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Glu Mobile Inc. (NASDAQ:GLUU)

Q4 2012 Earnings Conference Call

February 5, 2013 16:30 ET

Executives

Greg Cannon - Vice President, Finance

Niccolo de Masi - Chief Executive Officer

Matt Ricchetti - President, Studios

Eric Ludwig - Chief Financial Officer

Analysts

Michael Graham - Canaccord

Sean McGowan - Needham & Company

Richard Ingrassia - Roth Capital Partners

Eric Wold - B. Riley

George Kelly - Craig-Hallum Capital

Darren Aftahi - Northland Securities

Operator

Good afternoon. My name is Shelly and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2012 Glu Mobile Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Greg Cannon, VP of Finance, you may begin your conference.

Greg Cannon - Vice President, Finance

Good afternoon, everyone and thank you for joining us on the Glu Mobile fourth quarter and full year 2012 financial results conference call. This is Greg Cannon, VP Finance from Glu Mobile. On the call today, we have CEO, Niccolo de Masi; President of Studios, Matt Ricchetti; 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. Generally, these statements are identified by the 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 in 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 on November 9, 2012.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude the change in deferred revenues and royalties, amortization of in-process development contracts, amortization of intangibles, stock-based compensation charges, restructuring charges, changes in the fair value of the Blammo earn-out, transitional cost, impairment of goodwill, release of tax liabilities and foreign currency gains and losses primarily related to reevaluation of assets and liabilities. Additionally, we will be discussing adjusted EBITDA, which is defined as non-GAAP operating income or loss, excluding depreciation. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and we encourage investors to consider all measures before making an investment decision.

For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today’s press release regarding our fourth quarter and full year results. The press release has also been furnished to the SEC as part of our Form 8-K. In addition, please note that the date of this conference call is February 5, 2013 and any forward-looking statements that we may make today are based on assumptions that we believe to be accurate and 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 express written permission of Glu is strictly prohibited.

With that, I’ll turn the call over to Niccolo.

Niccolo de Masi - Chief Executive Officer

Good afternoon, and welcome to everyone joining us today. Before I begin, allow me to direct you to the supplemental presentation accompanying today’s earnings. It can be accessed via our Investor website, glu.com/investors. In addition to the presentation, you will find demo videos of titles that we expect to launch between now and the next earnings call. I am pleased to welcome our President of Studios, Matt Ricchetti to our call today for the first time. He will be summarizing his findings and focus to-date in prepared remarks that follow mine. He will then be available during the Q&A session of this call, so not for any callbacks thereafter.

Allow me to begin with our Q4 revenue and EBITDA which both came in at the top end of our guidance range. These results were underpinned by two sequels in the Contract Killer franchise. Our $18.5 million of non-GAAP smartphone revenues represented 24% growth year-on-year. Our non-GAAP smartphones revenues for 2012 were $75 million. As a reminder with recorded revenues net of amounts retained by storefront owners and advertising networks. For example, two largest customers Apple and Google each retained 30% of the gross dollar amount the consumer spend on purchases from the Apple App store and Google Play store. As discussed on our previous quarter’s call, we took the decision to delay approximately half of our Q4 2012 titles. This was in order to allow map an opportunity to implement changes designed to improve average revenue per daily active user in each of them. None of these delayed titles have been killed, although more rework time than anticipated last quarter has been required for each. We expect that all will be live in spring except for one which we’ll launch in H2. Due to this timing the super majority of revenue impact from these delayed titles will be in Q2 and beyond.

As outlined on slide 20 in our investor presentation, we believe there are four core pillars that drive the revenue success of a freemium game, engaging core game play, high production values, consumer reach and deep monetization. We believe that we are already strong on the first three of these core pillars and are resolutely focused on institutionalizing dramatic more powerful monetization systems.

During Q4 2012, we closed our Sao Paulo studio. This will enable us to bring in a new generation of talent, while keeping R&D costs flat from 2012 to 2013. We continued to aggressively upgrade the quality and quantity of monetization expertise throughout Glu’s global studio function.

Matt hit the ground running as President of Studios and has embraced our mission to raise ARPDAU in 2013. He has brought strong monetization discipline to our Greenway process as well as an expertise in critical areas such as live operations. With his leadership we are revising our roadmap to provide for principally three types of products. The first type comprises sequels to our biggest action franchises with the deepened meta-game. By meta-game we are referring to scope for activity and long-term investments in a title around its core gain loop. Our aim here is to preserve our broad action adventure audience reach, while meaningfully improving monetization.

The second is a new category of products for Glu, real-time strategy and real playing game mechanics with narrower target demographics but significantly higher ARPDAU potential. The final portfolio will be devoted to casual and innovative mechanics. Our aim is to invest in fighting not the current war but the next. The majority of our portfolio is focused where we expect the market to be evolving too. The once prominent casual category has lost substantial market share to casino over the past 12 months. Mid-core titles have had a strong H2 ’12 and we expect we will do well in H1 ’13. Our console gaming has seen sort of 50% of its revenue derived from hardcore shooters as if yet there has not been a $50 million shooter on mobile. We aim to change this and believe we have the franchises and DNA to do so.

