Glu Mobile Inc
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Glu Mobile Third Quarter 2015 Earnings Results 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 be given at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded. It’s now pleasure to turn today’s program over to Greg Cannon, VP of Finance and Investor Relations. Sir, the floor is yours.

[Greg Cannon:]

Good afternoon, everyone and thank you for joining us on the Glu Mobile third quarter 2015 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 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, unless otherwise stated, all financial results, metrics and guidance will be presented on a non-GAAP basis. The non-GAAP measures are not intended to be considered in isolation from, a substitute for 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 result, as well as the supplemental presentation accompanying today’s earnings call that can be accessed via our Investor Web site at www.glu.com/investors. Please also note that all references to EBITDA, our adjusted EBITDA calculations, which Glu defines as non-GAAP operating income or loss excluding depreciation. Finally, please note that during this call, we will be providing information regarding the total number of social followers of certain celebrities. We calculate total social followers by aggregating the total volume of friends and followers that celebrity has on Facebook, Twitter, Instagram, Vine, Vivo and Tumblr. Please not that these numbers will contain some overlap of these social audiences between channels and celebrities. 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 present and challenges facing Glu’s business. Allow me to begin by saying that we’re confident in our long-term growth prospects. However, our market landscape is ever changing and Glu must continue evolving to meet new challenges. Fortunately, we’ve a strong track record of doing so. Over the past five years, we’ve continually learned, course corrected and brought new expertise into our organization at pivotal moments. Each time growth has slowed, we’ve reinvigorated it the following year. During this call, I will walk through how our ecosystem is evolving. Due to a variety of factors, fewer games occupy top three app rankings on the Apple App store 10 years past, an elevated bar to reach and hold each top three rank, adversely impacts organic discovery and in turn install our new launches. We believe this is symptomatic of a maturing industry where consumers are retaining on existing high quality titles, constantly updated as live services by sizeable and experienced teams. The near-term impact of our landscape maturation has been the significant underperformance of anticipated install for important Q3 launches, including Deer Hunter 2016, Eternity Warriors 4, and James Bond World

[Eric Ludwig:]

Great. Thank you Niccolo. Overall the third quarter results were ahead of guidance even before factoring in the bonus accrual reversals. I will go through our Q3 results, provide guidance for the fourth quarter and full-year of 2015, and provide the preliminary preview of 2016. Our key financial highlights for the third quarter of 2015, our total revenue was $64.4 million, EBITDA was $8.5 million, our net income was $7.7 million or EPS of $0.06 per diluted share. All of these results were above our guidance for the quarter. During the third quarter we continued our diversification in our revenues from the top five titles. Our five largest titles during the third quarter represented 74% of total revenue, down slightly from last quarter. The largest title remains Kim Kardashian

[Operator:]

Certainly. [Operator Instructions] And our first question comes from the line of Doug Creutz with Cowen. Your line is now open. Please proceed with your question.

[Douglas Creutz:]

Thanks. Tough call. I got two part question I guess. The first that you talked about the decline of gains in the top app installs, and I guess I’m wondering is this -- did this mean that games are actually being installed less than they were a year ago or does this just reflect that there’s been a lot of growth in non-gaming app installs and they’re taking a higher share? The second part of the question is historically you guys have parted yourself and not spending a lot of variable marketing cost. Your marketing spend as a percent of revenue is significantly below most of your peers. I’m wondering if you think perhaps this approach is working anymore because of the changes from the mobile gaming market. Thanks.

[Niccolo de Masi:]

