Glu Mobile Inc
Q1 2009 Earnings Call Transcript

Published: 7 May 2009

[Operator:]

Good afternoon. My name is [Erika] and I will be your conference operator today. At this time, I will like to welcome everyone to the Glu Mobile's first quarter financial result conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). Mr. Potter, you may begin your conference.

[Seth Potter:]

Thank you. Good afternoon everyone and thank you for joining us on the Glu Mobile's first quarter 2009 financial results conference call. This is Seth Potter from ICR. On the call today, we have CEO, Greg Ballard, CEO whose dialed-in from London, the CFO, Eric Ludwig; and Senior Vice President of Global Publishing Jill Braff. During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Any statements that are not statements of historical fact maybe deemed to be forward-looking statements. For example, words such as expect, believe, anticipate, intend, and other words that denote future events are intended to identify forward-looking statements. 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 the actual results to differ materially from the forward-looking statements in the press release in this conference call. These risk factors are described in today's press release and are more fully detailed under the caption "Risk Factors'' in the Form 10-K filed with the Securities and Exchange Commission on March 31st, 2009. During this call, we'll present both GAAP and non-GAAP financial numbers. Non-GAAP measures exclude acquired in-process, research and development, amortization of intangibles, stock-based compensation charges, impairment of option rate securities, restructuring charges, the non equity component of the MIG earn out, transitional expenses and foreign currency gains and losses related to the revaluation of assets and liabilities. 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 these figures, please refer to today's press release regarding our first quarter results and certain non-GAAP financial information available in the investor relations section of our website, www.glu.com. The press release has also been furnished to the SEC as part of a Form 8-K. In addition, please note that the date of this conference call is May 6, 2009 and any forward-looking statements that we make today are based on assumptions that we believe are 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 and 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 to the company. Greg?

[Greg Ballard:]

Thanks, Seth. And thank you everyone for joining us today. As Seth mentioned, I'm speaking today from London, our Eric is in San Mateo. We are going to try as best as possible to avoid any difficulties from the geographical separation. We generated $20.8 million in revenues in the quarter, an increase of 1% over Q1 2008. Our non-GAAP operating margins were significantly above our guidance, coming at $1.4 million or 6.7% of sales. Again we delivered operating expenses of $13.6 million which were significantly lower, almost over 20% then our peak last year. Most importantly, we focused on maximizing our cash resources. Apart from license free payments of $5.4 million in Q1, we generated $2.9 million in positive cash flow from operations. We are pleased with our results in this quarter, not just because we brought in revenues that exceeded our expectations, but because our margins on that revenue demonstrate our commitment to cash generation and profitability. We are hopeful that our performance in Q1 will in that regard provide some assurance to our investors, our ability to deliver not just solid performance on the top line, but disciplined results throughout the P&L and Balance Sheet. The revenue this past quarter was generated by solid performances across all of our regions .While it is clearly too early to declare that the market has returned to its pre recession strength, we were encouraged that the market at least for Q1 appears to have ceased its prior rapid decline. In China our results have been somewhat exaggerated by the impact of a one time catch up payment of approximately $700,000 from China Mobile for various activities in previous quarters. But even apart from that China still performed well during the quarter. In North America Verizon once again provided a solid base and Glu achieved its highest ever number of best sellers and Verizon was 7 titles in the top 25. Elsewhere in our global carrier business, we saw strong results again in France where we continue to see growth and gains in market share. And Latin America continued to provide solid growth each quarter. In large part of these results reflected an active and impressive new title release schedule during the first quarter, as we aggressively embraced both the carrier business and the next generation opportunities represented by the iPhone, N-Gage, and Android. We launched 5 significant titles in the carrier desk during the quarter. Our most important launches for the quarter were the gains associated with 2 successful movies; The Watchmen from our Warner's licensing relationship and Monsters vs. Aliens from DreamWorks both of which were solid global releases supported by carriers through our distribution reach. During the quarter, we also launched Superman Batman

[Eric Ludwig:]