During the course of the year, we expect to launch approximately 15 titles with five in the first quarter. Two of these are titles pushed from Q4 2012, Dragon Storm and Gun Bros 2 and three are sequels, Stardom Hollywood, Small City and Samurai vs. Zombies Defense 2. We also expect o launch approximately five titles in Q2. In addition to these launches, our first real money gambling title will be in the slots category with a theme based around our well loved Samurai vs. Zombies IP. It will launch in Q1 on iOS and the UK through our partnership with Probability PLC. A couple of weeks ago, we closed the small investment in premium casino startup Bee Cave Games as part of our efforts to ramp capabilities in this sector. Bee Cave’s founders have extensive casino backgrounds, most recently having worked at Zinga.

We believe that with our new hires and monetization focus our probability of generating one or more hit titles has significantly increased. We believe the linear investments and additional refinement time for our titles during live beta testing can often yield greater than linear increases in ARPDAU. More flexibility of worldwide release windowing will provide us with greater opportunity to enhance life time revenue per title. As such going forward, we will be making operation decisions with a focus at all times on the full year outcome. The obvious, corollary to this however, is the quarterly results volatility may increase and current quarter gains may employ a wider range than previously.

I now turn to two topics that have been at the centre of our efforts since the last call. The first is the creation of a new Glu Publishing division. The second is our positioning to capitalize on what we have begun to call Social Gaming 2.0. Each is detailed in our company investor presentation on slides 18 through 25.

Today, I am pleased to announce the launch of a new Glu Publishing division. Glu Publishing will partner with third-party developers worldwide who wish to tap into outreach capabilities. Each development team with a product that has demonstrated a strong kernel of success be it on a given platform, country or language, we will be able to partner with Glu Publishing to dramatically expand worldwide reach. Glu Publishing will act as a one-stop shop for successful iOS titles looking to reach the Android, Windows 8, and Amazon platforms. Leveraging our offices in Beijing, Moscow, and Hyderabad, Glu Publishing will also act as the conduit for connecting emerging market game developers with North American consumers.

Glu Publishing will employ a high touch business model, a deep enrollment with a modest volume of third-party developers. Glu has always received a significant volume of inbound publishing requests from developers all over the world. Going forward, we will not only select from these, but also actively seek out partners worldwide who have a track record of success. We have already hired a VP of third-party publishing and are exploring additional senior additions to drive the division forward aggressively. Also, our guidance does not reflect any revenue from this business line. In H2 2013, we expect to launch (circa of) 4 titles. In 2014, we will aim to launch up to one third-party title per month. The Glu Publishing model is designed to enhance operating leverage in our business as well as our long-term top-line growth trajectory. Interested developers can submit proposals to publishing at glu.com.

The freemium business model emerged in late 2009 on iOS and early 2011 on Android. The majority of success during the first three years came from casual 2D games that could often only be enjoyed on the phone. Session lengths were short and game play was predominantly single-player mode. With relatively modest competition having one or two of the core pillars detailed earlier operating well was sufficient for profitability. As we appear into the next three years, we see our mobile gaming landscapes or the winning companies have all four core pillars institutionalized and firing on all cylinders. We believe Social Gaming 2.0 will be about the rising importance of tablets rather than phones, 20 minute rather than 2 minute sessions, in-game communities not between game Facebook connections, multi-player instead of single-player interactions, and 3D realism rather than 2D cartoon production values. Android devices in totality will ultimately generate significantly more revenue and presently due to the overwhelming volume and improving merchandising.

With Glu’s acquisition of GameSpy Technology last summer, we have positioned ourselves strongly on all of these Social Gaming 2.0 trends. Casual mechanics have broadened out the base of mobile gamers globally. These consumers are now gravitating towards deeper and more immersive experiences mid core and hardcore. Glu has all of the foundations in place to lead in a Social Gaming 2.0 landscape. We are and will continue to be masters of fragmentation in our mobile world. We cover over 750 Android devices in 8 languages and have strong relationships with Apple, Google, Microsoft, Amazon, and device manufacturers in all territories. Windows 8 is only beginning to emerge now and we believe will gain a meaningful market share over the next three years. Glu’s ability to reach across the entire mobile ecosystem is poised to become even more important in a world with several consumer relevant mobile platforms.

Over the past three years, we have proven ourselves adept at continually evolving our organization. Key to this is our ability to test, validate, and rollout new insights and techniques across all of our global studios. We will be taking full advantage of our learning organization to make rapid progress, deepening meta-game and monetization systems. Throughout my tenure, we have consistently made decisions through the lens of maximizing Glu’s long-term prospects. My confidence in Glu’s positioning on positive global macro trends remains bright, as is our expectation of significant growth for the remainder of this decade. We are absolutely committed to and we remain resolutely focused on improving monetization in the coming quarters.

I am pleased to now hand you over to Matt Ricchetti for an overview of his first 100 days at Glu as well as our initiatives to systemically raise ARPDAU across our portfolio.