Hi, Doug. Those are both good questions. I think its safe to say that there’s obviously more smartphones -- taking an order there’s more smartphones obviously in the world today than there were a year ago or two years ago. So there’s probably cyclicality in consumer interest in various categories of apps and there’s no doubt that if the whole world goes mobile there’s obviously no distinction between what online means whether its desktop, mobile et cetera and I think a lot of people are moving their businesses to be where Glu is which is 100% mobile in the long-term anyway. So I expect total app installs to keep growing. I certainly expect them to grow quickly in emerging markets. Lets remember that smartphone penetration might be 75% in the U.S. and the UK and various developed nations. But a lot of the Middle East Africa, South America and Asia, South East Asia just its still early days. So, I think its impossible to believe that app installs will do anything but grow overall. The debate is of course between the categories. And there’s no doubt that as people spend more time on mobile devices each category is catering for their segment. So in prior years I think other entertainment companies, other productivity companies, other social networking companies had fears a couple of years ago they were going to miss out on the move to mobile. Hardware keeps getting more powerful. Consumers are spending more time on it and ultimately everybody is going to have a tremendously strong mobile offering or they won't really be in a digital business. So I think that we’ve seen a maturation that was inevitable and its relatively stable in the sense that games are entertainments and entertainments tend to occupy a growing portion of peoples time and then ultimately wallet. But at the moment there is probably a bit of a pinch from social messaging, social networking, competing for some of that time and ultimately we’ve just been hit by an IOS upgrade cycle where people have been reinstalling what I would call staple apps whether that’s Facebook or a productivity app and those have certainly crowded out less staple apps in a number of instances. So, I suspect this is a cyclical affair much more so than a permanent one and we’re obviously heavily exposed in a good way to emerging markets, other languages. If I talk about your second question on marketing spend, one of the things we’ve been doing Doug to structurally underpin distribution and we’ve obviously been at this for a year now is to expand celebrity partnerships in a world where its more challenging at install or more expensive to get an install. Celebrity partnerships should be more valuable and in some cases I would say much more valuable. We obviously pay a royalty for that. So you can think of celebrities as in many ways a marketing spend because they are promoting, they are treating, they have name recognition. And so, for those types of games, no I don’t think that we’re going to see a growth in marketing spend although you are right, compared to our peer growth we spend less and that might be an opportunity for us as we think about the balance between revenue growth and profitability. Many of our competitors routinely spend 50% of the revenue on marketing and/or licensing on top of that. And particularly if you’re not subject to the public market disciplines of these quarterly calls, I think there are plenty of people that are investing in long-term brand building and probably spending half the revenue in marketing and still licensing on top of that. Ultimately we will have to play this by a year and its something that subsequent to the category we’ll take a different view on brand building for IP we own versus IP that we are lets say partnering with for a multi-year period or a very long period of time. But its also the case Doug that we are not going to be entertaining partnerships that are for short amounts of time. So you’ll see either IP partnerships, there’ll be partnerships that are multi-year in long-term. Yes we’ll be investing in our own original IP but we have tended to put that investment into product quality, and that’s still where our bias lays. We still believe that the best way of combating competition in top three is from the categories is to make our games more compelling and more entertaining. And we’ve obviously taken the steps to hire talent to support that and we’ve also been thinking about our roadmap a little differently in terms of reinvigorating for a game play innovation. If we surprise and delight our consumers, better chance of word-of-mouth morality which is a way of avoiding more expensive marketing spend. This has to of course be done in conjunction with moving monetization rates up, moving LTV up and keeping our social investments going in terms of social features to ensure that consumers retain. So we’re upping our game and as always we’re rising to the occasion of moving with the time. And I do believe this sector has a lot of growth still left in it. Only half of the world still has a smartphone even on the most conservative estimates. I’ll leave that there Doug, anything else you want me to dive into?

[Douglas Creutz:]

No. That’s good. Thanks a lot.

[Operator:]

Our next question comes from the line of Mike Olson with Piper Jaffray. Your line is now open. Please proceed with your question.

[Michael Olson:]

Hi. Good afternoon. Can you provide any details on what the cadence is of releases for the new celebrity titles that you talked about between now and 2017? And then could you give us a sense for how many titles that could be? And then, I guess you kind of just already answered this but I’ll ask it anyway, regarding the challenges that really any developer seems to face in the industry, it just seems like its now the case that a developer could make the best game ever made and it just may not really see the light of day because of all the noise of other games and apps in the app store. So beyond increasing marketing as you just talked about, is there anything that can be done to kind of raise the profile of certain titles or do you expect that will continue to be a challenge and it’ll just be more or less to kind of chance I guess which titles are able to gain traction? Thanks.

[Niccolo de Masi:]

