Glu Mobile Inc
Q4 2007 Earnings Call Transcript

Published: 12 Feb 2008

[Operator:]

At this time, I would like to welcome everyone to the Glu Mobile fourth quarter and year-end 2007 earnings result conference call. All lines have been placed on mute. After the speaker’s remarks, there will be a question-and-answer period. Stacie Bosinoff will begin the call. Please go ahead.

[Stacie Bosinoff:]

Good afternoon everyone and thank you all for joining us on the Glu Mobile's fourth quarter and year-end results conference call. This is Stacie Bosinoff from the Blueshirt Group. On the call today, we have CEO Greg Ballard; CFO Rocky Pimentel and Eric Ludwig, our Vice President of Finance. Before turning the call over to the company, I would like to read the Safe Harbor. During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Generally, these statements are identified by use of the words such as expect, believe, anticipate, intend, and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. 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 this conference call. These risk factors are described in our press release and are more fully detailed under the caption “Risk Factors” in the Form 10-Q filed with the Securities and Exchange Commission under Rule 424(b)(4) on November 14, 2007. During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude acquired in-process technology, team dividends, amortization of intangibles, restructuring charges and impairment of investments and option rate securities, gain on sale of assets and stock-based compensation expenses. These non-GAAP measures are not intended to be considered in isolation firm, 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 fourth quarter results and certain non-GAAP financial information available in the Investor Relations section on our website, www.glu.com. The press release has also been furnished to the SEC as part of the Form 8-K. In addition, please note the date of this conference call is February 11, 2008 and any forward-looking statements that we make today are based on the 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. Lastly, this conference call is the property of Glu Mobile. Any recording, reproduction or rebroadcast of this conference call without the expressed written permission of Glu is strictly prohibited. With that, I will turn the call over to the company. Greg?

[Greg Ballard:]

Thanks, Stacie, and thanks to all of you on the line for joining us on the call. I will briefly review the quarter and 2007, but I would like to spend the majority of my time today talking about what will impact the business and the industry in 2008 and how that will drive Glu success. Revenue for the quarter was $18.1 million, an increase of 27% year-over-year and 9% over Q3 of 2007. GAAP net loss for the fourth quarter was $861,000 or a loss of $0.03 per basic share, which includes the tax benefit of $1.5 million or $0.05 per basic share. Non-GAAP net income was $1.7 million or $0.06 per diluted share. For the full year revenue was $66.9 million, an increase of 45% year-over-year. GAAP net loss for the year was $3.3 million or a loss of $0.14 per basic share, which includes the tax benefit of $1.5 million or $0.05 per basic share, while non-GAAP net income for the year was $2.8 million or $0.10 per diluted share. Let me provide a little color on our Q4 results. We are very pleased that we are able to deliver results at the high end of our revenue range especially considering the soft comments from our competitors. Our results were strong in both the Americas and I am pleased to say in EMEA as well. We saw very strong performances from new titles such as Call of Duty 4, which we launched worldwide through our partnership with Activision and Who Wants To Be A Millionaire 3, which continued to have franchises placement as a perennial top end in Europe and Asia. We also launched Konami’s Pro Evolution Soccer in Europe generated remarkable results through our integrated marketing program with Vodafone making the most sold game on Vodafone ES in November. Pro Evolution Soccer was also number the one selling title on SFR and Orange France in November and December and in the top 10 with all major carriers in Italy and Germany. In addition to our introduction to sequel to Diner Dash -- Diner Dash 2 showed quick sales growth reaching best sellers status on several carriers. Results would suggest that will continue to be one of our key franchises going forward. By any measure 2007 was an extraordinary year for Glu Mobile. We launched ourselves as a public company in March, so that we could enhance our ability to secure strong long-term licenses, expand geographically and consolidate the market share below us. We were successful against each of these objectives. We grew steadily in 2007 due in part of the solid roaster of games that we produced and distributed worldwide. We have launched a number of big branded titles during the past year, including Project Gotham Racing for Microsoft and the global release of TRANSFORMERS, which recorded support over 1000 handsets and more than 25,000 SKUs. We also successfully executed the worldwide rollout of our own IP Brain Genius, which has been on the ELSPA's top 10 titles consistently for the past six months. In addition to launches of these major titles, we continue to see strong sales from our existing titles including Zuma, World Series of Poker, Who Wants To Be A Millionaire and Deer Hunter 2. Our 2007 growth was also the result of market share gains in the US, Latin America, Asia Pacific and large parts of Europe, which have been a key feature of our story. In the US Glu increased share and was ranked as the number two US publisher in the fourth quarter by metrics. According to ELSPA, which collects top 50 titles across all of the UK carriers, Glu's gains have been significant in that region as well. Glu has six out of the top 10 titles in October and in November Glu had four out of the top 10 and eight of the top 25, the most of any mobile game publisher on the ELSPA chart. In France, we made a commitment to the region with a new office and a very talented local team that moved us from well outside to top five a year ago into a position of number two according to leading carriers in that region. There have been other similar games in others parts of Europe, Latin America and Asia. These market share gains have come as the market has got increasingly tough for many of our competitors. For example, many of the leading carriers continued to actively reduce the number of publishers that they work with. We saw this phenomena last year in Europe. Even companies that are successful in the console businesses Sega, Konami and Codemasters discovered the difficulties of establishing a complete trans-European set of carrier relationships. They have chosen instead to work directly with us. We see the same trend beginning to take place in the US. Several large US carriers have recently taken steps to reduce the publishers that they will directly distribute. We expect that these actions will have their greatest impact in the next several quarters, as some of titles associated with smaller publishers begin to drop off the decks. All of this consolidation is taking place against the backdrop of an evolving mobile games market. On the last conference call for our third quarter earnings, I discussed our view that the global market for mobile games will continue to grow at a healthy pace in a way. That view has since been reaffirmed by a number of outside analysts. For example, and [formal reason] has suggested that the market will recover from what they described is the slow down in '07 and grow an additional 24% in '08. Other recent reports have been even more optimistic. As we look forward to 2008 we entered this year with our strongest lineup ever. Just today, we announced that our first title on the Warner Brothers relationship Speed Racer, will launch in late April. Speed Racer is the highly anticipated new movie from the creators of the Matrix and the game which is now in its final stages of testing, looks to be one of our best efforts to-date. It is also worth noting that it is the first of nine games in 2008 to emerge from our new studio in Beijing, beginning the return on the investment we've made there over the past year. Our second Warner Bros. title Batman, The Dark Knight, we'll launch in June and will be more fully detailed in the future announcement, but we are, obviously, extremely excited to be involved with this movie, which by all indications will be a tremendous box office attraction. In the next several weeks we will also launch two original titles of our own

