Glu Mobile Inc
Q3 2016 Earnings Call Transcript

Published: 4 Nov 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 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, VP 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 third 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 Executive Chairman, Niccolo de Masi; President and newly named CEO, Nick Earl; 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 forms 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 third 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 and discuss certain non-GAAP financial measures in future quarter, specifically we will no longer adjust for the change in differed revenue and differed cost of revenue when arriving on our non-GAAP measures. However, we will provide the change in deferred revenue -- deferred cost of revenue information so that investors can calculate out non-GAAP results based on the same methodology we have used in prior quarters. For today's call, all non-GAAP measures reported as they previously defined by Glu. With that, I'll turn the call over to Niccolo.

[Niccolo de Masi:]

Good afternoon and welcome everyone joining us. Today we have three important developments in Glu's business to discuss. The first, is the evolution of my own role Glu. Related to that, the second is the appointment of my successor as CEO. And third, is our consummation of a transformative acquisitions. I will touch on each topic before passing the call in turn to my colleagues; Nick Earl and Eric Ludwig. We will be available take analyst questions thereafter. Beginning now with the evolution of my role at Glu. We announced today that I have transitioned from my role as Chairman and Chief Executive Officer to become the Company's Executive Chairman. This is a position newly created by the board that will enable me to focus on strategy, M&A and maximizing Glu's celebrity relationships. Importantly, it has paved the way for Nick Earl to become Glu's CEO who is a game industry veteran with a proven track record creating hit games. Glu's experienced tremendous fundamental growth since I assume the CEO role in January 2010. We successfully negotiated the platform transition from feature phone, paid downloads to Smartphone free to play. Our revenue has grown between 2010 and 2015 as CAGR of nearly 30%. Our balance sheet in this period has been strengthened from a net debt position of $14 million on December 31, 2009 to a net cash position on September 30, 2016 of $147.5 million. I am proud of all that Glu has accomplished over the past 27 quarters and believe the time is now right for me to transition to a fully strategic role. In addition to my role as Executive Chairman, I have accepted and I'm excited about a new leadership role working with Andy Rubin, the creator of the Android Operating System and ecosystem. My work with Andy Rubin will be in the hardware sector, and thus entirely non-competitive to my involvement with Glu. Moving now to our second significant topic, the appointment of Nick Earl as our new CEO. Glu's Board of Directors is pleased to announce today that Nick Earl has been named to Glu's new CEO. Nick is an experienced veteran of electronic arts, and mobile gaming, who has been with Glu for just under a year serving as our President of Global Studios. Our strong and experienced C-suite looks forward to continuing to work with Nick, as we execute on existing and new initiatives, and shake them to drive long-term shareholder value. Today Nick has rightly elected to prioritize leading the successful integration of a significant acquisition we announced minutes ago. SRT [ph] will be departing for all hands with our new Crowdstar colleagues after the Q&A. I am delighted Nick is my successor and excited for him to lead the company with the creative talent-centric strategy that has delivered tremendous growth for organizations, such Electronic Arts, Pixar an HBO. On next quarter's earnings call, Nick will outline the broad strokes of Glu's strategic evolution, as well as the changes he will implement. I shall now move on discussing the transformative acquisition we announced this afternoon and my final transaction as CEO. Over the past 24 months, we have monitored the progress of the top grossing fashion app, Covet Fashion. We have been continually impressed with the fact that unlike most games, Covet has grown steadily for three years now. This phenomenon is due to Covet in fact being a platform for engaging with high-end fashion, judging and competing for the best look in dozens of weekly events. Crowdstar pioneered this platform mechanic and has generated over $100 million of cumulative revenue thus far with Covet. Having long coveted Covet, we are delighted to be adding it to the Glu portfolio of genre leading studios and original IP. We anticipate potential upside synergies from our celebrity relationships as well as world class user acquisition and advertising. In addition, Crowdstar also anticipates launching a new platform interactive app based around designing one's home as opposed to building out one's closet with the latest fashions. Crowdstar's home app has been in beta in this past month and as exhibit metrics that appear to bode well for building the second long-term annuity beyond Covet. My colleagues will go into more detail on this transaction. However, I would summarize the Crowdstar acquisition is bringing four great assets to Glu; one, a long-term annuity in the form of Covet Fashion; two, leadership in the fashion category; three, a company which pioneered and understands how to build highly social, interactive mobile committee platforms; and four, a validated new growth driver for 2017 in the form of the new home app. I'm tremendously proud of our team for consummating such a transformative transaction that we believe offers a significant growth opportunities for Glu in the fashion and home categories. I now hand you over to my successor as CEO, Nick Earl for a few brief words.

