Glu Mobile Inc
Q2 2016 Earnings Call Transcript

Published: 3 Aug 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2016 Glu Mobile Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow 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. Greg Cannon, Vice President of Finance and Investor Relations. Sir, you may begin.

[Greg Cannon:]

Good afternoon, everyone and thank you for joining us on the Glu Mobile’s second quarter 2016 financial results conference call. This is Greg Cannon, VP of Finance and Investor Relations from Glu Mobile. On the call today we have Chairman and CEO, Niccolo de Masi; and COO and CFO, Eric Ludwig. During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Any forward-looking statements that we may make today are based on assumptions that we believe 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 risk 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 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 today’s press release regarding our second quarter results, as well as the supplemental presentation accompanying today’s earnings call that can be accessed via our Investor website at www.glu.com/investors. Finally, in order to comply with recently issued SEC guidance on the use of non-GAAP financial measures, we will be changing the way we present to discuss certain non-GAAP financial measures, specifically we will no longer discuss non-GAAP revenue, but will instead disclose bookings information which is calculated consistently with how we historically calculate non-GAAP revenue. In addition, we will be discussing certain adjusted financial measures, such as adjusted gross margin, adjusted operating income loss, adjusted net income loss and adjusted EPS. These non-GAAP financial measures are calculated in the same manner as we have historically calculated non-GAAP gross margin, non-GAAP operating income loss, non-GAAP net income loss and non-GAAP EPS. With that, I’ll turn the call over to Niccolo.

[Niccolo de Masi:]

