Glu Mobile Inc
Q4 2015 Earnings Call Transcript

Published: 4 Feb 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2015 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 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 fourth 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 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, 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 or superior to our GAAP results and we encourage investors to consider all material 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 fourth 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. Please also note that all references to EBITDA are 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 prior quarter and present opportunities in Glu’s business. Before discussing a number of strategic topics, I will first outline our fourth quarter results. We outperformed the midpoint of our Q4 2015 revenue guidance by 13.5%. Q4 EBITDA came in ahead of the midpoint of guidance by $5.3 million. We are very pleased that this afternoon we announced a multiyear exclusive gaming partnership with Taylor Swift. Taylor is arguably the most popular person in the world with over 220 million social followers. She has sold over 40 million albums and there is uniquely strong interest in both her music and life from all demographics. Our Taylor game is expected to launch in the late December this year and has been built by our strongest and most proven celebrity studio. Our partnership with Taylor Swift and recently announced partnership with Gordon Ramsay cements Glu’s position as the undisputed leader in celebrity gaming worldwide. By the end of 2017, we anticipate games being live, featuring celebrities with approximately 1.3 billion social followers. This aggregate figure has grown organically by over 200 million since our Analyst Day last May. Having now reached our targeted scale, we intend to considerably slow the signing of additional celebrity partnerships. We have one known musician male and one female celebrity signed that will be announced near their 2017 game launches. Balancing creative innovation and market timing means that we of course do not expect every single celebrity game to be a hit. However, the portfolio our celebrity platform benefits from unique barriers to entry. Relative to our expectations in the first half of 2015, Glu significantly underperformed in Q4. For my part, I was overly aggressive in pushing for the expansion of some of our most successful studios of H2 2014 and H1 2015. In our quest for growth, in one location I broke my own rule regarding Glu’s strategy of consistently specializing in a single genre under each GM. After a flat year-on-year performance, we are committed to forecasting new launch revenue conservatively in 2016 and beyond. Last year, a perfect a storm of excessive optimism around engineering velocity, poor technical decisions and cascading resourcing impacts meant that one studio posted revenues approximately $50 million below our internal plan. Due to inadequate innovation oversights, two other studio locations contributed additional eight figure misses against our internal plan. Glu is a company that has overcome execution, business model, platform transition, process and talent challenges throughout our 14-year history. We have and will continue to learn from the issues of last year and have taken steps to ensure such perfect storms do not reoccur. Our second year of approximately $0.25 billion in smartphone revenues supported us attracting world-class senior technology and product development leadership. We hired Tim Wilson, as our new Global CTO last October. This has brought a heightened level of technical oversight as well as engineering planning rigor. We hired Nick Earl as our new President of Studios in November. Nick and Tim worked together for 13 years and shipped several hit mobile titles as leaders of EA’s mobile division. In the past three months, we have restructured our studios in three important ways in order to create a strong foundation and avoid a repeat of 2015’s disappointing H2. First, we’ve created a strong multipronged central studio operations function, overseen by an SVP level executive. Central, technical and product oversight now comes via three upgraded mechanisms

[Eric Ludwig:]

Great. Thank you, Niccolo. Overall, the fourth quarter results were ahead of our expectations. I will go through our Q4 and full year 2015 results and conclude by providing our updated outlook for the first quarter and full year 2016. Our key financial highlights for the fourth quarter of 2015 are total revenues of $57.9 million, EBITDA was $2.8 million, our net income was $2.3 million or EPS of $0.02 per diluted share, and all these results were above our guidance for the quarter. During the fourth quarter, we continued our diversification in our revenues from both the top five titles and licensed IP. Our top -- our five largest titles during the fourth quarter represented 71% of total revenue, down slightly from 74% last quarter. The largest title remains Kim Kardashian

[Operator:]

[Operator Instructions] And our first question comes from Darren Aftahi from Roth Capital Partners. Your line is now open.

[Darren Aftahi:]

Just a couple. Given how Katy Perry performed, sort of have two data points out there on the celebrity platform, what are you assumptions in your guidance for Kendall and Kylie? I know it’s doing well in beta in Canada and obviously there’s correlation there. But I am curious if you’re taking more of a conservative stance is kind of first question. Second question, given the performance of Katy Perry, I mean, is there still a relationship there and how do you kind of -- there is how do you kind of plan to kind of re-kindle that, that platform? And then third, looks like advertising revenue was particularly strong as a percentage of revenue, I am just kind of curious is there any kind of redo [ph] on that? Thanks.