[Rocky Pimentel:]

Thank you, Greg. As Greg mentioned, our fourth quarter revenue finished at the high end of our guidance at $18.1 million. A sequential increase of 9% compared to $16.7 million last quarter and 27% increase over 14.3 million in the fourth quarter of 2006. Revenue growth was driven by several factors, such as increased revenue per title, new titles launched during the quarter, our continuing catalog strength and broader distribution in all parts of the world. Revenue for the full year 2007 was $66.9 million, a 45% increase compared to $46.2 million in revenue for the year ending December 31, 2006. Reviewing some of the specific revenue metric, our top 10 titles represented 52% of revenue, slightly down from 59% in the third quarter of this year and compared to 53% in the fourth quarter a year ago. The average revenue per top ten title was $950,000 in the quarter, slightly down compared to $980,000 last quarter but increased significantly from $751,000 in the fourth quarter of 2006. As a side note, the slight decrease from Q3 to Q4 does not reflect any broad trend, it is simply a matter of title timing where in the third quarter we had a full quarter of TRANSFORMERS title released but in the fourth quarter two of our strongest titles were only in the market for a small portion of the quarter. For the full year the average revenue per top ten title was $3.5 million, a 40% improvement over 2006. The increase in average revenue per top ten title was a direct result of our broader global distribution and the growth in the overall mobile games market. As further evidence of our title diversity, no title represented 10% of revenue for the fourth quarter or for the full year 2007. Revenue from Glu original titles in the fourth quarter was 11% of total revenue, essentially flat in absolute dollars, compared to the third quarter of 2007. For the full year revenue from Glu original titles was 12%. Revenue from new titles represented 43% of revenue in the quarter, $662,000 higher in absolute dollars from Q3 of this year and 10% higher compared to the fourth quarter a year ago. For the full year, 2007 new titles made up approximately 47% of total revenue compared to 44% in 2006. Our top four carriers represented approximately 45% of revenue in the fourth quarter of 2007, compared to 51% in the fourth quarter of 2006. For the full year our top four carriers represented 48% of revenue compared to 55% for all of 2006. By geography revenue for the fourth quarter 2007 was 56% in North America, 35% in EMEA and 9% in the rest of the world. All regions grew year-over-year in absolute dollars, but it is worth noting that in contrast to the comments by some of our competitors, we saw particular strength in the North American market in the fourth quarter. Royalties in the current quarter were $5.1 million, which represented 28.2% of revenue compared to 27.5% of revenue in Q3 2007 and 28.6% in the fourth quarter of last year. Gross margin was 68.5% slightly down from 69.6% last quarter and slightly higher than the fourth quarter 2006 level of 67.5%. When excluding the amortization and impairment of intangibles gross margin was 71.8% in the fourth quarter, which were down slightly from last quarter of 72.5% and inline with fourth quarter 2006 non-GAAP gross margin of 71.4%. Moving to the rest of the income statement for the quarter, please note that my comments on expenses are exclusive as stock-based compensation, amortization of intangibles and in process research and development, which I will address separately. Operating expenses in the fourth quarter were $13.4 million, an increase of 10% from the third quarter of this year and an increase of 18% year-over-year. Research and development was $6 million or 33% of revenue, sales and marketing expenses were $3.5 million or 19% of revenue, general and administrative expenses were $3.9 million or 22% of revenue for the quarter. Stock based compensation was approximately $1 million in the fourth quarter. In the fourth quarter of 2007, we also recorded operating expense charges for amortization of intangibles of $67,000 and a $59,000 charge related to the acquire in-process research and development for the MIG acquisition. The company had an operating loss on a GAAP basis in the quarter of approximately $2.1 million, an improvement compared to a GAAP operating loss of $2.6 million in the fourth quarter last year. Operating loss on a GAAP basis for the full year of 2007 was $5.5 million compared to a GAAP operating loss for the full year 2006 of $11.3 million. We recorded $862,000 of net interest income in the quarter and $116,000 attributed to foreign currency exchange gains. You will note on the income statement that we have recorded an impairment related to investments in auction rate securities. As we mentioned last quarter, the company has two auction rate securities investments totaling $2.8 million, which failed at auctions starting in August of '07 and which have continued to fail. You will recall that at September 30th we had an unrealized loss of $259,000 relating to these investments. These auction rate securities continue to pay interest according to their stated terms, however we have concluded these two securities have suffered a decline at value and we have recorded an $806,000 realized loss in our results for the fourth quarter. We will continue to access the carrying value of these securities each quarter. Should they continue to fail at auction and further decline in value, we may take additional impairment