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Glu Mobile Inc. (NASDAQ:GLUU)

Q1 2013 Earnings Call

May 1, 2013 4:30 PM ET

Executives

Greg Cannon - Vice President Finance, Corporate Controller

Niccolo de Masi - President and Chief Executive Officer

Matt Ricchetti - President of Studios

Chris Akhavan - President of Publishing

Eric Ludwig - Executive Vice President and Chief Financial Officer

Analysts

Sean McGowan - Needham & Company

Michael Graham - Canaccord

Darren Aftahi - Northland Securities

George Kelly - Craig Hallum Capital

Operator

At this time, I would like to welcome everyone to the Q1 2013 Glu Mobile earnings conference call. (Operator Instructions) Mr. Greg Cannon, VP of Finance of Glu Mobile, you may begin your conference.

Greg Cannon

Good afternoon, everyone, and thank you for joining us on the Glu Mobile first quarter 2013 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; President of Publishing, Chris Akhavan; 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-K filed with the Securities and Exchange Commission on March 15, 2013.

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 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 first quarter results. The press release also has been furnished to the SEC as part of our Form 8-K. Given the recent SEC guidance regarding the use of social media channels to announce material information to investors, we are notifying investors, the media, our players, and others interested in the company that in the future we might choose to communicate material information via social media channels or if possible that information we disclose through social media channels may be deemed to be material. Therefore, we encourage investors, the media, our players, and others interested in Glu to review the information posted on the company forum, the company Facebook site and the company's twitter account. Any updates to the list of social media channels we will use to announce material information will be posted on the Investor Relations page of our website at www.glu.com/investors.

In addition, please note that the date of this conference call is May 1, 2013 and any forward-looking statements that we may make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events.

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

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 over the summer.

I am pleased to welcome our new President of Publishing, Chris Akhavan to our call today for the first time. Following his prepared remarks, he will then be available during the Q&A session of this call. Matt Ricchetti, President of Studios, joins us for the second time on today's call.

On last quarter's call, we laid out our belief, the consolidation and evolution in our industry would ultimately lead to a strong group of global mobile gaming players, amidst the landscape that we dubbed Social Gaming 2.0. We believe the past a success for Glu in Social Gaming 2.0 world, lies through a studio and product transition towards true games as a service.

Success in games-as-a-service or GaaS for short, requires an evolution for Glu studios towards online-only game play. Online-only games allow for a richer world of live operations, events and content updates, and typically enjoy longer lives than a predominantly single player titles we launched over the past three years.

Our GameSpy acquisition in August of last year was consummated precisely, because we foresaw the competitive advantage Glu would have, if we were able to drive all of our global studio locations of a single centralized server infrastructure. We are indeed making solid progress in doing so, and will deliver the majority of H2 2013 titles, using components from our GameSpy and GameSpy successor technologies.

Our Q1 revenue and adjusted EBITDA both beat the top end of our guidance ranges. However, improvements in monetization trends were partially offset by lower than anticipated retention. A number of new title launches performed at the low end of our expectations due to team execution issues.

I am delighted to announce the number of GaaS monetization proof points have been reached in the first few months of 2013. Most notably, average revenue per daily active user or ARPDAU had record highs for Glu in both Heroes of Destiny and Dragon Storm. Whilst retention was not strong enough to support either as a top 50 U.S. grossing game, we are pleased with U.S. peak ARPDAU in these titles was more than triple Glu's overall average ARPDAU of 2012.

Furthermore, we believe that the inclusion of a player versus player or a PvP mechanics was responsible from proved retention in Samurai vs. Zombies Defense 2 over its predecessor. In addition, updates to enhance deep player versus environments or PvE systems, led to meaningful revenue gains from existing products such as Indestructible, Contract Killer 2 and Eternity Warriors 2. We are as such confident that our studio evolution is on track and above the average peak and tail of new launches can be systematically grown.

Further refinement of our monetization team of Heroes of Destiny and Frontline Commando: D-Day, led to significantly improved revenue performance at launch. We have now also seen evidence of the ARPDAU benefits of DPvE and the retention benefit of PvP. It is clear to us that our past delivering breakout hits widen the integration of both DPvE and PvP from the ground up.