Okay, I’ll take those in reverse order. So, look I don’t believe its chance and I do think that content industries go through shakeout periods, installation periods, and ultimately what's happening with the store and the environment is a normal content industry maturation process whereby in the short-term we are -- we’re seeing challenge on new launches that means, if you are already a big game company you have opportunities to invest in the long-term which smaller companies that don’t have a revenue base, don’t have a user base, don’t have a balance sheet will simply not be able to afford. You can easily argue there have been too many people that piled into the mobile gaming space in the mid of a gold rush over the last few years. There are going to be many gaming companies in the mobile space because we’re the biggest segment of the overall gaming market by many measures, and that will remain the case. Its going to be a growing segment and will probably grow faster than all other platforms and categories of gaming overall as a macro climate [ph]. Within that, its been competitive and it stays competitive. However I do think that our ability to have a diverse portfolio of double digit title numbers, a publishing operation that has scale, a balance sheet, scaled studies, we’ll be willing to put dozens of people on individual titles when they work. These are all advantages that startups don’t have. And so, I think that things are challenging for us with new launches. It makes being a startup excruciatingly challenging and that will shakeout. I do think valuations will become as I said more [indiscernible] in that space. I do think there’s acquisition opportunities for larger companies including our self. We aim to take advantage of those in years like this and moments like this. But ultimately the market is expanding overall. More people will play games and put money into games and mobile devices in 2016 I suspect than ever before. It’s a case of your share of that. And so our response to discovery is of course, step one, build a better game that has word-of-mouth morality. Step two, yes invest in our original IP, but also three lets look at long-term partnerships that can help discover distribution namely the non one billion social followers we have on our celebrity platform under contract. And on that note, let me talk about the cadence of those titles a little bit. I said in my prepared remarks that Katy Perry is December 17 this year, we then have Kendall and Kylie’s game coming out in late Q1. We have Britney Spears in the spring and we have Nicki Minaj in the summer. We have approximately similar number of games that we will need to come out to get us over that billion social follower number by the end of ’17. So you can expect an approximately similar spacing of titles in 2017, approximately similar volumes as well, but we’ll give you more updates on that in future calls. The important message here is that, in a world of discovery and distribution being more challenged, we think we have the best contractual barriers to entry underpinning our distribution of any company in the industry frankly. We have five year deals, in some cases up to eight year deals. This is a very interesting strategic deployment of our cash and I would say we have nearly cornered the market on this. There are only so many popular people in the world that have a sizable number of social followers. We’ve obviously closed a lot of them. We’re proud of that and we intent to be the, lets say oligopoly player if not monopoly player in the space by combining what we have under a contract with great games, continued growth in our ability to monetize that user base and continue to believe to grow retention with our social investments, which by the way has been relatively rudimentary in most games so far. So we see social as a big opportunity for Glu in 2016 just as I said in our Analyst Day in May this year it was the next leg up for Glu’s product strategy. We’ve always worked on core game play, we’ll be doubling there. We’re improving monetization. Social is something which can help us not only break through, but also retain users. And I think that retaining users will become an every more important part of the space, i.e. make your hits last longer. Because when you do breakthrough the hits will be bigger and they will be company transformational and something like a WeFire partnership where we’re taking a very social game, a high LTV game in China and we’re combining with our IP that installs in the West can lead to these kinds of annuity hits and breakthroughs that can last multi-years, and not to mention the fact that obviously underpins are continued dominants in the shooter category.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Sean McGowan with Oppenheimer. Your line is now open. Please proceed with your question.

[Sean McGowan:]

Thank you. I also have a couple of questions. First on the Tencent partnership on WeFire, can you clarify the timing of when you would have access to that game in the various markets? Is it all at once everywhere or is it kind of phased around?

[Niccolo de Masi:]

So the partnership is already very active. We have team members working at Tencent’s headquarter in Shenzhen. They are sending team members to work with us at our headquarter in San Francisco. There are dozens of people working to make this a pioneering, in many ways pioneering business model for both companies. I currently anticipate that the game will be going live at approximately the same time, but there will be obviously some tactics around localization timing. I’m not ruling out the ability to go live in say English first with other languages to follow. We have a lot of languages to cover for these markets. But I’m optimistic that when I say the game will be live in mid 2016 that will be for all languages in all of these territories and if we’re able to bring English in, that would be great otherwise that’s a -- we believe a conservative day for the better part of a dozen languages being done in of course dozens of countries.

[Sean McGowan:]

Okay. Thanks. And then on kind of bigger, more philosophical question, and we can see from your repeated commentary and the announcements that you’ve been made on celebrities as well as the impact on the balance sheet that this is obviously a place where you’re placing a lot of bets. But really at this point, you have Kim and you have Jason. So do we really have enough data points to kind of feel good about doubling down and trying to corner the market? For example being more specific, has the performance on the Jason Statham tile actually made it worth it. Is the out performance enough to justify whatever the royalty was?

[Niccolo de Masi:]

Sure. Well, let me break it down to a couple of answers. On Jason Statham, its obviously -- it appears to be, yes. The game is -- its early in its lifecycle. It is not again a particularly social game. So the actual engine and product was not terribly expensive to get live. Its now a case of seeing how much we update the game and how we advance it or if that makes an actual sense. But I said the outperformed Mission Impossible which was a successful movie at the Box Office and Terminator which certainly has done well internationally, if not domestically. So we only had one other shooter due the same or better as Statham’s title and that was Contract Killer

[Sean McGowan:]

Okay. And then one quick question for, Eric. Eric, there was a big jump in other long-term liabilities in the quarter. Can you describe what that is?

[Eric Ludwig:]

Yes, so the other market liabilities is when we sign a celebrity transaction whether we pay them upfront or pay them over time, we book the entire item to the balance sheet. So we gross up the prepaids, we gross up liabilities, then we determine depending upon whether its being paid in the next 12 months it will be in short-term or in long-term.

[Sean McGowan:]

Okay. So even though its not called royalties, that is a long-term liability. So I figure that’s what it was. All right. Thank you.

[Niccolo de Masi:]

All right. Thanks, Sean.

[Operator:]

Thank you. And with no further questions in the queue, I would like to turn the call back over to management for closing remarks.

[Niccolo de Masi:]

Well I’m going to close by thanking my colleagues for their efforts and our stockholders for their patience and support. We are pleased with the automatic stabilizers of our bonus accrual reversals deliver Q3 EBITDA ahead of guidance. Although we face headwinds in Q4, we remain confident in our ability to learn, evolve and deliver new breakout hit titles. Thank you again for joining the call.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's program. This does conclude the conference and you may now disconnect. Have a good day everyone.