charges. Our net tax benefit for the quarter was $1.1 million and consisted of $287,000 of foreign withholding taxes, $147,000 of income taxes and a tax benefit of $1.5 million. The $1.5 million tax benefit was generated from a foreign income tax program in the United Kingdom which allows smaller, medium enterprises to monetize research and development expenditures that would otherwise give rise to net operating loss. This program allowed Glu to trade a portion of its tax losses for cash today rather than maintaining the NOLs as carry forwards against future income in the United Kingdom. Our GAAP net loss for the quarter was $861,000 or $0.03 loss per basic share, including the tax benefit of $1.5 million or $0.05 per share. Non-GAAP net income, which excludes amortization of intangibles stock based compensation, restructuring and impairment of auction rate securities and in-process research and development was $1.7 million or $0.06 per diluted share. GAAP net loss for the year was, a loss of $3.3 million or $0.14 per basic share including the tax benefit of $1.5 million or $0.05 per basic share. Non-GAAP net income for the year was $2.8 million or $0.10 per diluted share. Let me now turn to the balance sheet. Cash, short-term investments in and marketable securities were $59.8 million as of December 31st, 2007, compared to $72 million at the end of September. In the fourth quarter the company used a total of $14.2 million in cash, $12.9 million of which were related to net cash used to acquire MIG. Our full cash flow statements will be available with the 10-K, but I can report that we used approximately $1.3 million of cash from operations for the quarter, due to royalty advances and $1 million for the full year. Accounts receivable at the end of the quarter were $18.4 million versus $14.4 million a year ago, and up from $16.4 million at the end of Q3 2007. Turning to guidance, I will first make a few comments about MIG. As we said, when we completed the acquisition, we expected MIG to add a modest amount of revenue and to be accretive in 2008. As such, we have increased revenue guidance for the year by $2 million to $3 million and non-GAAP EPS by $0.03 a share at the low end of the range. Therefore our revenue range for the full year increases from $80 million to $85 million, to a range of $83 million to $87 million. And we have changed our non-GAAP earnings per share range from $0.12 to $0.20 per diluted share to a new range of $0.15 to $0.20 per diluted share. On a GAAP basis, we expect earnings per share for the full year, to range from a loss of $0.31 per share to a loss of $0.36 per basic share. For modeling purposes, I will provide color on other items related to MIG. We should add approximately $630,000 per quarter for amortization of intangibles to cost of sales for all four quarters of 2008. And in your stock-based compensation line, we should add approximately $1.7 million each quarter over all four quarters of 2008, related to the accrual of payments related to MIG procurements milestone and the continued employment of certain MIG principals. Such amount if earned will not be paid until 2009 and will be paid predominantly in stock. For the first quarter of 2008 we currently expect revenue to be in the range of $18 million to $18.4 million. Gross margin excluding amortization is estimated to be between 70% and 71%. GAAP net loss is expected to be between $5.1 million and $5.4 million or a loss of $0.17 per share and $0.18 per basic share. Non-GAAP net loss is expected to be between $1.3 million and $1.6 million or $0.04 per share loss to a $0.05 per share loss per basic share, which excludes $1.2 million for amortization of intangibles and approximately $2.6 million of anticipated stock based compensation. While we won't provide specific guidance for the other quarters in 2008, I would like to provide some modeling help by talking about the seasonal trends. Given our plan to reschedule for 2008, our revenues will not follow a normal seasonal cycle. We expect a modest improvement in revenue from Q1 to Q2 and then based on strong title slatted for Q2 release we would expect a larger sequential increase into Q3 followed by another modest increase in Q4. Our bottom line expectations mirror that guidance with a modest improvement in Q2 followed by strong improvement in Q3 and a modest improvement in Q4, than in the year with a previously mentioned $0.15 per share to $0.20 per share per diluted share in non-GAAP EPS. We made some significant investments in infrastructure and operating overhead during 2007. One of the most significant investments was the opening of our Beijing studio. As 2008 progresses those investments will begin to produce meaningful returns. Greg mentioned the first title being released from our studio is SPEED RACER. We expect to release as many of nine titles this year from the Beijing studio, which will have a meaningful impact on the guidance for increasing profitability in the second half of this year. The quarterly color that I just provided also reflects the trend we expect to see in our cash flows for the year. We anticipate generating a modest amount of cash during 2008, although we anticipate using $6 million of cash in the first half of the year primarily due to license arrangements and the cost related to our corporate office move in March 2008. We believe these investments will continue to position the company for growing success in the latter half of 2008 and beyond. And with that we'll open it up for questions.