Matt Ricchetti - President, Studios

Good afternoon. Let me say first off, that I am very excited to be here at Glu and see great opportunities for our studios in 2013. I came to Glu last October because I had consistently admired the company’s ability to put out 3D high production value titles with engaging core game play across a variety of genres from shooter and arcade to SIM and casual. I have now been with Glu for approximately three months and I’m deeply impressed with the process and the technology used to develop our studios titles. In any free-to-play company, I have encountered, Glu has successfully build mature, disciplined development studios that share common technology on both the client and increasingly server. This has confirmed my initial belief that Glu is uniquely positioned to operate at global scale on all mobile platforms and with a broad product portfolio.

As Niccolo has just discussed, Glu has an industry leading grasp of three of the four core pillars required for premium mobile success engaging core game play, high production values and consumer reach. The fourth pillar, deep monetization is one that I was hired specifically to build and is where I have focused the last several years of my career. I would like to take the next few minutes to discuss how we are going to make significant strives this year in the area of deep monetization.

Deep monetization can be broken down into three key components, deep player progression, e-commerce best practices and in engaging social layer. But first, deep player progression involves shifting our portfolio away from single player games with finite PvE or player versus environment content and tort games that offer endless content and endless PvP or players versus player game play. Without losing our market leading position in action adventure and hardcore shooters, all new Glu titles will focus less on pure skill and more on player investment via stats, gear, characters, cards and other upgradeable systems.

These systems naturally scale over the player life cycle and therefore have the ability to generate substantially higher lifetime values. Player investment will be coupled with repeatable game play loops like PvP combat and dynamic expandable PvE content. This prevents investment from being capped and allows players to spend hundreds and thousands on a single game instead of tens and hundreds. Since I began at Glu we have already hired several free to play monetization experts with proven track records of building these systems. All new Glu titles are being built with a focus on this design philosophy and as Niccolo mentioned we already have several Q1 titles that deepened player investment in this manner.

In terms of e-commerce best practices, we are creating a new user experience design function at Glu to champion highly usable interfaces that allow players to efficiently find and purchase the items they want. Games with deeper progression systems require inherently more complex interactions around the purchasing and use of virtual goods. As a user experience design veteran myself, I see substantial low hanging fruit for Glu in this area. We are aggressively hiring top UX design talent in our studios that will minimize friction to monetizing actions in every new launch.

Finally, we will be adding an engaging social layer to all new Glu titles. First and foremost, we have begun to rollout a broad new set of social features via our GameSpy Technology suite. These features will allow players to engage in both real-time and asynchronous communication, interaction, and competition. The net result will be enhanced engagement, retention, and social pressure, all of which are designed to lead to deeper investment and higher LTVs. Secondly this is the year that Glu will truly make the transition to the game as service model of business operations. We are investing in product features that allow for dynamic in-game events, creation of tighter communities, more intense competition, and greater power to market new content, all of which drive player investment, and hence we believe will lead to higher player LTVs. We have already begun hiring experts in live operations, community management, and customer support to ensure a robust high-touch player experience.

Having implemented these three components of deep monetization, under multiple circumstances on multiple platforms over my 8-year career in free-to-play gaming, I am quite confident that together they can drive significant improvements to our products ARPDAU and LTVs over this product cycle. Every game we release in 2013 is designed to have the potential to outperform even our best titles of years passed.

I now hand you over to Eric Ludwig for analysis of our financial results, operating metrics, and guidance.

Eric Ludwig - Chief Financial Officer

Great, thank you Matt. Overall, I am pleased with our ability to meet or exceed our expectations across all of our financial metrics. With Matt on board, our earnings call format is evolving. I will be spending more time in my prepared remarks explaining how Glu’s strategic operating decisions shape our future financial performance expectations. Near the end of the supplemental presentation, you will find a key operating metrics slide. This slide includes the last six quarters of metrics for the items I will refer to you during this call. As such, I will not reference every quarter-over-quarter and year-over-year number when reviewing our results.

First, I will provide some details on the company’s financial results and certain operating metrics for the fourth quarter of 2012 as well as the full year. I will then conclude by providing our outlook for the first quarter and full year 2013. Summarizing some of our key financial highlights for the fourth quarter of 2012, total non-GAAP smartphone revenues of $18.5 million were up 24% on a year-over-year basis and at the high end of our guidance range. Non-GAAP smartphone revenues accounted for 89% of total non-GAAP revenues, compared to 75% for the fourth quarter last year. Non-GAAP gross margin of 89.6% was in line with our guidance and included slightly higher revenues in our guidance from Call of Duty: Black Ops Zombies. Due to favorable OpEx management, we are able to report an adjusted EBITDA loss of $1.8 million in Q4, which was significantly above our prior guidance.

And lastly, our non-GAAP net loss was $3.2 million or $0.05 per basic share, which was also above our guidance range. We had approximately 54 million downloads of our titles on Apple, Android, and other platforms during the fourth quarter and our cumulative downloads are now at approximately 384 million. Our daily active users in the month of December 2012 were approximately 3.5 million users, while our monthly active users were approximately 34.8 million.

Summarizing the key actual results for the fourth quarter 2012, total non-GAAP revenue was $20.8 million, which was above our guidance range of $19.5 million to $20.5 million. Non-GAAP smartphone revenues of $18.5 million, was at the high-end of our guidance range of $17.5 million to $18.5 million. And as expected, we experienced sequentially flat smartphone revenue as compared to Q3 due to the planned delay of five new titles to afford map the opportunity to implement deeper monetization systems in them. The four titles we launched during the fourth quarter of 2012 accounted for 21% of our non-GAAP smartphone revenues during the quarter.