In order to achieve this in two upcoming releases, working titles, Tons of Guns and Mobsters and Gangsters, we have elected to hold them from late Q2 to late Q3. Whilst the delay will impact Q2 revenue, we believe clearly in the long-term best interest of Glu, both from a lifetime revenue and institutional learning perspective.

During the quarter we made significant strides to strengthen our centralized monetization, live ops, sever technology, UX, and product management functions. The talent density in these centralized GaaS functions is largely responsible for generating our new Glu ARPDAU records, and should allow us to scale true online-only titles.

By growing our centralized GaaS functions we anticipate higher peak performance as well as fatter tails on our next-generation products. Best of all, it is expected to improve the risk profile and predictability of R&D returns.

We believe constant trading resources on fewer titles with a greater centralized support infrastructure will accelerate revenue growth in Q4 2013 and beyond. We made over 20 new GaaS hires in Q1 and anticipate hiring at a similar rate throughout the year.

Our goal is to shift headcount investment out of raw studio team volume and into our centralized GaaS functions. A reduction in force was commenced today to promote talent density throughout the studio as well as fund over 80 new GaaS colleagues. This reduction is equivalent to circa 12% of the year's starting headcount of 564 employees. Adding back forecast hiring, we anticipate finishing 2013 with approximately 580 Gluers worldwide.

Our recently appointed President of Publishing, Chris Akhavan, brings to Glu a world-class category in mobile user acquisition, advertising revenues and developer relations. Previously, SVP of leading mobile ad network Tapjoy, Chris was instrumental in growing Tapjoy to an over $100 million revenue business. Prior to Tapjoy, Chris served in a number of roles at RockYou and Yahoo.

From late Q2 onwards, we anticipate him driving improved return from our marketing budget. We expected internal cost promotion efficiency as well as total advertising revenues will both be enhance from Q3. Chris will also spearhead the third-party publishing initiative that we commenced last quarter.

Today we are pleased to announce that our third-party publishing division has signed one long-term agreement and two additional binding LOIs, with game developers that include two of the leading mobile MMO's of China. We anticipate launching these in western markets during the second half of Q3. Our pipeline of third-party publishing partnerships is growing and we now expect to launch approximately six such titles by yearend.

The business unit is now staffed up with an experienced team of product managements, projects management and our resources. Our R&D rebalancing as well as growth in third-party publishing will result in what we see is a more optimum mix of risk throughout our overall organization, circa two-thirds first party and one-third third party by volume. In 2014, we anticipate this mix shifting towards an approximate 50-50 split between first and third-party titles.

In Q2, we will be focused on significant updates to existing titles, optimizing our live ops function and honing our direct marketing and advertising revenues. We look forward to reporting on our progress in these areas at next quarter's call. We're refining deep PvE plus PvP games for launch in Q3 and beyond, and expect only a modest impact to full year revenues from the totality of initiatives I outlined above.

Last quarter, we were an early mover into the real-money gambling markets on mobile devices, launching Samurai vs. Zombies slots in partnership with Probability PLC. Tomorrow Probability will launch the second Glu IP-branded real-money slot game in the U.K., under the Contract Killer brand. In addition, we've begun collaborating on full casino suites of real-money Blackjack, Roulette, Bingo and Slots, which will leverage Glu IP.

We look forward to further launches later in the later, as we deepen the operating relationship between Glu and Probability. Though, expected to be a modest topline impact in 2013, with New Jersey and Nevada now both poised to allow interactive gaming, we see a robust long-term opportunity in the mobile real-money gambling sector.

I am very pleased with the caliber of senior talent we have attracted to Glu over the past six months. A positive network of factor is building momentum as we increase talent density in all levels of the organization. Firm foundations are being laid to succeed in the Social Gaming 2.0 landscape, where truly global games-as-a-service rule the roost.

I believe we will have the expertise and infrastructure to be a leading global player from H2 2013 on, and built our first and third-party games. 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.

I am pleased with the monetization progress we made during Q1, and the steps we are taking to maintain this momentum. We are absolutely committed to accelerating growth in the coming quarters.