[Operator:]

(Operator Instructions) Your first question comes from line of Brian Pitz with Banc of America. Please proceed. Brian Pitz - Banc of America Great guys. I want to know to what extent does your '08 guidance include the affect of acquisitions and then a second follow on. What is the impact or are you seeing any impact yet from Android and its open wireless consortium in terms of industry development, game adoption, etcetera? Thanks.

[Greg Ballard:]

Our numbers for '08 include guidance for acquisitions only to the extent that we indicated the $2 million to $3 million from MIG, nothing else is baked into that and won't be until we consummate those deals and figure out the impact. We are very excited about Android and everything that we've seen and heard about Android is encouraging. I think it's still too early to be able to access the impact or certainly to see the impact it's having on the industry. It is certainly one of the bigger developments, in the past several months, in an industry that if nothing else is characterized by big developments. The point which is most noteworthy is that all of those developments have been very positive from the development of the iPhone to Android, Microsoft's announcement today about the Danger acquisition, all of these things feed into a general view that we have the next big movement forward in this business taking place.

[Brian Fitzgerald:]

Great. Thanks.

[Operator:]

Your next question comes from the line of Mark Wienkes with Goldman Sachs. Please proceed.

[Mark Wienkes:]

Great, thank you. Just a follow up on that revenue question. What's the pro forma revenue growth that you have to your new targets, if you exclude both HASBRO and MIG?

[Greg Ballard:]

Well the year-to-year growth is 24% to 30% on that range. Yeah, obviously it's bigger if we do some and exclusion of the HASBRO impact on that, Rocky you have…

[Rocky Pimentel:]

I meant that if we were to exclude HASBRO quite frankly the growth rate would be as much as 50% or so. So, you know we see a lot of opportunity in 2008 needless to say with our new relationship.

[Mark Wienkes:]

Okay. And then I guess as the landscape continues to shift towards some mobile guys dropping off, what's happening to the splits or the carriers as you see it in '08 and then also on gross margins with respect to your license fees, specifically I guess not so simply but the Big Fish Mystery case filed and other recent titles that you've signed.