Our non-GAAP smartphone revenue by platform for the fourth quarter of 2012 was 60% on the Apple platform, 32% on Android and 8% on other smartphone platforms. By geography, the Americas accounted for 53% of non-GAAP smartphone revenues, EMEA approximately 20% and the Asia-Pacific 27%. A-Pac revenues in particular grew this quarter as we continue to invest in the localization of our titles. As an example, we saw solid revenue growth from Eternity Warriors 2, which was localized in Korean and featured by the Google Play Store in that country.

As Niccolo mentioned, we plan to leverage our presence in Beijing, Moscow and Hyderabad to the creation of Glu Publishing, which will act as a conduit for connecting game developers in emerging markets to the North American consumers. Our non-GAAP freemium smartphone revenues were $16.7 million, up 24% from the prior year and up slightly compared to Q3 2012. Non-GAAP freemium smartphone revenues accounted for 90% of our total non-GAAP smartphone revenues during the quarter. During the fourth quarter, our non-GAAP gross margin was 89.6%, up from 86.7% last Q4 and in line with our guidance. Total non-GAAP operating expenses were $21.2 million in the fourth quarter and approximately $1 million lower than our guidance, reflecting continued OpEx management during the quarter.

Let me take a moment to walk you through the final 2012 full year results. Total non-GAAP revenue for 2012 was $87.8 million, which is up 20% compared to 2011. That growth was driven by the increase in non-GAAP smartphone revenues which grew 78% year-over-year to $74.6 million. The growth in non-GAAP smartphone revenues was partially offset by $17.9 million decline or a 58% drop in non-GAAP feature phone revenues to $13.1 million.

Non-GAAP operating loss for the full year was $4.6 million, compared to a loss of $3.4 million during 2011. Non-GAAP net loss for 2012 was $5.1 million compared to a loss of $4 million in 2011. Non-GAAP net loss was $0.08 per share on 64.3 million basic shares outstanding compared to a net loss per share of $0.07 based on 57.5 million basic shares outstanding during 2011.

During 2012, we generated approximately 208 million downloads of our games and ended the year at approximately 384 million cumulative lifetime downloads. Note that a full reconciliation of GAAP to non-GAAP financial measures was included in the press release we issued today.

Now, turning to the balance sheet, as of December 31, 2012, our cash and cash equivalents totaled $22.3 million, which was down slightly from $24.1 million on September 30, 2012, but still better than our expectations. During Q4, we used $1.6 million of cash in operating activities and $274,000 in CapEx. We received $136,000 from stock option exercises and experienced a $35,000 FX gain on our balance sheet accounts.

Now let’s just finish with some thoughts regarding the financial outlook for 2013 starting with the full year. We have entered the year in a strong financial position and our confidence in the strategy we outlined to increase monetization will pay off. As Niccolo mentioned, of the four pillars we have identified for success in the Social Gaming 2.0 landscape, Glu is already strong with respect to three of them. Deep monetization execution is the missing pillar and our key priority for 2013. When I look across the competitive landscape, there are few companies in that Glu’s global scale, 18 development teams, over 45 million new downloads in each of the last five quarters, typically 90% or more of such downloads coming organically and high-end production capabilities. As we expect to begin seeing monetization success, we will roll out those learnings across all 18 dev teams as rapidly as operationally possible.

Titles later in the year naturally have more time to benefit from our new monetization DNA as well as successful data points in the first half. We expect to have more data on the anticipated improvement in monetization when we report our first quarter results in early May. Additionally, we currently plan to hold an Analyst/Investor Day on May 30 in New York City.

From a full year 2013 perspective, we currently expect total non-GAAP revenues to be in range of $84 million to $92 million, which includes $80 million to $88 million in non-GAAP smartphone revenues. 2013 will be the last year, where we have -- where we experienced declines in our legacy feature phone business that will materially impact your business. We expect feature phone revenues to decline $9.1 million from 2012, down to $4 million for 2013.

Our non-GAAP smartphone revenue guidance for the full year of 2013 represents growth of 7% to 18% on a year-over-year basis and we expect growth in the second half of the year to offset year-over-year declines in the first half of the year. We expect non-GAAP gross margin of 91.5% for 2013. Operating expenses for 2013 will range from $87.7 million to $89.3 million and we continue to expect our R&D expenses during 2013 to remain flat with the actual second half 2012 levels on an annualized basis. Adjusted EBITDA loss is expected to range from $1.8 million to $7.5 million and we expect 67.3 million basic shares and 73 million diluted shares for the full year. In addition, we anticipate ending 2013 with at least $14 million in cash and no debt and we are comfortable with that level of cash to operate our business.