Great, thank you, Greg. To reiterate your sentiment, we were pleased with the company's first quarter results, which exceeded the high end of our guidance and that we generated a 6.7% non-GAAP operating margin despite the challenging economic environment Let me review our first quarter results, and then I'll finish with the brief discussion of our outlook. Starting with our first quarter income statement. Total revenue for the quarter was $20.8 million, which was well above our guidance range of $18 million to $18.5 million and compare to $20.6 million in the year ago quarter. Even after excluding approximately $700,000 from a one-time non-recurring payments from China Mobile attributable to our try and buy promotion from 2008, which was reported to us by China Mobile in the first quarter, and which was a positive surprise, our revenues were still comfortably above the high end of our guidance. In addition, considering the volatile foreign exchange environment, it is worth noting that our total revenues would have grown 4% over the prior year on a constant currency basis. The better than expected revenues was primarily attributable to the fact that the revenues from the carrier business did not decline in the first quarter as much as we'd expected, though we did experience contraction and our new title releases also performed well in the quarter. Reviewing some of the specific revenue metrics. Our top 10 titles represented 32% of revenue, up from 31% in the fourth quarter of 2008, and down from 42% in the first quarter of last year. The average revenue for top 10 titles was $658,000 in the first quarter of 2009, that's down both sequentially and compared to the first quarter of 2008. Our largest title was 5% of revenue, which is down from 6% in the year ago quarter, reflecting the growing of our games launch in 2008. Revenue from new titles represented 46% of revenue in the first quarter of 2009, compared to 44% in the fourth quarter of 2008 and 45% last year. As for the revenue mix between license titles and original IP, original IP was up sequentially accounting for 24% of revenue. We continually expect revenue from original IP to remain in 20% to 25% range for the remainder of the year. Our top four carriers represented approximately 48% of revenue in the first quarter of 2009, compared to 43% in the fourth quarter of 2008 and 47% in the first quarter of last year. We had two carriers in the first quarter of 2009 that represented 10% or more of revenue, Verizon at 22% and China Mobile at 12%, though China Mobile was benefited from the additional $700,000 of one-time reported revenue. By geography, our revenue mix the first quarter of 2009 was 48% in North America, 27% in EMEA and 25% in the rest of the world. Royalties in the current quarter were $5.8 million, which represented 28% of revenue, up slightly compared to the 27% in both the fourth quarter of 2008 and first quarter of 2008. Turning to profitability, starting with the highlights of our GAAP results. GAAP loss from operations and net loss were $2.9 million and $5.8 million respectively compared to GAAP loss from operations and net loss of $5.5 million and $6 million respectively in the first quarter of 2008. GAAP loss was $0.19 for basic share in the first quarter of 2009, compared with a GAAP loss of $0.21 per basic share in the same period last year. I'll touch on these in more detail shortly. Moving onto our non-GAAP measures which will be providing for each, first quarter 2009 expense category which measure exclude amortization of intangibles, stock based compensation expense and the non-equity component of the MIG earn out, acquired in process R&D, restructuring in traditional expenses and foreign exchange revaluations and certain assets and liabilities. With the volatility in the global economy, our tax profile and our debt service cost, we believe that our non GAAP operating margin, most accurately flat have a core business is performing. Additionally this measure shows, whether we are driving leverage toward our long-term target operating model and is the best measure for consistently evaluating how we are managing our business. All comparisons will be using the non-GAAP current year results. Non-GAAP gross margin was 72% during the first quarter of 2009, which is up from 53.3% last quarter and relatively stable and compared to the year ago quarter. The sequential increase in gross margin was primarily due to the inclusion in the prior period of a $4.2 million royalty impairment, which was not repeated in this period. Total non-GAAP operating expenses in the first quarter of 2009 were $13.6 million down from $14.9 million last quarter. The decrease was primarily due to our continuing efforts to find additional operational efficiencies in our business, a small non recurring benefit related to the sale of a number of patents, totaling $165,000 and a positive effect of the stronger U.S dollar on our foreign operating