[Greg Ballard:]

Those are fair questions Mark. We are not seeing a whole lot of net movement in the carrier splits right now. In any one quarter we may have a negotiation going on with a carrier where we are losing a little bit of margins but we also may simultaneously have one with another carrier; we’re actually getting some points back. So, that is being the case, as far as I could remember, for the past five years that I’ve been in the industry. In the licensing arena, I would actually say that the things are moving more favorably to us. Every time we do a license deal, it seems to be just anecdotally that those deals appear to be better deals for us than they were in the past. But one thing I will noted is, the trend is a little bit different that is, that the guarantees are going up for some of these deals simply because the amount of money that we anticipated being able to deliver from a particular title is now also larger but now we have a lot experience modeling license deals when we put a number on the table with licenses or we feel very confident that we’ll be able to delivered that number and the result of it, as much as anything else that the guarantee is going up. There is a little bit less pressure I think on royalty rates, so I think we’ve been beneficially affected by that.

[Mark Wienkes:]

Are you seeing more betters at the table for those licenses or fewer?

[Greg Ballard:]

Actually I would say far fewer, and that’s been true for the last couple of years. Once some of the companies that like ourselves early on had a lot of venture capital money to try and get some market share have faded away. Now you have just a very small handful of companies that can afford to put a big guarantee on the table, but perhaps more importantly, who can realistically calculate that the guarantee make sense to them. And I remember right now there are only three maybe four companies that really have a global footprint and so when we’re sitting down across the table from a global licensor, we are able to put together a plan for them that is more extensive and also generates, in general, more revenue just because of the strength of our distribution than somebody who is a smaller player. And so this is one of those, where the haves continue to get more than the have-nots have a more difficult time competing because on a global basis, having that distribution allows us simply to bid more at the table and that made all the difference in the world.

[Mark Wienkes:]

Okay. That's great, thank you.

[Greg Ballard:]

Thanks Mark.

[Operator:]

Your next question comes from the line Amir Rozwadowski with Lehman Brothers. Please proceed.

[Amir Rozwadowski:]

Hi, afternoon guys. Just following up in terms of that consolidation among the carrier community you had mentioned Greg. It seems like you highlighted that you expect that to continue over the next couple of quarters. Is that an accelerated consolidation in terms of the vendors and if so, what's driving the accelerated consolidation?

[Greg Ballard:]

We don't think Amir that I can say that there is an event that triggered it because as I think about each of the carriers that is undergoing the review internally it's been triggered by their reasons. But its pretty clear that most of the leading carriers in the US that they have decided for their own business purposes and those business purposes may be strictly unique to them, that they want to deal with fewer publishers than they did last year and the year before. Each of those carriers is taking a different cut at it, some are cutting to a larger number than others. But some of them were actually cutting [free from our back] and the reason I say this is going to take place over the course of the next couple of quarters. Most of those cuts have actually been made and I believe most of the publishers have been notified. But there are certain grandfathering provisions that we understand to put in place, so that the titles will continue to be sold through some period of time until eventually they will work their ways up the deck. So, the decisions have been made and perhaps even been implemented, but the title impact will take several quarters to play out.

[Amir Rozwadowski:]

Okay. Then make sense. I realized that you can't really talk about the Superscape transaction, given some of the regulations in the UK, given some of the deck placement checks one would image you had stated sort of their position in the US being very strong perhaps if you looking into '08, post acquisition how do you see sort of your geographic distribution? I mean are you going to be still a higher weight towards the US or do you see other means for you to distribute that sort of exposure throughout your business?

[Eric Ludwig:]

Yeah I mean I think right now initial integration of Superscape would probably increase our revenue concentration in North America, but across a handful of North American carriers. But actually in the aftermath of that initial phase, we see opportunities for our global distribution channel to actually take their titles pretty much to all of our regions and especially in Europe, where they haven't had the scale to distribute. So, we hope to see the opportunity to actually get true leverage in terms of distributing their titles with our platform.

[Amir Rozwadowski:]

How receptive have those carriers been to the announcement in terms of the acquisition?

[Rocky Pimentel:]

Well, in terms of due diligence we had conversations with those carriers and got very positive feedback relative to the professionalism and [benefits] of Superscape.

[Amir Rozwadowski:]

Great, and then lastly on these two major title announcements the SPEED RACER and I guess the Batman property. I guess two questions from that stand point. Within your guidance outlook for '08, is there any sort of a mark that you are hoping to hit with these two titles. Should we consider both of these titles perhaps in line with the performance of something like the TRANSFORMERS and then secondly, within that is, what have you learned -- I guess, you have done several major property launches, sort of movie properties and what have you learned from the past launches that you think maybe you can do, improve on or need to change with these two sort of high caliber properties.