[Nick Earl:]

Thanks, Niccolo. Hi everyone, first let me start off with just a few words on my background. As Niccolo mentioned, I've been here at Glu for almost a full year. Prior to Glu I was President of Worldwide Studios at Cabam [ph] where we launched the Top 10 Hit Marvel Contest of Champions; and prior to that I was at Electronic Arts for 13 years. The first nine years at EA were spent writing console and PC studios, developing franchises like Tiger Woods, James Bond, Lord of the Rings, Dead Space, The Godfather, Command Conquer; and the last four year I was heading EA Mobile where we launched the big evergreen hit, Simpsons Tapped Out, Real Racing 3, and the Sims Replay. As for this appointment to CEO, I view it as an immense honor and responsibility. I intend to give everything I have to make Glu Mobile a success as we navigate the constantly changing landscape in the mobile premium space. Over the next two months I'll be working with C-suite and our Board of Directors to finalize our 2017 operating plan, and I will also be focusing on how best to evolve our evergreen and talent strategy. I'm confident that we can improve our product lineup and odds in creating and launching successful games, and I believe we can set up ideal conditions for hit creation which will translate into improved performance for the company. Thanks, I'll hand it out to Eric now.

[Eric Ludwig:]

Thank you, Nick. Overall, the third quarter results were in line with our expectations excluding impairment charges. I will first summarizer our GAAP financial results for the third quarter 2016. I will then go through our Q3 bookings and adjusted results. As Greg mentioned upfront, this will be the last quarter that we go through in detail the adjusted results, due to the new accounting guidance from the SEC. I will conclude by providing guidance for the fourth quarter and full year. Our Q3 GAAP results -- our GAAP revenue was $51.4 million. Our five largest titles during the third quarter represented 71% of GAAP revenue. In the third quarter 64% of total GAAP revenue came from titles where we paid a royalty of some kind to an external IP holder. GAAP gross margin was 9% negative which included $29.8 million in prepaid royalty impairments and $4.6 million in license fee impairments. Just under half of these impairments were related to rival fire with the remaining due to the underperforming celebrity titles. Excluding these impairments, gross margin would've been 49%. Total GAAP operating expenses were $37.3 million and GAAP loss was $43.7 million or $0.33 per basic share. Excluding the impairments GAAP loss would approximately $0.10 per basic share. Now turning for Q3 bookings and adjusted results; bookings were $51.3 million at the high-end of our guidance. Our five largest titles during the third quarter represented 74% of total bookings, same as last quarter. In terms of bookings, the largest title was Tap Sports Baseball generating $9.1 million; Gordon Ramsay Dash generate $8.3 million, while Cooking dash was $8 million. Kim Kardashian Hollywood generated $6.7 million and Racing Rivals bookings were $5.8 million. In the third quarter 67% of total booking came in titles were we paid a royalty of some kind to an external IP holder. Our adjusted gross margin of 5% included the prepaid royalty impairments I mentioned earlier. Excluding the prepaid royalty impairments, gross margin would have been 63% which was slightly above our guidance. Total adjusted operating expenses including the depreciation of $800,000 were $34.1 million in the third quarter including $7.5 million for user acquisition. This was favorable to the high end of our guidance range due primarily to lower spending on marketing, bonus attainment, and external development cost. In Q3 we reported adjusted EBITDA loss of $31 million, excluding the royalty impairments we have exceeded our adjusted EBITDA guidance range. Income tax expense in the third quarter was $100,000 and weighted average basic shares outstanding were $133.1 million for the quarter. Now turning to the balance sheet, as of September 30, our cash in equivalence totaled $147.5 million a decrease of $10.5 million from June 30. The decline during the third quarter was primarily due to the $10.8 million in royalty advances from previous signed license agreements. We additional used $800,000 primarily for our build out of our India office, as well as a $0.5 million for the Poky [ph] acquisition. These outflows were partially offset by cash flow generated from ESPP and other option exercises. Before I discuss our financial outlook, I want to provide some additional details on the acquisition of the controlling interest in Crowdstar which we announce today. We acquire shares representing approximately 80.6% of the issued and outstanding