expenses. Our operating expenses would have been approximately $14 million excluding the patent sale and using constant exchange rates for the entire quarter. We continue to anticipate quarterly non-GAAP operating expenses to be in the $13.75 million to $14 million range for the remainder of 2009. During the first quarter, R&D was $6.2 million or 30% of revenue, down from 34% last quarter. Sales and marketing expense $3.3 million or 16% of revenue, down from 17% last quarter and G&A was $4.1 million or 20% of revenue for the quarter, up from 18 last quarter. Our non-GAAP income from operations in the first quarter of 2009 was $1.4 million, exceeding our guidance of a loss of $600,000 to a loss of $1 million and represented a non-GAAP operating margin of 6.7%. Even excluding non-recurring payment from China Mobile and the proceeds from the patents sale, we would have achieved positive non-GAAP income from operations of approximately $550,000 which was still above our guidance. I do want to point out that in the first quarter of 2009, we invested over $1 million of our R&D spend on the next generation platforms including the iPhone, which had insignificant revenue contribution in the quarter. This means that our carrier based business had a non-GAAP operating margin of over 11% in the quarter. With our lower operating expense profile, we've been able to use our carrier business to fund the investments on the next generation platforms, while still generating an operating profit this quarter. Income tax expense during the quarter was comprised of $325,000, of foreign withholding taxes and an income tax expense of $1.7 million for a total expense of $2 million. It should be noted that the $1.7 million income tax expenses excluding the foreign withholding taxes, it includes an estimated $850,000 of tax expense that we anticipate taking as income tax benefit in the second half of the year. During the first quarter, our non-GAAP net loss was $977,000, based on $29.6 million basic and diluted shares, outstanding non-GAAP loss including the impact from the higher than expected tax expense was a loss $0.03 per basic share favorable to our guidance. Turning to our results on GAAP basis, which include $2.9 million related to amortization of intangibles, $754,000 related to the allocation and stock based compensation, $656,000 of earn out expenses related to the MIG acquisition and $461,000 related to FX losses related to the reevaluation of certain balance sheet items, the following expense level determined in accordance with GAAP. Cost and revenue $8.7 million, R&D $6.4 million, sales and marketing $4.1 million and G&A $4.5 million. For the first quarter, GAAP loss from operations was $2.9 million, net loss applicable to common share was $5.8 million resulting in GAAP loss per basic share of $0.19. Let me now turn to the balance sheet, cash and cash equivalents were $14.7 million as of March 31st, 2009 compared to $19.2 million at the end of the 2008. During the first quarter of 2009, the company used approximately $2.5 million from operations, which includes $5.4 million in royalty prepayment. It should be noted that the $5.4 million in license prepayments in the first quarter of 2009 is over 45% of what we are forecasting to spend for the entire calendar year, and despite such a large outflow in the first quarter, our cash usage from operations was only $2.5 million of net. Additionally, we used $305,000 related to CapEx and experienced $115,000 reduction due to foreign exchange translations on foreign cash accounts. Accounts receivable at the end of the quarter was $19.7 million, down from $19.8 million at the end of the fourth quarter. Let me now discuss additional details related to our capital structure, including a review of our obligations to the former MIG shareholders. To-date we have paid $9 million of the $14 million due to MIG in 2009, which includes $6 million installment paid on January 15 and a $3 million installment paid on April the 1. In addition, at the end of the first quarter of 2009, we have $4.5 million outstanding on our line of credit with Silicon Valley Bank. And we were in compliance with all financial covenants related to the facility. It is important to note that we maintain a significant cushion with respect to our bank lender defined EBITDA covenant, since we exceeded our first quarter non-GAAP operating income guidance. Remember that the covenants are on a rolling six months basis. During the first quarter of 2009, we achieved EBITDA as defined by our lender of approximately $1.34 million and when combined with our fourth quarter of 2008 lender defined EBITDA loss of approximately $1 million loss, we reported $320,000 of positive EBITDA for the six months starting October 1, 2008 and ending March 31 2009. This is comfortably above our covenant of an EBITDA loss of $2.4 million for the same six month period ending March 31 2009. To help you with reconciling our first quarter