[Greg Ballard:]

Well, that's a lot of questions Amir. Well, let me….

[Amir Rozwadowski:]

Yes.

[Greg Ballard:]

I think we expect these titles -- we don't forecast individual titles when we talk to you guys, but I think it's a reasonable assumption that these two movies will be big successes for us. We chose those movies in consultation with Warner Bros. because we believe that they would be very big properties and so we will expect them to behave like TRANSFORMERS, only we would hope that every year it we will get a little bit better on how we execute on something like this and I think that's a fair assumption. Movies behave a little bit differently than other products, in the sense that they do tend to have a little bit of an earlier peak and then a fairly long life after that. We are still selling Ice Age 2 for example, in most regions of the world quite successfully. We will expect these titles to follow that pattern as well. The one thing, that I think we've gotten very good at doing, is working with the movie studios to exploit and leverage the marketing expenditures that they are making in the far reaches of their global marketing efforts and this is true in Korea as much, as that is in Finland or South Africa. We've gotten very good at local marketing that leverages the international scale of these movies. And that's something that we expect to get better and better at. And one of the reasons why we like long-term relationships with a studio like Warner is that each movie we expect will be better and better as we teach the right people to work in the various regions and they are comfortable with us. So we are excited about that. I guess the only other observation I would have, about movies is we have learned in the past that not all movies are created equal for mobile games. And therefore we have become very selective in the movies that we choose to license and we don't take movies that undermined or questionable box office hits. We try to be selective enough that we are picking the ones that are generally perceived as being clear AAA winners. I think we have done that again this year and I think we will see the benefits of that in our revenue this year.

[Amir Rozwadowski:]

Great. Thanks for taking my question, guys

[Greg Ballard:]

Thanks

[Operator:]

Your next question comes from the line of Tavis McCourt with Morgan Keegan. Please proceed.

[Tavis McCourt:]

Hi, good afternoon guys. First a financial question, just on MIG. I know it only had about 9 or 10 days in the quarter, but were there any one-time costs associated with that in the quarter, and then also related to MIG, had a look at the Q1 guidance, it looks like if you back up the tax benefit this quarter, your non-GAAP is about break even, a little better than break even but your guidance is for about $1 million non-GAAP loss, pre-tax in Q1. Is that a solution for MIG or just ongoing, growing of the OpEx at Glu's traditional business?

[Rocky Pimentel:]

Yeah Tavis, I think that, that is in Q1, the operating expenses are expected to expand particularly in the R&D area. We plan to add about anywhere from say 75 to a 100 headcounts this year all pretty much all of which are in the R&D area and so we'll continue to be making some additions, but in China and Latin America mainly from an R&D standpoint to support the title plan that rolls out of the backend of 2008. So, the first quarter and where the revenue ranges there will be some marginal investment that comes before the marginal revenues and gross profits if those will return.

[Greg Ballard:]

I was just a remind that we sort of gave everybody heads up at the end of the third quarter that first quarter of 2008 was going to be by far our biggest challenge both in terms of revenues and also in terms of net income just because of the sort of the loss Hasbro and the postponements some of the other titles coming in and you are seeing that effect take in those numbers.

[Eric Ludwig:]

And one point I did miss is the less interest income we're going to have as a result of using cash for the mid transaction that we gave up at the end of -- early in December.

[Tavis McCourt:]

Got it and then in terms of the some of the games from the Beijing studio kicking in, in the back half of the year and that having a positive impact on the margin, is that just basically finally generating revenues from that asset and just being able to cover the fixed cost over there better or is there actually shifting of labor resources over there?

[Greg Ballard:]

Well, that there are both of those things taking place. Not shifting per say, but by far the bulk of our hires going forward in R&D is in China or other studios there in low cost areas. We are not shrinking anywhere else, but when it comes time to add people, we are typically adding in low cost places. But if you think about it, we launched the China studio initiative last year in February or March and we've been paying the expense side of that without having yet had a title into the market that generates revenue. So, I think as much as anything else, its kind of starting to get some of the revenue pay back for the expenses that we have been paying all the way long.

[Tavis McCourt:]

Got you, and Greg I want if you can comment, in the last quarter you spent a little time on talking about some of the challenges in the European marketplace, having done the math and kind of how this quarter came out in Europe. But talk about housing or trending there?