I am now pleased to hand you over to Matt Ricchetti, for an update on our studio progress in Q1 as well as our initiatives to systematically raise ARPDAU across our portfolio.

Matt Ricchetti

Good afternoon. In our last earnings call, Niccolo and I discussed the four pillars required for success in the mobile games market, engaging core game play, high production values, consumer reach and deep monetization. Today, I would like to revisit those pillars and discuss our performance and improvements against each over the last quarter.

In Q1, Glu released seven new titles, Dragon Storm, Stardom Hollywood, Gun Bros 2, Small City, Samurai vs. Zombies Defense 2,

Heroes of Destiny and Frontline Commando: D-Day. These titles demonstrate once again Glu's strong grasp of the first three of these pillars, engaging core game play, high production values and consumer reach.

In terms of engaging core game play, Glu continues to maintain one of the most balanced portfolios in mobile gaming. These seven Q1 titles includes a casual RPG, a casual city SIM, a World War II, third-person shooter, a futuristic arcade shooter, a side-scrolling tower defense, a tactical fantasy RPG, and a fantasy strategy MMO.

We believe that no other mobile gaming company has shown the same ability to repeatedly create engaging free deployed games across such a broad variety of genres and themes. We will continue to lean into this ability and believe it will serve Glu well in an increasingly competitive mobile marketplace.

In terms of high production values, Glu has produced some of its best looking titles ever this past quarter. Five of our seven titles are full 3D with a level of graphics and performance that we believe are at or above our competitors. Heroes of Destiny, Gun Bros 2 and Frontline Commando: D-Day, in particular take advantage of the latest end-mobile hardware to bring console quality graphics to the market.

Glu's facility with engaging core game play and high production values has continued to translate into strong consumer reach. These seven titles accounted for over $12 million downloads in Q1. Six of these seven titles peaked at over 200,000 daily active users, but Frontline Commando: D-Day surpassing 1 million DAU.

In our last call, I discussed how deep monetization is tied to our ability to make the transition to the games-as-a-service GaaS business model. We have great games and attract a steady volume of new players. Now, we need to retain and monetize these players for months and years.

Over the past quarter we have begun recrafting our studio organization and operations to support the games-as-a-service business model. When I first joined Glu late in Q4 of last year, the studio organization comprised seven different locations around the world. Glu had a strong central technology team, but lacked the other support services necessary to operate games-as-a-service.

With the changes we have announced today, we are committing to focusing on our four core studios, Moscow, Beijing, Seattle and Toronto. These locations are home to our most talented teams, strongest technology and highest quality products. The expenses we save from streamlining studio operations will be used to invest in the right support functions to make the transition to gain this service.

Over the past three months, we have already hired an experienced product management team that has focused on monetization across all studios; hired a GM of our Seattle studio, with years of experience operating games-as-a-service; overhauled our business intelligence function by switching to more sophisticated analysis tools and hiring a VI management expert from DNA; begun building a user experience design function to support deeper, more persistent, more social games; strengthen the senior production and design talent with people who bring games-as-a-service expertise from companies Tencent, Aria, Kabam, Gaia, Trion, and others. We made significant progress on our server infrastructure, launching our first title that supports MMO features like live chat, guilds, messaging and events.

Going forward, we will continue to invest in our support services and strengthen our central technology team. As we launch more games, it requires ongoing live operations in H2, we will also add the customer support and community management staff necessary to engage and retain employers.

The last topic I'd like to cover is the progress we have made toward deep monetization this past quarter. On our last call, I mentioned three key components of deep monetization, deep player progression, e-commerce best practices and an engaging social layer. We made significant strides this quarter in the area of deep player progression with titles like Dragon Storm, Gun Bros 2, Heroes of Destiny, and Samurai vs. Zombies Defense 2.

All four titles include deeper core economies via upgrading systems for buildings, characters and gear. Heroes of Destiny, in particular received focused attention from our new monetization team. Instead of only offering high priced durable goods, we added a well-balanced mix of consumables, incremental upgrades and low cost durables to the economy.