In regard to the first quarter of 2013, we currently expect our non-GAAP revenues to be in the range of $17 million to $18.5 million, which includes $16 million to $17 million of non-GAAP smartphone revenues. This guidance is down sequentially and year-over-year primarily due to the title launch schedule as Matt implements his strategic initiatives to improve monetization. We will be launching five titles in the first quarter, none of which are live as of today and only two of those are expected to have less than 15 days of revenue contributions for the quarter. We expect non-GAAP gross margin during the first quarter to be approximately 89.5% at the midpoint of the range, which is roughly in line with the fourth quarter and first quarter 2012.

Our non-GAAP OpEx for the first quarter is expected to be approximately $20.6 million at the midpoint of the range. Given these expectations, adjusted EBITDA, which excludes approximately $800,000 in deprecation, is expected to be a loss of $3.3 million to $4.6 million. Our non-GAAP net loss, including a $200,000 tax expense will be a loss of between $4.3 million and $5.6 million or a loss between $0.06 and $0.08 per weighted average basic share. Excluded from our guidance for Q1 in the non-GAAP figures are $1.1 million of amortization of intangibles in cost of sales, $0.5 million of amortization in OpEx, a $357,000 restructuring charge, and $1.1 million of stock-based compensation. And that $1.1 million of stock-based compensation, excludes any fair value adjustments related to the Blammo earn-out. And weighted average common shares outstanding for the first quarter will be $66.2 million basic and $70.8 million diluted.

Finally, we expect our cash balance to be approximately $80 million at the end of the first quarter, down $4.3 million quarter-over-quarter, which includes $2.5 million of annual bonus payments, which are non-recurring for the rest of 2013.

Now, there are two closing items regarding our annual guidance that I wanted to frame up. While we expect our batting average to improve from 2012, the 2013 guidance does not assume any multi-month top 75 grossing titles on the iOS and the Android App stores. As such upside to our 2013 numbers exist from any title that persists in the top charts for a sustained period of time. Secondly, we have not included any revenue from Glu Publishing nor our Probability Gaming real money gambling titles in this guidance.

So, in summary, we believe the company is taking the right steps to improve monetization. Key learnings will be shared rapidly across our global development teams and we remain very optimistic about our ability to resume growth over the course of the year. Given our ongoing commitment to controlling cost, we are confident in our ability to end 2013 without the need to raise additional capital.

I’ll now turn the call over to operator for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Graham. Your line is now open.

Michael Graham - Canaccord

Hi, thanks a lot – thanks guys. So, I just wanted to ask on the monetization issue, couple of things. First, as you ramp monetization like can you just bracket how much better it can get from where it’s been recently? And then what do you think that does as you improve monetization, what happens to the usual growth curves like do we have a difference in sort of where we ramp up in the peak users and how quickly that case. And then finally, as you improve monetization and you maybe extend development cycles, are we looking at a situation where the old model of sort of $0.5 million to develop a game and how much of cost to market and everything is that cost structure per game moving up? Thanks a lot.

Niccolo de Masi

Okay. So, let me sort of just step the scene and I will pass this over to Matt to sort of take a deeper dive on particularly the new style of products we are building. So, as I sort of laid out in my prepared remarks this is effectively kind of two halves to this monetization improvement story and it relates to user basis, right. A significant portion of the portfolio is going to be evolutions of titles that we have already done well on in the past, but with deeper meta-game and deeper monetization. On those titles we are trying to retain the audience breadth and reach, so that the dial base is going to be just as big hopefully if not bigger as it’s been in the past. And we believe we can make very significant improvements in monetization for that genre of title, but it may not be factor of ten, right. We are talking probably factors of two.

On the new style of product and that was the RTS/RPG reference I made, that will be a narrower audience, but it may well be up to a factor of ten better on average revenue per daily active user. So, there is going to be different sort of mix of products this year and depending on that particular piece of the mix, you will get a different type of user at different reach and down phenomenon – different ARPDAU phenomenon. On the cost front, absolutely we are looking to build titles that can be more persistent and more sustaining and if we keep teams supporting a title that’s successful for longer, of course the development time over the course of its live months will be larger and if we move a team off quickly. But there is again a matching of development costs with the type of product over its life. We will hand this to Matt now to dive a bit deeper.

Matt Ricchetti

The thing that I would say on the development side is that at Glu we already have created teams around the world that are quite mature in development approach and they have the ability to deliver games with green board engaging core game play and high production values. So, from a cost perspective, I think that that tends to be the most expensive part of development. Adding monetization expertise to our studios is not inherently an expensive thing to do and it’s actually because it's primarily a matter of expertise that we are sharing across organization it’s something that we can do to our games right away and have an impact on titles in Q1 and then progressively more as the year rolls along.

Michael Graham - Canaccord

Okay. Thanks, very much, it makes a lot of sense.

Operator

Your next question comes from the line of Sean McGowan from Needham & Company. Your line is now open.

Sean McGowan - Needham & Company

Thanks guys. It seems like you are embarking on a number of steps to greatly improve monetization and the quality in our overall revenue. And I am just curious as to why your assumptions for 2013 are not only cautious, but down right negative. I mean why so few titles in the second half of ‘13, why not assume some revenue from real money gaming or from Glu Publishing, just generally it doesn’t seem like you are expecting these steps to succeed, can you talk about that?