[Greg Ballard:]

I mean we had a good in Europe. I mean we felt pretty good about the recovery that we had in that market, although I'd absorb it was at the high end of what we had adjusted you guys down to. So, I'm not going to over claim the success that we had. But in general, some of the problems that we had seen in the third quarter, sort of corrected themselves. We didn't have major transformations of any of the carriers, no outages of any of the platforms, the shifts that have taken place and outsourcing sort of calm down. But we still anticipate that Europe is going to be a more challenging market for a period of time for everyone just because of the volatility and unpredictability of the market sometimes has. We're prepared for that, we built that into our expectations for the year. We've also by the way brought on a new senior team there with the addition of a new Managing Director. We already had seen really good things from them and we had some other exciting news of management additions and moving arounds. There I think we will do nothing other than strengthen that team and prepare them for whatever volatility comes. But we feel pretty good about Europe, but we are as the phrase goes guardedly optimistic.

[Tavis McCourt:]

Okay. Thanks.

[Operator:]

Your next question comes from the line of Mark May with Needham. Please proceed.

[Mark May:]

Thanks for taking my questions. First housekeeping, how many titles not SKUs titles did you launch in the fourth quarter and roughly how many do you expect to launch in 2008?

[Greg Ballard:]

Yeah Mark, so we launched roughly 12 titles in Q4, 11 of them were internal studio titles, one was a distribution title. In 2008 the range is somewhere between 30 and 35 and this excludes MIG, because we are still revising or finalizing their title plan which is going to be more titles. So that is 30 or 35 titles coming out of our worldwide studios and then another 20 to 25 titles from our major distribution partners. So we have a pretty robust title plan for 2008.

[Rocky Pimentel:]

And remember that when we mention a title not all those titles are necessarily global, some of those titles may be launched just in Latin America for example. We have had a very recent success with the launch of a title called Pasapalabra in Spain, which is doing extremely well there but it literally distributed only in Spain and nowhere else. So to give you a gross count on titles that may include the lot of titles that are fairly regional in their nature.

[Mark May:]

I think you mentioned $6 million in investments related to either licenses or expenses related to the headquarter change. How do you account for these expenses?

[Rocky Pimentel:]

Mark, you cut up for some reason, would you mind repeating that?

[Mark May:]

The $6 million that you attributed to licenses and headquarter relocation in the first half of the year, how are you, I guess how do you break that down and how are you accounting for those?

[Rocky Pimentel:]

The $6 million of cash, roughly probably somewhere between $3 million and $4 million is on licenses and…

[Rocky Pimentel:]

Do you think $6 million in cash -- I mean roughly probably somewhere between $3 million and $4 million is on licenses and up to a couple of $2 million is on the upfront improvements and facilitation of the new offices.

[Mark May:]

And are these all expensed as incurred?

[Rocky Pimentel:]

No. They are capitalized. For the royalties that are prepaid and then they are recognized according to the revenue stream….

[Mark May:]

All right.

[Rocky Pimentel:]

We saw improvement to capitalize, amortize on the license ...

[Mark May:]

Okay. And then the last question is, based on the revenue guidance for MIG, which is I think not far-off from where were. I think we were maybe even slightly higher, but in the ballpark. You obviously, have to look out pretty far to justify the price that was paid for this business. So I am wondering, if you could walk us through your thought process on the valuation and how you get to a reasonable number.

[Greg Ballard:]

Well, the one thing to keep in mind is that there are certain triggers that are built into this deal which we have not disclosed that gives the principles and the shareholders their earn out upside to the deal. For purpose of being conservative we have assumed those costs and given those costs to you as guidance. You shouldn't necessarily assume that the revenue number that we have given you is the revenue that would trigger that upside to the principles. So it's still a little bit of a guessing game for you guys, but at least to stay way. But we are pretty confident that if they hit the numbers that trigger the earn out, the deal is very accretive and we'll over the course of several years proving to be what we think is a really strong addition to our global distribution. It's no secret that China has finally gotten to the point, where all of the much discussed growth is starting to happen. We are seeing it in 2008 in its beginning stages, but we are really seeing all the evidence that it will really happen, substantially in 2009 and 2010. We also are seeing some collateral effects and benefits from the deal and that we are now able to go to a licensor and talk about having the number one games company in China, in addition to the rest of our world wide distribution. And it's always difficult to say, what is the final straw that puts you on to it and wins the license in the end, but just as everybody in our business seems to have a China strategy, it turns out that the licensing community also likes to be able to tell their bosses that they have a China strategy as well. And so we have gotten a lot of very positive feedback from licensors in having the deal done. So I guess the long and the short of it is, we've built in the cost of the upside, we haven't necessarily built in all of the revenues in the upside and we'll just sort of see, where the deal falls in between.