Good afternoon and welcome to everyone joining us as we discuss the opportunities in Glu’s business. I'll begin today by outlining our second quarter results. We outperformed the midpoint of our Q2 bookings guidance by 7.2%. Q2 EBITDA came in ahead of the midpoint of guidance by $3.1 million. Underpinning this outcome was a continued strong performance of our Tap Sports Baseball and Cooking Dash Title. Other existing [indiscernible] titles in portfolio also demonstrated vibrancy in the quarter, with users reengaging with our updates and live ops. Our Racing Rivals games retained its users and revenues well, despite a strong launch from Zynga CSR2. This elongation of existing franchise revenues is an important theme – is to return to on today’s call. Our partnership with Tencent to westernize and launch WeFire in Glu's co geographies saw us debut Rival Fire on July 19. Feature and ILS was muted possibly due to sensitivity around the tragic terrorist events that have unfolded recently. So far we've seen very strong reviews from the Rival Fire community and decent retention for shooter title. CPIs have been acceptable, however, the monetization has been slow to ramp up, potentially due to the complexity of its medi game systems. Rival Fire has depth and unique synchronous PVP game play mode, we intend to market and support this title with the same ROI philosophy as all other games in our portfolio. Our GORDON RAMSAY launch in late in Q2 met expectations, with life term value or LTV meaningfully improving over a predecessor or cooking dash game. Gordon's brand appeal is strong in English speaking country, but they not resonate as well as expected in other languages. We have such increasing seen interesting potential in creating future original IP game brands that can be supported by multiple celebrities with diverse international following. An example this new product category is a new resource management game called Ultimate Chef that we will launch in H1 2017. Ultimate Chef is build by veterans of Zynga's frontier wheel and cashable teams and will be supported by a new celebrity approximately every 90 days. We continue to focus on long-term talent denting our studio and appointed EA veteran Mark [ph] as SCP of studio. Mark was previously the CEO of EA Mobile and GM of EAs Pogo platform. He is based on H2 and was responsible for growing our investment in original game IP brand supported by multiple celebrities. In addition, we have strong second party development partnership with Travis Boatman carbonated studio. Travis was formerly an SVP of both Zynga and EA. Our partnership with Boatmen will create unique free deploy app centered around topical current events. Travis is team is composed of veterans fro EA, Zynga, Sony and Blizzard including their chief creative Coby [ph] I will now move on to the key theme of today's call which what we call ever green games. Over the past year I discussed on earnings call the fact that in a maturing industry landscape new block busters have become rarer. When new hit occur they can be exclusive as the overall global mobile games market continues to grow. Pokémon GO's recent success is a strong example of the upside potential possible in our sector. Once it’s highly successful it also remains so for longer. We have clearly seen this in our Racing Rivals, Kardashian, Dear Hunter Cooking Dash and Tap Sports Baseball franchises. Whose focus over past 6.5 years has historically been on shipping a healthy cadence on new tittles, as such our approach to supporting existing titles has been relatively lean and content centric. We have set in new environments, cars, weapons and characters that have rarely added new game play modes, systems or social features. We have grown a number of our franchises year-on-year via the release of successful sequels. However, pretty single SKU, only Racing Rivals on iOS has avoided revenues declining year-on-year post release. As with small minority of games in the App Store that have shown year-on-year growth, Racing Rivals has a highly engaged player community and deep meta-game. In consultation with Tencent over the past year, we have come to the conclusion that there is significant latent potential in most, if not all, of our major live games. Tencent has also been successfully in not only arresting declines, but in fact, growing revenue in older titles. The key to this is focusing on the biggest spending and most engaged players, so-called whales and elder gamers. Installs and dow drift down over time. However, by adding the right new gameplay modes, systems and social features, we believe it possible to dramatically increase bookings from highly engaged elder gamers and whales. Average bookings per paying user or ABPPU, as well as spender retention are two key metrics that we believe can be moved up by learning from Tencent's best practices. In many Glu games, ABPPU remains considerably below what many top 10 grossing games achieved. Spend retention similarly is often months, not quarters, in most of our titles. By improving these two aspects of our elder game, we would stand to not only potentially arrest declines in our leading existing titles but even reverse them. Combining this top line element with our cost reductions from last quarter, we anticipate being able to exit 2017 with catalog bookings covering our entire fixed cost base. Racing Rivals is currently the closest example we have to an evergreen game in our portfolio. This is due to its community as well as live ops, incremental systems and new cars that we have added throughout the past three years. We plan significant updates for the franchise by year end, which we expect will allow us to increase lifetime value, maintain and even grow our market share in the genre. Tap Sports Baseball has been the baseball mobile gaming category leader for the past three seasons. The current Tap Sports Baseball 2016 title has seen a doubling of LTV from the 2015 version due to significant socio-competitive refinements. We've seen a powerful demonstration of the upside potential and sports by the performance of EA's Madded Mobile and NBA LIVE Mobile this year. We are, as such, doubling down on Tap Sports Baseball and on track to make a dramatic step forward next season in visual fidelity as well as adaptive systems and ABPPU. We aim to similarly evolve Kim Kardashian, Deer Hunter, Cooking Dash and Gordon Ramsay

[Eric Ludwig:]

Okay. Thank you, Niccolo. Overall, the second quarter results were ahead of our expectations. The sequence and flow of my script will be slightly different than in prior periods due to the inclusion of additional disclosures to reflect the recent SEC guidance on the use of non-GAAP financial measures. I will first summarize our GAAP financial results for the second quarter of 2016. I will then go through our Q2 bookings and our Q2 adjusted results. I will conclude by providing guidance for the third quarter and full year. Our Q2 GAAP results are revenue was $48.4 million. Our five largest titles during the second quarter represented 69% of revenue. In the second quarter, 61% of total revenue came from titles where we paid a royalty of some kind to an external IP holder. Gross margin was 57%. Total operating expenses were $40.9 million. We’ve recorded a non-cash $2.3 million impairment and a $2.1 million mark-to-market charge related to our investment in plain vanilla, a combination of our better-than-expected revenue and gross margin, plus OpEx that was in line with our expectations resulted in a loss of $17.9 million or $0.14 per basic share. Now turning to our Q2 bookings and adjusted results. Bookings were $50.9 million and above the high end of our guidance. Our five largest titles during the second quarter represented 74% of total bookings, down slightly from last quarter. In terms of bookings, the largest titles was Tap Sports Baseball, generating $11.3 million or 22% of total bookings. Cooking Dash was $8.9 million, while Kim Kardashian

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Mike Olson with Piper Jaffray. Your line is now open.

