love with it. And we struck a deal which we're really happy with. And furthermore, they are just a tremendous partner on the marketing front. I mean, we were with them a few weeks ago and talked to a lot about all of the marketing vehicles and really harnessing the whole kind of Disney empire. It's absolutely incredible. So we're excited about that. We're excited about the pedigree of the team and we're excited about the progress we're already making. And then to kind of your last question, is that - does that indicate there will be potentially more of these kind of deals? And I - what I would say is that there's absolutely that possibility. We've got a couple other things in development right now that we're excited about that are more 2019 and 2020 that are unannounced. But any great partnerships out there in the licensing front, if the right - if the deal is right, the partnership is right, it's a good cultural fit, and most importantly, the creative leader and the team, they want to pursue it, then we're absolutely greenlight for that.

[Darren Aftahi:]

Great. Thank you.

[Nick Earl:]

Thanks, Darren.

[Operator:]

[Operator Instructions] Our next question comes from the line of Drew Crum with Stifel. Your line is now open.

[Drew Crum:]

Okay, thanks. Good afternoon, everyone. So Nick, your comparison of WWE to Tap Sports Baseball, you characterized it as being less seasonal or not seasonal and more global. So with that in mind, just based on Eric's comments that Growth titles or new titles would constitute about 15% of bookings, which, I guess, at the midpoint of your guidance, implies about $50 million. How do you - what are your expectations for WWE relative to Tap Sports, which - it looks like it will be a little more than $40 million in bookings in 2017?

[Nick Earl:]

Yes. Hi, Drew, so you have to remember that we're launching this in the middle of the year, not towards the beginning. So you've got to sort of annualize it. But yes, listen, we do have high expectations for the reasons you just mentioned. This is a global property, not a North American property, for all intents and purposes. And it is a property that has live events, and so it's marketed 52 weeks out of the year. There are some really big events that happened that we can key off. But this is something that sort of never goes away. They're an incredibly smart organization, super impressive, again, lots of good marketing vehicles. They really understand their customer extremely well. So we think we can partner with them well there. So yes, listen, we feel there is enormous potential. We're guarded against over-forecasting for obvious reasons. And we're in a position now as a company where we don't have to over forecast because we've got such strong live games and we've got the vast majority of our revenue coming from things we have an eye on and we know how they're going to pan out. So I would say we're being reasonably conservative. But we think this is one of those perfect matches. And I always say, there's no such thing as a sure thing in video gaming, but this is one of those opportunities that is fairly close to it. Feel like it's going to work out.

[Drew Crum:]

Okay. And then separately, Eric, can - did you give us the user acquisition cost as a percentage of bookings for the year? I heard 24%. But I think you were referring to the first quarter. So just clarification on that? And can you help us understand what changed in terms of the breakeven threshold with respect to bookings? You're previously saying $300 million. Now you're saying $280 million. So just want to understand what has changed.

[Eric Ludwig:]

Yes, sure. Yes, so on the bookings as a percentage for UA spend, in Q1, my guidance is 24%. For the full year, it's 23%. And then in terms of how our breakeven level went from - in Q3, if you annualize Q3's $85 million, our breakeven level in Q3 of last year was about $342 million. On that call in November, I mentioned that in 2018, I anticipated that being about $300 million. And then with the divestiture in Moscow, that's lowered us down to about $280 million. And really, the bridge as to how we went from that $342 million breakeven back last year to where we are today is a combination of the restructuring that we've done throughout the year, and now those are fully realized. Number two, we've got the executive comp plan that I talked about that is less cash - no variable cash comp and more performance stock options and performance shares that are tied to aggressive bookings and EBITDA, bookings and EBITDA, not either/or; and then lastly, we also dialed back our user acquisition. As we said from the middle of last year in May, last year was a transition year. It was also an investment year on Design Home for spending on user acquisition. That was such a successful campaign that even with us ramping up our user acquisition by about $33 million from what we had originally planned, we almost generated a breakeven level performance, excluding the royalty impairment. So last year was both a transition year and almost breakeven, but now we're spending less on UA, but we've also rug in [ph] the cost structure on the other components as well.

[Drew Crum:]

Okay. Thanks, guys.

[Eric Ludwig:]

Thanks, Drew.

[Operator:]

Our next question comes from the line of Brian Peganoff with Deutsche Bank. Your line is now open.