[Niccolo de Masi:]

Okay. I’ll take the second one first Darren and then I’ll hand this to Eric for other two. Ultimately a great hit, so to speak, happens only when the moons align around, monetization impact, strong retention because you have some mechanics which resonates and obviously we have brand or some sort of IP that’s installed. We certainly had a number of team execution issues on the Katy Perry game, but we take a lot of confidence from the fact that obviously the Kim game worked very well for us and the Kendall and Kylie Jenner other game is I think the strongest game we’ve had certainly in Canada for probably a year or so. And probably since the Kim game was in Canada, we haven’t had a title that strong in Canada. No guarantees that translates worldwide and there is no doubt that Kim, Kendall and Kylie are English centric celebrities. But we absolutely think that the prospects of the celebrity label for us and platform performing as if not better than every other genre in are still intact. Now, relationships with all the license partners are actually good and that’s the case for James Bond as it is for Katy Perry and her team. We make creative decisions in partnerships with our partners and sometimes those decisions come together well and they come together well technically and they resonate; sometimes just like with an album that doesn’t win a Grammy Award, doesn’t hit, sometimes it doesn’t come together well. And I think our partners recognize and we do that everybody has made these decisions together in good faith because we thought and expected them to resonate. And if they don’t, we often if not invariably are going to try, try it again so to speak. But with plenty of additional learnings and plenty of additional I think sort of familiarity with how we work together and the kinds of things that we need to push harder on being more paranoid about and stay away from in some cases. I think it’s fair to say that every Grammy Award winning musician probably has better albums and weaker albums. I think the same is true in the gaming space. We are hit driven as is the book business, the movie business, the TV business and the music business. And so, when we look at ourselves as a large publisher and a portfolio, I think the barriers to entry in celebrity business are interesting, we’re going to slowdown, as I said the signing of additional celebrities, but the right brand partners and creative partners we still believe across the business can be entirely additive. So feeling positive about the future of celebrity in light of Kim plus Kendall and Kylie in beta, feeling positive about all licensing relationships actually at Glu across the board, and certainly feeling positive, Darren, about where ad revenues were and where we could take ad revenues to in light of a strategy to focus on driving them up in later stage titles and also a strategy of recognizing that we can be more aggressive in integration of ad units earlier in games and more thoroughly across even some of our bigger live titles. So, I am going to hand it over to Eric to talk about your guidance question.

[Eric Ludwig:]

So, Kim Kardashian

[Operator:]

Our next question comes from Mike Olson from Piper Jaffray. Your line is now open.

[Mike Olson:]

Maybe going one layer deeper, Eric, on the guidance there for 2016; could you give us a sense for how much of 2016 revenue guide is from new titles versus existing titles or sequels?

[Eric Ludwig:]

So, we’ve not broken that out specifically. But we’ve looked at certainly our historical catalog trends and have modelled catalog trends similarly. One thing I will point out that we have just kicked off this year though is several of our old titles are now being live operations in a lower cost locations. We think that combination of having the core team building another title while our India team building and supporting live ops might be a good sense of helping us to extend the tails on these older titles. But we have modelled based on our historical trends for the catalog.

[Mike Olson:]

You mentioned good trends with QuizUp, but minimal revenue at this point. What would you say is the timing of more potential, material revenue monetization on that front? And if there is monetization before you would you do an overall acquisition, would there be some rev share or would you not benefit until you would actually acquire the business?

[Niccolo de Masi:]

So, it’s early days on implementation of our advice and consulting for QuizUp. I think there is no doubt that we wouldn’t be as bullish on the long-term prospects here, if we didn’t see quick wins, implementable wins, and something that we can make real progress on this year. I think it’s fair to say that we will know inside 12 months [indiscernible] 15, if what we are suggesting and pushing on is going to ultimately bear fruit. We might know even as quickly as six months. But on today’s call I think we’re going to ultimately not give a deadline on that yet as there is a fairly complex amount of work to be done on their side, not only to keep extending the roadmap of their own features but also to partner with NBC on development of this QuizUp TV show. So, there is competing interest obviously from NBC, from us on the monetization side from the company and trying to balance those. I think all can happen this year and we could have a show on the air by the end of the year even which would be obviously a game changer and I think would give us more dough [ph], more engagement and potentially incremental revenue and profitability which would increase the prospects of enacting our call option. But so far, so good; we’re quite pleased with how things are working. Our investment is a senior secured convertible note and so we don’t have a portion of consolidation at this time.