voting power crowds star directly from certain Crowdstar investors. In addition, this purchase trigger certain drag along provisions containing a voting agreement among crowds star and certain of the stockholders. One the drag along procedure is completed; we expect to own approximately 98.5% of the out setting sitting voting power of Crown Start. We don't intend to acquire the remaining 0.5% as soon as possible thereafter. The transaction valued Crowdstar approximately $45.5 million. Encountered 2015 crowds star generated approximately $43 million in total bookings adjusted EBITDA of 2.2 million. In 2016 the company is currently on approximately $48 million bookings run rate. This calculates out to an approximate current year acquisition revenue multiple 0.9 times. In terms of EBITDA we expect that they will lose approximately $1 million in EBITDA 2016 while heavily investing in their new title design home. We believe Design Home will launch later this quarter. Their titled model what the success of Covet and is currently in beta and as of last night was ranked 54 top grossing app in Canada on the IPhone. The acquisition was opportunistic for Glu as Nick mentioned we are very excited to add Covet fashion their flagship fashion in styling games with over &35 million sold to date to the Glu portfolio. The acquisition of a controlling interest in crowds star closed yesterday. We believe there are two primary areas of synergies. First, we believe we can improve crow star ad revenue generation. Crowdstar generates approximately 80% of the revenue from in game advertising. We believe that over time we can work with a team to increase those average of 16%. Second, we believe that crowd circuit achieved the same user acquisition growth with lower overall spend. Presently they spend 35% to 40% of gross looking on UA, while Glu's UA costs approximately 15% to 20% gross bookings. We expect the acquisition to be accretive and are confident in our ability real -- realize a significant return on investment. We've acquired similar assets with positive ROI, including all three of our largest studios play first, Pick six to the developers of Tap Sport Baseball. In our front of studio acquisition of blame on games [ph]. The acquisition also further bolstered Glu's casual expertise. And provides us with an experienced team with a successful track record of creating evergreen type game. Now turning to guidance. For the fourth quarter we currently expect our total booking to be in the range of $46 million to $48 million. Including approximately two months of relative crowds star. This reflects the expected acquires a catalog titles and minimal contributions from Niki Minaj. Our expected adjusted gross margin of 64.6%. Our adjusted CapEx for fourth quarter it affected the approximately $40.1 million at the midpoint. The system is variable marketing as percentage of bookings increase slightly from the third quarter levels. Depreciation expense $800,000. We expect a contractual fourth quarter to be an expensive $300,000 and expect average basic share and diluted shares outstanding to be 134 million. Regarding our full year 2016 we slightly adjusting our guidance to reflect our Q4 guidance which I just mentioned. As a result we now expect total booking in the range of $202 million to $204 million. Compared to our prior guidance the $195 million to $202 million. We anticipate 2015 adjusted gross margins, to be approximately 48% or 62.7 % excluding the impairments, which is in line with a prior guidance. We expect operating expenses for 2016 to be in the range of 147 million to 148 million. In addition, we expect variable marketing to remain relatively consistent at approximately 17% of total full year bookings. And depreciation for 2016 expect to be 2.9 million. Finally, we continue to expect end the year with $80 million in cash. After affecting of for the $40.8 million we paid the controlling interest in Crowdstar plus the additional approximately $4.7 million we expect to pay to acquire the remaining shares of Crowdstar. Now in regards to 2017. Well, we're still very early or planning process given all the announcements today, we currently expect total core bookings excluding crowds star to decline year-over-year. In regards to crowds star we currently expect revenues to be relatively consistent with full year 2016 which includes a minimal contribution from Design Home. We plan to provide detailed guidance to the next earnings call. So in summary, while we continue to work in the near term challenges, we're in a very optimistic about long term growth opportunity. With that we'll turn the call for questions, operator.

[Operator:]

Thank you [Operator Instructions] And our first question comes from Michael Graham from Canaccord. Your line is open.