Niccolo de Masi

Sure. So, most of this is they make sure of uncertainty on timing combined with wanting to leave ourselves room for progress and updates throughout the year. So, the number of titles is obviously a conscious decision for us to focus on making sure we have the time to build into the deeper PvE progression Matt referred to, the deeper the game the deeper monetization and that’s a time function as much as anything, particularly in new titles and of course the titles that we have delayed from Q4. Whether or not there is going to big progress sooner than we have guided to obviously, comes down to individual execution. And as Matt said and I concur entirely we believe we are building some of the best tittles and not the best titles that we built in Glu’s history at least certainly under my tenure. And any one of them could be a certainly a hit by Glu standards if not a hit by industry standards. Simply not that easy for us to predict exactly when that hit can be arrived at.

Matt Ricchetti

Yeah. Sean, I am going to just add, I mean, I think we’ll be remised in brand new business models that we have yet to execute on to be adding in significant or even a material revenue. Glu Publishing, we have hired a new VP of publishing very recently and he is executing on the plan, but has yet, have titles in the hopper. And then the same with the probability partnership, I think we are encouraged by what we are seeing, but nothing is live yet and until we have some real proof points, we would think it’s more conservative to not have any numbers around those.

Sean McGowan - Needham & Company

Okay. And if I can follow up on the Glu Publishing, could you just kind of outline what will be different about this effort to do third-party publishing and then steps you have taken in the past?

Niccolo de Masi

Sure. So, we have never actually employed this particular business model. We have in 2011 we had a work for higher program, where we ultimately struggled to find developers with greater free-to-play expertise than we had internally. And that program didn’t work terribly well, because we ended up having to spend our time training largely premium developers on the kind of rudimentary underpinnings of a freemium game design and game development process. A lot has actually changed from the past couple of years. There is a much broader base of freemium DNA around the world, A. B, in this case, this is not a work for higher program. So, we are looking for games which are already successful on a given platform country language. And we are looking really to participate in extending the reach of that product, whether or not that’s a game built by a U.S. developer that’s successful on iOS, but is looking to get to Android and Windows 8 and Amazon, whether that’s a game that’s been successful in Korea, but has yet to reach English-speaking audiences. We can play a role in all of that and we can be close partners with games that have been proven out as opposed to being earlier in the development cycle in taking actual development risk. So, this is really utilizing the sales marketing bit of organization, reporting part of our organization, and perhaps some of the monetization expertise, although really this is focused on a de-risked approach to what we kind of so call, so to speak turn the handle on to broaden out the audience space of an already proven out high LTV title.

Sean McGowan - Needham & Company

Okay, thanks. That’s helpful to make that distinction. Thanks.

Operator

Your next question comes from the line of Richard Ingrassia from Roth Capital Partners. Your line is now open.

Richard Ingrassia - Roth Capital Partners

Good afternoon, everybody. Matt or Niccolo, could you scope the competitive environment today, and Matt, in particular, your ability to attract and retain the talent that you have referred to in the e-commerce and social area specifically?

Niccolo de Masi

So, I’ll make a comment on Glu and then I think that’s definitely all Matt will have. We have been very successful the past quarter, of course, getting people like Matt on board, but also around the world, getting new potential recruits to Glu to recognize the opportunity here and it really is an unparalleled opportunity to marry scaled development infrastructure. Three pillars that are working, one pillar has to be fixed, a business that has incredible upside with one or two successful products. And so we are finding that, that is a method that actually is increasingly resonating as you have seen the market of all the way from casual to more hardcore, and we believe the direction is more hardcore, is more profit platform. There is a talent absolutely sort of a talent wheel here that spins harder and harder and faster. And I think as we get more momentum going on monetization front, we’ll get more monetization talent, but people like Matt have been absolutely instrumental in getting that wheelhouse to start spending.

Matt Ricchetti

Yeah, I would say from my perspective, the thing that I see about talent is that I voted with my feet to be here at Glu and I am very excited about the opportunity primarily because of again some of the things we have already spoken about that Glu has consistently delivered games that have high production values and in a broad number of genres. And I think this company is relatively uniquely positioned in the market and that’s something that’s very attractive to people who want to be involved in the next wave of mobile gaming. And in terms of my on the ground feedback from hiring, I have had no trouble at all. Just having been in the free-to-play industry for so long, I know the companies that are good at monetization, I know where the expertise is, I know how to target those people and people want to be here.

Richard Ingrassia - Roth Capital Partners

Okay. Thanks, guys.

Niccolo de Masi

Thanks, Rich.

Operator

Your next question comes from the line Eric Wold from B. Riley. Your line is now open.

Eric Wold - B. Riley

Thank you. A couple of questions, I guess give a sense of the – you guided to 16 for the year, five for Q2, I know you are going to be kind of watching how the Q1 launches go and try to incorporate any of those learnings into the games and development. So, how much flexibility is there on the games in Q2 in the second half if you see something dramatic from the game one launches – our Q1 launches that you want to incorporate?

Niccolo de Masi

There is lots of flexibility to keep working on successful titles, alright. So, the 15 or 16 we have announced so far for the year, those are all teams that can keep supporting success from H1 into H2. And it’s certainly something that masks a lot of expertise on and as we have always done and said we have done in the past three years we will toggle this on a month-by-month if not week-by-week decision making cycle.