[Operator:]

And our next question comes from Michael Graham from Canaccord. Your line is now open.

[Michael Graham:]

I just wanted to ask two things

[Greg Cannon:]

So, let me give an exact ratio on overlap. However, I will say that we’re pleased with the fact that the launch of the Kendall and Kylie game has not impacted the grossing position of Kim Kardashian

[Mike Graham:]

And then the other one is just I was looking for a little more depth on why you think the Katy game didn’t take hold. Was it that it was a similar game play to the Kim Kardashian but the audience was looking for something different or just can you go into any more detail about sort of -- I mean you said you learned a lot about why it didn’t work it and I am sure that’s the case; and I am just wondering could you give us a little more color around what didn’t work?

[Niccolo de Masi:]

Sure. So, I think the number one issue here has been internal technical engineering execution issues. We know that the game style based on what Kim and Kylie and Kendall was done. We know this narrative role-playing game mechanics can generate pretty healthy life and values. And we also have believe or not, indications potentially of information on a Britney Spears title which is now in beta in I believe couple of small countries in Europe and so on. So we know not only from our own titles but from the broader market. And you look at narrative games the last 10 years, there have been all sorts of ones. There has been high school story; there have been episodes, these are not blue titles. But they’re narrative role-playing games that work and drive pretty healthy monetization. Due to our own challenges, we did not produce an engine that delivered I’d say top quartile monetization. And part of that was because of ambition around fully online only game, fully server-side game, which while its function has had challenges with bugs and challenges with decisions made early on a development that ultimately we believe we can avoid going forward, given our new CTO and process and systems, but would have been so expensive to redo that you’d be rebuilding the title once we discovered them. Ultimately, you have a product which is buggier than it should be, less stable than it should be and not as responsive as it should be. And that means that you tend to have poor retention when players see that. And poor retention of course is actually the hardest thing to change in a game. Installs, monetization, you can push on. Retention is the metric that when you have it and it is strong like it is in our Kendall and Kylie game that’s great, that’s a wonderful indicator that you lot of to work with. When you don’t have it, it’s very hard to double as a metric in alpha and beta et cetera, and it’s multi-factorial. So, I would say that for technical issues, bugs, service site decisions are probably in first place. You then have potentially the creative decisions we made. We chose to put things into the game like Katy Vision and various other core tier [ph] elements which we all thought were going to resonate well. They may not have and clearly I’d say based on the installs and so on didn’t resonate to the extent that we thought they would be. And that was same kind of situations that we had with our James Bond title. We were building and we have been building for quite some time the James Bond game that was going to be new innovative difference, not a shooter, turns out probably that most people still want and expect a shooter from the James Bond franchise, even though the movie franchise has become deeper, more narrative driven and a little more cerebral. That hasn’t worked translating that over to a strategy game in the Bond space for example. So, as I said in my prepared remarks, Michael, there is going to be volatility and variability I think in every label, shooter; celebrity; sports; simulation. They’re not all going to work reliably. But if you can get 2 out of 3, 3 out of 4 for any label, if you can get to 2 out 3, 3 out 4 being singles, doubles, and you get the occasional hit; you have a pretty nice divisional business. And of course it all rolls up to an overall Glu portfolio that’s nicely diversified and hopefully becoming more predictable as we look to scale OpEx towards and underneath catalog revenues between 2016 and 2018.

[Operator:]

And I am showing no further questions at this time, I’d now like to turn the call back over to management for any further remarks.

[Niccolo de Masi:]

Allow me to close by thanking my colleagues for their efforts and our stockholders for their patients and support. We look forward to the launch of our Kendall and Kylie game on February 18th. Thank you again for joining the call.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. You may all disconnect. Everyone have a great day.