non-GAAP operating margin of $1388,000 to the first quarter EBITDA as defined by our lender of $1341,000, you need to back out these $656,000 MIG earn-out compensation expense and add back $593,000 of depreciation expense and add back 16,000 of interest income. In regards to our EBITDA covenant for the 6 month starting January 1, 2009 and ending June 30, 2009, our covenant requires that we exceed the covenant of an EBITDA loss of $812,000. In the first quarter of 2009, our EBITDA was a positive $1.34 million, which was 2.05 million favorable to the first quarter target. Consequently, we remain confident that we'll remain in compliance with the EBITDA covenant for the next measurement period. We currently expect to end 2009 with a cash and equivalent balance of over $11.5 million, which includes the $3 million paid in the former MIG shareholders on April 1. Our making the last 2009 payments to the former MIG shareholders are $5 million due on July 1. Our drawing down a total of $7 million on our credit facility an increase of 2.5 million over our current drawdown. Our repatriating approximately $4.2 million from China, which we expect to complete in the second quarter of 2009, and our expectation of generating positive cash-flows from operations during the second half for the year. Given our reduced expense structure and the fact that we expect to pay only $3 million in the second half of 2009 on prepaid licenses, we remain committed to achieving positive cash-flows from operations for the full year 2009. Turning now to guidance. The second quarter of 2009, we currently expect revenue to be in the range of $18.75 million to 19.25 million. This is down sequentially by approximately 5% when backing out the extra revenue from China Mobile in the first quarter of 2009. And we first continued quarter-over-quarter contraction in the carrier business, due to lower forecast with handset sales and then the general economic outlook, partially offset by increasing revenues on the next generation platforms specifically the iPhone. Non-GAAP operating income for the second quarter is forecasted to be in a range of a loss of $200,000 to an operating profit of $200,000. Our income tax expense for the second quarter is expected to be $1.1 million and includes $600,000 of withholding taxes, resulting from the China repatriation. Non-GAAP net loss for the second quarter is expected to be between a loss of $1.2 million and a loss of $1.6 million, or a loss of between $0.04 to $0.05 per basic share. The non-GAAP loss excludes $1.3 million for amortization of intangibles and approximately $1 million of anticipated stock based compensation and a non equity component of the MIG earn out. Weighted average common shares outstanding for the second quarter of 2009 are expected to be approximately $29.7 million basic, and $30.3 million diluted. GAAP net loss for the second quarter is expected to be between a loss of $3.5 million and a loss of $3.9 million, or a loss of between $0.12 and $0.13 per basic share. For the full year 2009, we are increasing our revenue forecast to within a range of $78.5 million to $80 million and our non-GAAP operating income is forecasted to be between $2 million and $4 million, or non-GAAP operating margins between 2% to 5%. Our taxes for the full year is expected to be $3 million, which includes $1.5 million related to foreign withholding taxes, $600,000 related to be China repatriation and an income tax expense of [$800,000]. This includes the income tax benefit in the second half of the year that I mentioned earlier. We expected non-GAAP net income and loss for the full year to between a loss of $2.2 million and a loss of $100,000, or a loss of between $0.07 to break even per basic share, which excludes $6.8 million for amortization of intangibles, approximately $4.1 million of stock based compensation, and MIG earn out expense and $461,000 related to un-hedged foreign exchange losses. On a GAAP basis, we expect the net loss for the full year between $11.4 million and $13.5 million, or a loss of between $0.38 to a loss of $0.45 per basic share. Weighted average common share outstanding for the calendar year 2009 are expected to be approximately $29.7 million basic and $30.8 million diluted. We are reiterating our commitment to being cash flow positive from operations for the full year 2009. We believe, we are well positioned to continue to gain market shares on a traditional carrier business, continue our recent success in the iPhone and to be the leader on the other App Stores as they evolve. Lastly, for those of who you will be in New York City on Wednesday May 27th, we will be hosting our Third Annual Investor Mobile Games Day from 5 PM to 7 PM, where we will be previewing many of our second half 2009 next generation titles on the iPhone. Please contact Seth Potter for details. And with that, we will open up for questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of Tavis McCourt.