[Mike Olson:]

Hi good afternoon. So it sounds like you're going to be focusing on making fewer titles better and more sustainable over a longer time frame. Is that kind of the idea? And if so, does that translate into fewer new title launches coming in the next several years? And could you repeat what the evergreen titles that you're going to be most focused on? Tap Sports Baseball? And what was the rest of the list that you rattled off? Thank you.

[Niccolo de Masi:]

Yes, hi Mike. So I'll take this in turn. So effectively, we're doubling and tripling down on the titles that already are what I would consider a genre leader. So we're number one and number two in each one of the three or four or five genres, depending on how you break up sports and racing. But Tap Sports Baseball, Racing Rivals, Kim Kardashian, Deer Hunter, Cooking Dash, Gordon Ramsay

[Mike Olson:]

This the second question about the evergreen titles.

[Niccolo de Masi:]

So looking for more information on -- evergreen title is? Or evergreen titles were?

[Mike Olson:]

Yes, you got it covered. KK, Racing Rivals, Kim Kardashian, Gordon Ramsay

[Niccolo de Masi:]

Yes, I mean, there are some tier 2 ones that we're either going to bring better versions out on or double down. Just to be clear, by evergreen, we mean something that can be a perpetual revenue generator and can be either flat annuity or growing annuity. And how we achieve that vary little bit by each title. So obviously, Racing Rivals is exactly all about adding new cars, new events, keeping the community going as a general theme. Titles like Kim Kardashian don't have much in the way of social or much in the way of community. We actually have more community and social in our Kendall and Kylie genre game. And so those rooms to add – there's room to add more social into Kim. More room to add certainly new modes to games like Deer Hunter 2016 that are still installing, but obviously having – haven't been strong for us in the last year as when they launched. And Gordon and Cooking Dash, and baseball, we're feeling really good about, given that they've shown that they can launch and grow. So we're starting to get some evergreen behaving the portfolio already. If you look at our investor deck this quarter, we're showing not only how baseball is improved year-on-year but also how Gordon Ramsay improved on cooking. And I'm also showing how we're thinking through the definition of evergreen, community focus. It's about counter title fundamentally grow year-on-year. And I think it's a good point in Glu's history to say it's double-down accordingly because we've had 85 titles launched in the last six and half years, and we've been able to see which ones have come to the forefront. And so our sort of moneyball strategy of doubling down on genres we're already a leader in or the winner in, in most cases, we think can bear a lot of fruit the next 12 months.

[Mike Olson:]

All right, thanks a lot.

[Niccolo de Masi:]

Thanks Mike.

[Operator:]

Thank you. And our next question comes from the line of Michael Graham with Canaccord Genuity. Your line is now open.

[Unidentified Analyst:]

Hey it's Austin [ph] on for Mike. Just two quick questions. Installs were kind of low. Just wondering if that's from App Store dynamics, the number of launches maybe competition? And then as it pertains to your celebrity genre, it sort of struck me that Kim Kardashian's success came from the sheer level of activity coming from her. I mean, I remember like a lot of Instagram and tweets from her in the first year. First of all, did you pay for that? Or is that all organic? And second of all, are you having that same level of partnership with your new celebrity launches like Nicki Minaj or Taylor Swift? Thank you.

[Eric Ludwig:]

So I can tackle the download question and Niccolo can tackle the second question there. So installs on a quarter-over-quarter basis were down. We had really two titles launching this quarter, Britney Spears the middle of the quarter and Gordon Ramsay with two days up in the quarter. And so Britney was a bit of a muted outperformance and [indiscernible] was late. Baseball had launched at the very tail end of Q1. And there's a slide in the earnings deck, Slide 16, I talked about how this version of Tap Sports Baseball '16 had more downloads year-over-year than the prior version. So we had shown in outperformance both in terms of downloads as well as bookings from that title. But it's a pretty small U.S.-focused title. I mean, Gordon Ramsay really had two days of contribution to the quarter. Hence, that's the reason why overall downloads were down. The other question, I want Niccolo to chime in there.