[Mark May:]

Okay, thanks.

[Operator:]

(Operator Instructions) Your next question comes from the line of Alec Berman with AMPAC Research. Please proceed.

[Alec Berman:]

Hey, how you doing? Just wanted to ask do you see raises because of your acquisitions going forward you made a couple of in the middle one and made one, and do you see continued opportunities there or you think it may be a sort of manipulation that these growth bid and then go from there.

[Greg Ballard:]

Well, I think the analogy I use recently is that, we are living like a snake with something that we've just finished eating. I think we need to go up in the side, for a little while and digest. We've done two transactions in a relatively short period of time. We have big ambitions, but we're still at the end of day a relatively young company. So, we don't want to overtax ourselves. We are not, and I have been very clear in talking about in the past. We are not embarked on a roll up here. So, this is not about just trying to buy every cheap property that we come across. We bought companies that are valuable in our minds. They have a fair amount of class to them and when we do those transactions, we want to make sure that we are respectable of that transaction on the backend as we are in the front end and make sure that we do a good world-class job of integrating that. That's been our history. We did a great job of integrating the macro space transaction, I think we did a fantastic job with iPhone transaction and got a lot of synergies out of that deal. We plan on doing a good job of integrating these two before we put our heads up and look around for the next opportunity. Those opportunities will be there. They may be further consolidation in the mobile business. They may be future geographic expansion, we may find a title or two that we pick up in relatively smaller deals or we may find an opportunity to do something that is more expansive into some of adjacent areas we have talked about in the past, whether that's some mobile applications that we find interesting that are not strictly speaking games or whether its something in the online or other platform area of the casual games business. So, a lot of different places we can go, but I think we are committed to making sure that we have done the right thing by digesting these thoroughly and make sure that our integration is as good as it can be.

[Alec Berman:]

Okay. Thank you. You could obviously give me an overview, what is your goal for 2008 obviously 2009 is a ways away, but just sort of qualitatively what do you think we might be setting a year from now and we might be talking about and what's your vision for 2009 and beyond sort of very qualitatively?

[Greg Ballard:]

Well, it actually is a very good question. I'll see what Rocky wants to add to this too. But I think what the big news is from 2008, in my mind and frankly we wouldn’t have necessarily seen this, at this time in 2007. But I think it's going to be about the emergence of new platforms and new handsets in the multimedia area. Whether it’s the iPhone or Android or the Sidekick or the N-Gage. I mean those have been the things that have gotten our attention in the last few months, and frankly wherever we had an opportunity to see how those sell, they sell better than traditional plane ordinary color phones. And if you remember all of this adventure that we are on right now started in 2001, 2002 when the world went from black and white to color handsets. And a similar transition is happening right now, when we are removing from color handsets to full multimedia computer capable handsets that people are demonstrably using to play games and to access other forms of content. You add that to the faster networks that are coming and new pricing plans on those networks. And I think all of a sudden you have a completely different world than we might have imagined even six months ago. And we are still filled with challenges as opportunities. I suspect sitting here today, as that’s going to be the story that we will discussing in 2009. Rocky do you want add anything?

[Rocky Pimentel:]

Yes, I think that’s exactly, and I think with the smart phones, the events around ANDROID, the acquisition of Microsoft of Danger today, I think we're going to see an acceleration of advance handsets during 2008, which is going to be a great impact on the mobile media category beyond just games. I think what's interesting is, I just got back from, on a week on hops. See them 222with our European team and had a chance to talk with a couple of carriers. And I think one interesting thing that we've captured and talking with them about the whole content spaces that we've seen a couple of different themes of content and content related things happening in the mobile space whether it's ringtones and wallpaper which has kind of become a commodity now, moving video or streaming video, which is s challenge because of the imperfection of the networks and the limit of handsets. But the one thing that has been a constant grower for the carriers has been mobile gaming and I think they are gaining more and more respect and enthusiasm for it as long-term high growth category as a result of our perennial performance through the end of 2007. So as we entered 2008 qualitatively I encore more emotionally excitement about the business and optimistic than we've ever been just because of the way that's Glu in itself has evolved this year as well as how the market is sustaining its momentum and remains with a confidence for the distribution channels.

[Alec Berman:]

Okay, thanks.

[Greg Ballard:]

Very interesting.

[Operator:]

Ladies and gentlemen this concludes our Q&A session. Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.