Eric Wold - B. Riley

I guess it’s a follow-up I think I guess the teams that are working on let’s say Q2 games specifically are they kind of at a and was a standstill, but they are kind of holding back from getting Q4 on development in case having vis-à-vis tweaked early stages of that game or is it kind of beyond that point?

Matt Ricchetti

Not at all, Niccolo mentioned that we delayed some of our Q4 titles, so that I have the opportunity to dig in deeper on the monetization and bring some of the strategies that I mentioned earlier too. So, those titles have already had the benefit of like overview and I think will show improved ARPDAU on LPV immediately upon release in Q1. The rest of our titles we have enough lead time to kind of build monetization into the designs from the get go, and we are doing other things internally like restructuring some of our process so that we kind of have more monetization reviews and all of the milestones throughout the product cycle which again will lead to increasing games in that area as the year unfolds.

Eric Wold - B. Riley

Perfect. And then just a follow up question on Sean’s question on the guidance for the year, Eric should we assume that the guidance in terms of game performance for the 16 for this year are still based on historical monetization patterns you experienced 2012 and before nothing changed from the historical levels?

Eric Ludwig

Yeah, they are more historical based, certainly not any assumptions on higher ARPDAU as well as the shapes of the titles are more first quarter of revenue being bigger than future quarters. So, if we do have truly sustaining successful titles the shapes of those would have a much longer tail than anything we have seen in the past and anything we are modeling for guidance.

Eric Wold - B. Riley

Okay and just final question, with the layoffs and the closures that have happened in some of the possible longer development cycle for game, should we assume that 16 is kind of the capacity with the number of teams you got on hand?

Eric Ludwig

Yeah, and we have got 18 core dev teams down from 24, so we cut about 100 people and that’s cut out six dev teams although we now have 18 teams and given title releases that are at the end of the year those full 18 teams probably will not get out 18 titles a year, so yeah that’s a fair assumption perceptively.

Niccolo de Masi

As I have said on numerous calls before we are trying to build sustaining hits every time we break ground on something. So, if you were to take an extreme example incredibly successful this year all 15 or 16 of those launches this year would have teams that would continue to work on them for potentially a whole year or longer than that thereafter. And that would lead to a growing revenue and profitability situation which we are of course all focused on creating, but it would lead to very few new launches for example next year as the teams would still be supporting success this year.

Eric Ludwig

But I think it's important to know Eric that as I mentioned in my prepared remarks our 18 dev teams are anywhere from three to five times the number of teams that a lot of our private company competitors that might have one or two successful teams with one or two successful titles and that are doing quite well. So, I think the volume is important when it comes or once we nail monetization and has done probably twice and it looks like it's repeatable we can apply that across a very, very large number of teams to hopefully get large scaling titles.

Eric Wold - B. Riley

Perfect. Thanks, guys.

Eric Ludwig

Thanks, Eric.

Operator

Your next question comes from the line of Mitch Bartlett from Craig-Hallum Capital. Your line is now open.

George Kelly - Craig-Hallum Capital

Hey guys, this is George on for Mitch. Just one question for you, can you talk about the economics of the revenue model for the publisher business and what kind of investment that will take to build that out?

Niccolo de Masi

Sure. I think we do not have a formal template business model here. I mean high-touch by definition means there is going to a bespoke case-by-case deal, right. And it can range from everything on the one hand to no risk from Glu and simply a revenue share through to a modest amount of risk as in a modest six-figure amount of risk to potentially a larger six-figure amount of either events, royalties, or some kind of guaranteed sort of publisher payment to the developer. It ultimately is going to come down to a horses-for-horses situation here right, where the bigger the title and the bigger the evident success on whatever platform country or language a given partner has demonstrated, they intend to command larger upfront risks from Glu and they also tend to command potentially better revenue shares. But at the moment, this is not something which is going to get the handle turned on it in a way, which is kind of off-the-shelf. It’s something which is us targeting developers that have the success and successful developers coming to us and us finding the right reach, extinction that we can offer them.

Matt Ricchetti

And then I think from our headcount perspective, it’s one handful of head – current internal headcount not – it’s not the size of a dead team, it’s a few people that will be staffed for this organization.

George Kelly - Craig-Hallum Capital

And then just to be sure that I heard you right you said four in 2013 and one per month in 2014 that you target?

Eric Ludwig

Current expectation, four in the second half of 2013 and then growing from there next year.

George Kelly - Craig-Hallum Capital

Okay, thank you.

Matt Ricchetti

And just to be clear, those four titles plus the one title from Probability are on top of the 15 or so titles internally as well, just to make sure, that’s clear.

George Kelly - Craig-Hallum Capital

Right, okay, thanks.

Operator

(Operator Instructions) Your next question comes from the line of Darren Aftahi from Northland Securities. Your line is now open.

Darren Aftahi - Northland Securities

Thanks guys for taking my questions. Just a couple, first on the monetization kind of strategic initiatives, I guess for Matt and Niccolo, one, what sort of the timeframe for full implementation? And then two, what of those mechanics is sort of a customization game by game versus sort of a repeatable implementation?