[Niccolo de Masi:]

Look, just add on that, Austin. You can track in our investor deck the fact that we made as much about money in ad revenues as we spend in advertising. And you hear a lot of talk about CPI is going up. And that's actually happening. We are fortunately hedged out on that front because we're sort of net neutral ad player. But there's no doubt that, in a matter of revenue competing in the amount of – let's say quality products competing for installs, continues to increase in the world that has gone mobile. Six years ago, gaming was the only thing in the App store in a lot of ways. Today, you've got Facebook and social media. And you've got a vibrant music and video market. Netflix, HBO, Showtime, Google, YouTube, Pandora et cetera. All are very strong mobile grossing products. So ultimately, I think that we need it would be surprise and delight we bring out a title in order to sort of get the number one free and hold that spot. And that's what drives the installs. We’ve done it before. We're cautiously optimistic with titles like Nicki Minaj this year, Taylor Swift, at the tail end of this year; early next year could do it. And there's more titles that we're working on including ultimate Chef and beyond that are going to be pretty, pretty unique. So more time and bigger teams gives us more of an ability to surprise and delight, which I think is not only a necessity but also the upside opportunity in our portfolio model. As regards to celebrity support. Believe it or not, think a lot of the Kim Kardashian effect was earned media. So Kim does a lot. And she’s a great partner of ours. And we continue to work together closely, exchanging everything from ideas to approvals, to brainstorming weekly, if not sometimes, daily. But she was first. And it was a big hit and there was a lot of earned media and the press and TV, et cetera and print. Classic word-of-mouth rally that I think help pushed the installs in that game. Since then, you're correct. We have not seen that level of, call it, cultural – sort of phenomenon from anything we've launched through Gordon Ramsay, although that doesn’t necessarily mean that they haven't been good workers and good partners for us. I mean Gordon's been outstanding and he is got the same attention of detail as came for his game, he did a wonderful launch event for us and he is got a fair amount of earned media and he is very active on so for media. My comment on Broadens fan [ph] is being great English and not so great, not in English is an interesting one because if you dig into our investor deck you will see that we've actually had pretty flat revenues in North America and we've had less than flat revenues in the last few quarter in international territories. And so we are holding our own or better with our focus on North America, titles like Transport Baseball do well, their Gordon Ramsay does well here, Deer Hunter does well, Racing Rivals is well here. We are not beating companies like Tencent in their home markets in China or big companies like Net Marble in Korea, little owned [indiscernible] and DNA in Japan. So I think this cover natural part of the maturation of industry, Tencent invested in our business because they wanted to grow overseas and we are doing a pretty good job of that in sort of English and North America ultimately as I said in prepared remarks, we are looking to expand our Sabri [ph] model to be increasingly to go forward title, future titles who want to see more Glu original IP branded titles like Ultimate Chef, they can be supported by not one celebrity but disported by one every quarter and if we think carefully about who we work with we can do a better job of the appealing to all, broad demographics but also more key territories as well as frankly emerging markets which of course are still big growth opportunity here. I mean there is only maybe 2.5 or 3 billion partners in the world, and there is 7 billion people, so there is still another few billion people that get together smartphone but they are all in Africa, Middle East, South East Asia, Latin America et cetera. And that’s something that Glu does good job of because we always cater for international languages but I think increasingly our philosophy of building barriers to entry in our marketing and building brand entry with celebrities will be applicable but we'll have to work with local celebrities overseas, not just US centric global which are great for North American English and not as power for Saudi Arabia et cetera or the Belgium Congo [ph] et cetera. So that’s your questions.

[Unidentified Analyst:]

Yes, very helpful. Thank you.

[Eric Ludwig:]

Thank you, Austin.

[Operator:]

Thank you. [Operator Instructions] And I am showing no further questions at this time. I like to turn the conference back over management for any final remarks.

[Eric Ludwig:]

Wonderful. Well, let me close by thank you my colleagues for their efforts and our stockholders for their patience and support. We look forward to executing on our new evergreen game focus and long-term Nicki Minaj title. Thank you again for joining the call.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude program, you may all disconnect