[Justin Patterson:]

Thanks guys this is Justin Patterson in for Tavis today. Just a couple quick questions. First a housekeeping item. Could you repeat what CapEx was for the quarter?

[Eric Ludwig:]

Yes, CapEx was $305,000.

[Justin Patterson:]

Okay, great, thank you. Then just moving on to some other the next generation platforms. It sounds like this is still kind of a immaterial revenue contribution for you guys but just off of the initial economics of what you have seen, can you perhaps just give us a sense of what kind of the tail of the games are here, I mean at least looking at your fairly long tail for some of your catalogue games. So, I'm wondering how that really compares on say a platform like iPhone where you have much more competition on the platform.

[Greg Ballard:]

I'll take that initially. This is Greg speaking. So, that's a very good question. I think to a very large extent right now people are trying to understand that tail themselves. Initially, it would appear though the tail on the iPhone is much shorter tail, much more like a traditional entertainment business, where a title becomes a hit fairly quickly, although a little bit slower than perhaps in a movie or music setting, but, then also fairly rapidly declines. That has not been the experience of course with the carrier business, and we would hope that there would be some ways of extending that tail. Nonetheless, while it is a hit, the number of downloads, and I think to some extent, the number of the dollars that can be earned on this is still fairly significant for a good hit title at a high price. One thing I would add is that on the iPhone, Apple has now introduced in 3.0 the possibility of many transactions that could be carried on over the life of a title, so that people can continue to be engaged and buy either upgrades or power-ups or new levels to the title, and no one yet understands exactly how that will affect either the economics of the business or the tails of the products on the business. They also are going to enable subscription, which could have to the affect of increasing the tail, which to some extent has been the secret of tails being longer in the carrier business as well. So, I would say today the tails is short, tomorrow as the new platform items are rolled out, we could find that to be quite different.

[Justin Patterson:]

Moving on to carrier side of the business, obviously much better than expected this quarter as evidenced by the substantial revenue relative to guidance. Can you give us some sense as to what it was there at least on some of the revenue split, but it sounds like that's somewhat minor at the moment. To what extent was this just kind of fueled by additional marketing, better deck placement, so on and so forth?

[Eric Ludwig:]

I was looking at Jill, I though maybe that might be more relevant question for Jill on the activities in Q1.

[Jill Braff:]

Sure. Certainly, we had strong titles in Q1 that probably helped in the quarter, but we also had a strong Q4 lineup that carried over. I think in general as Eric and Greg spoke to in the prepared remarks, we were concerned heading into Q1 at the precipitous decline we were seeing in the back half of '08 was going to continue. So really what we saw in Q1 was while maybe not a complete return to normalcy, definitely the carrier business was shored up and was ahead of what our expectations were. So, yes. There were marketing activities around things, especially like Monsters vs. Aliens, and the Watchmen in particular but not so different from our usual course of business.

[Operator:]

Your next question comes from the line of Mark May.

[Mark May:]

Sorry if you have already addressed this. Did you talk about what your expected cash burn rate will be in the June quarter and also the remaining royalty prepayments? Is there any one quarter for the remainder of this year there will be more of those payments than in others?

[Eric Ludwig:]

Sure. Hi Mark. I did not mention what the cash usage would be in the second quarter, though we will still have cash losses from operations in the second quarter. We are forecasting spending $12.1 million in total for license prepayments. We spent $5.4 million in the first quarter, and we're going to spend $3 million in the back half. So the preponderance, the remainder is spent in the second quarter.

[Operator:]

(Operator Instructions) There are no audio questions at this time. Mr. Ballard, do you have any closing remarks?

[Greg Ballard:]

None specific other than to say, we appreciate everybody joining us this quarter. We look forward to addressing you again in three months time, and we wish you all the best for the rest of the afternoon and evening. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect. Presenters please remain on the line.