Niccolo de Masi

Okay. Well, I think those are both firmly in Mr. Ricchetti’s wheelhouse. So I will refer to him on those.

Matt Ricchetti

So sorry, can you repeat the question, the two parts again?

Darren Aftahi - Northland Securities

Sure. So, on sort of the new monetization strategic initiatives, so one, what sort of the timeframe for full implementation and then two what sort of a customized versus repeatable game versus game?

Matt Ricchetti

So, to go back to the three components of deep monetization that I called out, deep player progression, that’s something that we have already begun to address with the titles that we delayed from Q4 that are releasing in Q1. I think kind of to answer both parts of the question at the same time, that’s something that is definitely little more case by case, because every game we are not sort of building the same game over and over again, we have games in a number of different genres and we will continue to have a broad portfolio. So, each game design is going to require a specific progression that we are going to be deepening. On the e-commerce front, we are also taking steps there right now, but I think that will evolve over time as we bring more expertise into the studio. The engaging social layer, we mentioned the games by technologies that are going to allow us to do kind of more server side features that really transition our games to the game of service model. We have some of those games that are taking advantage of that technology. Again right now, in Q1, but the technology will be rolled out over the course of the year. So, by the end of the year I think you will see the full implementation of that technology in kind of the highest benefit to our revenue and kind of deeper monetization then.

Niccolo de Masi

So, I mean Darren, there is a playbook here, right. It’s kind of like being in the car business. There is a playbook in a process to developing a new car. There are certain things you have to have in every car. And so there us certainly, I have been impressed by the amount of mechanics, the machinery that Matt and various new team members he has recruited in the past quarter have been able to bring quickly to not only titles in the start of the year, but you can see how they are going to extend to virtually every title Glu has built historically and certainly to every new title that’s coming out thereafter. Like with building that car analogy, you got to build parts that fit the new design but there is the same kind of number of parts and the same sorts of parts you are going to need to ship any new car. I think that’s probably an appropriate analogy to what we are doing in the game business.

Darren Aftahi - Northland Securities

Fair enough. And then two more if I may. One, in terms of just hit rates, in the fourth quarter as initial games Contract Killer Zombies and Contract Killer were both very successful, yet it seemed like even though sort of timing was not pursuant for each game in the fourth quarter. It seems like Contract Killer 2 is a sequel performed a lot better than Contract Killer Zombies 2, did you I mean is there anything with monetization that you feel like I mean it seems like actually CK 2 actually monetized better based on the ARPDAU metrics you have in the presentation. I am just curious if you have anything commentary about that?

Niccolo de Masi

So, Darren you are absolutely right in the windowing and that’s why I covered my prepared remarks that we need more flexibility on windowing of launches to avoid any kind of potential on the margin cannibalization and exactly that example. With regard to the actual (Android) monetization I will defer to Matt to comment on that, but I think you've hit the nail on the head there obviously.

Matt Ricchetti

So, I think the thing that excites me about both of those titles and the Contract Killer franchise as a whole is that it has done quite well kind of relying on what Glu has been traditionally good at which is more of the core game play, high production value, broad reach, I think both titles have a lot of low hanging fruit from kind of deeper monetization side. They are both examples of games that have somewhat fine item out of content in them. So, as those franchises kind of continue to evolve in our portfolio you will see us addressing some of the things I mentioned in terms of extending the overall amount of investment that a player can make in those games and then kind of bringing in the much deeper retention that you get from the social features. As to why one monetized better than the other, I think maybe I would point more to a reach in just that Contract Killer 2 is a bit broader of the game overall and the controls are a little easier to kind of pick up and play. So, we are kind of always learning from that and I think as I said that franchise as a whole will play an important role and continue to do well for us in the future.

Darren Aftahi - Northland Securities

Fair enough. Then just this last one for Eric kind of housekeeping, I didn’t quite catch all the detail. So, you said in the 1Q guidance you are not modeling for any multi-month top 75 grossing, was that Apple iOS overall. And then the second one you said five titles in 1Q and no more than something about 15 days contribution, I didn’t quite catch all that if you just repeat that for me?

Eric Ludwig

Yeah, sure Darren, so what I said was, answering the last one first. The five titles that we had launched, none are live as of today yet. So, at most any title will have less than 60 days and two of the five titles will have less than 15 days of contribution, so clearly two are launched in the back half of March. So that was, that was their component. And then on the top 75 grossing kind of my point here was for guidance purposes when we created our forecast, we are not assuming any sustained hits that’s kind of top 75 grossing for a multi-month period of time. So, that’s kind of a general, multi-store fronts both iOS and the Android as well as, multi-countries as well. So, when we launch we launch globally, so we expect the title to do well in multi-countries not just the U.S.

Darren Aftahi - Northland Securities

Great, thanks.

Eric Ludwig

Thank you.

Operator

There are no further questions at this time. I would like to turn the call back over to the presenters.

Niccolo de Masi - Chief Executive Officer

Well, I would like to thank my colleagues for their efforts and our shareholders for their continued support. We are confident in our ability to improve ARPDAU and continue to grow smartphone revenues year-on-year. Thank you again for joining the call.

Operator

This concludes today’s conference call. You may now disconnect.

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