[Brian Peganoff:]

Hey, guys. Thanks for the question here. Feels like a lot of exciting developments around the quarter, especially where you're pivoting your long-term focus. Just want to take a step back real quick and see what your views are on the broader mobile gaming space in the next couple of years and how you fit in there and what makes you most excited about your position in the market. And then I have a quick follow-up.

[Nick Earl:]

Yes, great. Brian, good to have you on to call. I'll take a stab at this, and then Eric can jump in as well. I think it's pretty clear that this is one of, if not the most exciting sector inside of gaming, enormous growth potential. It's moving at a great clip. I do feel that there's beginning to be a separation from those who have figured out how to appreciate LTV, those who figured out how to drive user acquisition, those who kind of have the infrastructure to be able to scale appropriately and really understand the market. And I'd like to think that we are fitting into that category. So we feel great about the market. More importantly, what I feel great about is the fact that we've gone through just tremendous cultural change and adopted the right values here that really kind of forecast a lot of growth and frankly just like having the right kind of company and enduring company that's going to last. So the way we can work together. We celebrate each other's wins. It's really sort of one Glu. It's not competitive internally, kind of the [staff] we have for each other inside, so a lot of cultural, positive changes. And then finally, I look at trajectory of the company, 2017 was really an investment year. But as Eric just said, it really came out to be breakeven. 2018 is going to be clearly highly profitable, and we know that investors are excited about us kind of driving profit quarter-over-quarter into something meaningful. And then 2019, as we sit here today, looks like that's the year that we can really scale for the next level. And we've already talked about what margins that we believe we can get to at the next level. So we just feel like we're in a great trajectory inside of a great sector inside the market. Great culture, and while there's always bumps on the road, I feel like we are able to kind of withstand and move on from those.

[Eric Ludwig:]

Yes - no. I'll add to that, Nick. And Brian, thanks for the question. We set out a year ago when Nick became CEO with some financial goals, getting to Phase 3 of profitability. Originally, we said that we felt that sustained profitability would occur in Q3 of 2018. We actually essentially achieved that in Q3 of 2017 because we had about a $200,000 loss, put up substantial profit before royalty impairments this quarter. And we feel very, very confident that we will be sustained and growing EBITDA profit every quarter this year. And we don't need a lot of contribution even to hit our substantial EBITDA targets for the year from that, call it, 15% of our revenue from new titles. I think, also, we've really got a much more cleaned up free cash flow forecast model given celebrities. And we really have kind of finished out the minimum guarantees, either written them off or have pretty much paid off everything that was due. We've got $5 million remaining that will be paid in 2018 and will really allow us to be free cash flow positive along with being meaningfully EBITDA positive as well.

[Brian Peganoff:]

Awesome. The follow-on [ph] is much quicker. I just want to hear a little bit about the range here with the WWE with regards to cross-promoting the title alongside live broadcast, special events, stuff like that.

[Nick Earl:]

Yes, that's a great question, and we are deep in talks with that organization. We don't really have any - a bunch of details on that. We will come back to you with what the go-to-market plan is. But you can rest assure that will be taking full advantage of their network and their capability. As I mentioned earlier, they understand our customers so well, and it turns out those customers are just everywhere. Some of them are like sort of closet fans, but it's amazing how many fans there are for WWE. So we feel like we need to work very closely with them, along with using our - leveraging our infrastructure, especially user acquisition, to optimize and maximize the opportunity.

[Eric Ludwig:]

But as Nick mentioned earlier, we're so excited for that title for so many reasons. One, it's being built by a game team that has done sports for Glu before. It's being built off a game engine that has just proven itself. Tap Sports Baseball game engine has grown revenue 56% year-over-year, but baseball is a very seasonal title. The biggest revenue quarter is always Q2, and then it goes down, down, down. Then it grows. And overall, it grows up. But WWE, as Nick mentioned, has broader global appeal. And they have 2 events a week every week of the year. They have their own TV channel. So those combinations of a fine-tuned team and a fine-tuned game engine with a broader global appeal with a recurring slate of events and opportunities, we think, is what's going to set us really apart for next year.

[Brian Peganoff:]

Thanks a lot guys, Congrats.

[Eric Ludwig:]

Thanks, Brian,

[Operator:]

And I'm not showing any further questions in queue. I'd like to turn the call back to Nick for any closing remarks.

[Nick Earl:]

Great. Thank you. Thanks, everyone, for joining today's call. 2017 was a transformative year for Glu, and we very much look forward to continuing the great momentum this year. Thanks.

[Operator:]

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