[Michael Graham:]

Thank you, guys congrats on the on the acquisitions. I just want to ask somewhat big picture question on this Page 13 of your deck where you use talking about some of the different curves for monetization and you also mentioned that you had better ad revenue, which is helping offset some of the costs per install, is really that issue that I want to drill down into, which is like what do you see in from a macro perspective as you think about the apps store environments, and how challenge or not challenging it is to sort of do business there like, just are you encouraged or not or just what's going on.

[Niccolo de Masi:]

Okay, I think each of us will take a piece of that. So let's just stand back and look at the macro situation with the apps store, Glu's perspective increasingly is that there is a convergence between apps gains and frankly category leadership is what increasingly matters in the apps store, if you look at the top 20, 30 grossing apps. You know used to be 100% games, now it really is a mixture of apps and games certainly for apple, you have entertainment services like Spotify, Netflix, Hulu, YouTube. You still have classic games but you also have in emerging category everything from Dating apps, there really is almost game of experiences like Tender, through to product like Covet and the scene as we acquired just yesterday announced this morning, I think that Covet is really a great example of the kinds of things that Glu believes will be successful in the next 5, 10 years of the app stores. Covet is a genre leader is the list of top grossing fashion product in the store, it is a game but is broader than, that actually brings into the experience real world fashion games across the entire value chain, and they are aspirational, some are high in some are mid and but you got to build your own closet. And Covet clothing that you can't necessary afford or actually where in the real world, and this is a good example the way that Physical and virtual world getting twisted together. We've talked in the past of our Kim Kardashian game. Twisting up the real and the virtual world and Kim and I done a good job of that I think the future of Glu and the future of a lot of what Nick strategy is that look at products like Covet, I look our portfolio and say how do we own category, there's a home based product coming out of crowds star, this year which we believe can own another big broad $1 billion real world category. And I think the challenges of the apps store really around category ownership, as pertains to distribution. So let's take another example in the sport face, Tab Sport Baseball than our own baseball game in the store we own that is our own original IP. But I think it's fair to say the wealth that very successful the platform product. You're never going to have 10 top grossing apps from the top 10 grossing all the sport because, Humans like a mixture of things music, sports, games etcetera. And so what we think about the future, we think about the current challenge in the store, we're thinking in addressing that with a platform approach one. Two, a category leadership approach and thirdly, something Nick is very passionate about focusing on the talent in our in our studios. In terms of other questions you have on that one let me handle this to Nick and Eric maybe drill another some of detail down.

[Nick Earl:]

Michael one of the things to think about when you look at these games that you see kind of flat arising revenue curve is to try to understand the depth of social, and elder game features that they have and it's something that we really believe the cornerstone of our focus and strategy, certainly going forward. The depth of the metagame combined with even a simple core loop, in fact we do really like that combination in a generally drives the death of LTV that is that lead you to those kind of revenue curve. It is just something that's near and dear to us, it's easier said than done, take us you know a lot of work to figure out how to do it, in them the most effective way but it's something that all the studios and all the teams are very focused on is something that I think will get better and better as overtime.

[Eric Ludwig:]

Yes I think that covered everything Mike, I'll turn it over to you.

[Michael Graham:]

No, that's good, thank you for the color I appreciate it.

[Operator:]

[Operator Instructions]

[Niccolo de Masi:]

Okay we'll be on call back, so let Nick wrap this up.

[Nick Earl:]

In closing I just wanted to share how incredibly excited I am to what take the helm here at Glu. We definitely have challenges, that we are working through but the opportunity for building a great business our front of us and certainly achievable. We look forward very much to work with the new colleagues at our Crowdstar, and continue to grow our leadership in the fashion sector, and then as mentioned we expect to launch hopefully leading game Home Designs and Décor, so we're very excited about that. And then finally, I very much look forward to reporting back in February in the Q4 earnings call and reviewing my first 100 Days as CEO and presenting the going forward pan.

[Niccolo de Masi:]

Thanks Nick, thanks Eric, and thank you all for the last 27 quarters of a support. And I'm very pleased with our smooth succession of Nick Earl our new CEO. And look forward to accelerate growth trajectory I anticipate he will drive, after 27 quarters as a CEO I look forward to continue to serve the board and shareholders in my new role. Thank you again for joining the call.

[Operator:]

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