In terms of e-commerce best practices, Heroes of Destiny and Gun Bros 2 are best example for either direction in which Glu is headed. These two titles, both feature robust storefronts with dynamic sales, limited time offers, daily deals and chance-based purchase systems. Three of our Q1 titles show progress in developing and engaging social layer.

Gun Bros 2 maintains the original Gun Bros, real-time 2 player co-op game play. And Samurai vs. Zombies Defense 2 added an asynchronous PvP feature that has improved the game's overall retention and monetization. Dragon Storm also offers async PvP along with the MMO social features previously mentioned.

As a result of these efforts and as Niccolo has discussed, we saw record ARPDAUs on two of our Q1 titles. Dragon Storm posted record ARPDAUs for Glu as a company, peaking 3x our portfolio average and sustaining at a healthy 2x. Due to team execution, we weren't able to scale the game as large as we had planned. Heroes of Destiny's ARPDAU has doubled our portfolio average and second-only all time to Dragon Storm.

We still have a great deal of work to do to complete Glu's transformation into a games-as-a-service company, but we continue to push hard in this direction and Q1 has yielded initial positive results. I am confident that the rest of our 2013 titles, which bring with them progressively deeper economies and more robust social features will have an even greater impact on our business over the rest of the year.

I now hand you over to Chris Akhavan, our new President of Publishing.

Chris Akhavan

Thank you, Matt, and hi everyone. I am incredibly excited to be here on the Glu team. And although it's only my second week here, I am already greatly encouraged by the progress we're making. I've worked with just about every major free-to-play mobile gaming studio at my prior firm, and I joined Glu because of my view that the company is uniquely positioned to succeed.

Glu is one of the few companies in the space that combines high quality, console-like production values with a strong technology platform that allows the company to distribute its titles across every major platform, App store and device. Having spent a good amount of time with Matt Ricchetti and his studio leads, I'm impressed and excited by the company's ongoing efforts to increase Glu's deep monetization capabilities and progress towards delivering world-class games-as-a-service.

My focus at Glu is on leading our efforts to improve and optimize the business engine that powers our portfolio of first and third-party titles. The key components of this engine are player acquisition and growth, marketing and communications, advertising monetization, platform and strategic distribution partnerships and international expansion.

I am working closely with my team to increase the sophistication and effectiveness of our player acquisition strategy with the ultimate goal of trading as much distribution leverage and advantage for Glu as possible. This will be accomplished through a heavily data-driven approach to marketing our titles, using best practices and strategies I have learned by being deeply embedded in the mobile player acquisition space for multiple years. I expect these efforts to drive strong ROI for our marketing dollars and moving forward.

In parallel, we will continue to strengthen our key platform partnerships, while continuing to seek new partnerships that will position us to grow our distribution globally. I am particularly excited about our prospects across Asia.

Having established offices in Japan and Korea in prior roles, I look forward to helping Glu's efforts in these key markets, in addition to working with our great team in Beijing to accelerate our growth in China. We are also focused on driving growth in Glu's advertising-based revenue by both optimizing existing channels as well as adding multiple new advertising revenue channels into all of our titles.

I believe Glu is well positioned to capitalize on the expected increasing flow of ad dollars that many analyst believe will be coming into the platforms we operate on. Finally, we will continue to role out our third-party publishing program with the intent to add high quality engaging games to our portfolio titles.

Glu posses all of the essential ingredients required to become a leading publisher of third-party content. The combination of our existing 3.9 million daily active users as of March 2013, closed platform partnership, game design and monetization expertise, localization and cultural adaptation capabilities and global footprint, puts us in a unique position to be able to capitalized on this opportunity.

I will now hand you over to Eric, to review the Q1 actual results and guidance.

Eric Ludwig

Great. Thank you, Chris. Overall, I am pleased with our ability to exceed our expectations across all of our financial metrics. On the second last slide of our supplemental presentation, you will find our key operating metrics, which include the last six quarters of data for the items I will refer to during this call.

As such, I will not reference every quarter-over-quarter and year-over-year number when reviewing our results. I will first provide some details on the company's financial results and certain operating metrics for the first quarter of 2013, and will then conclude by providing our outlook for the second quarter and full year 2013.

Summarizing some of the key financial highlights for the first quarter, total non-GAAP smartphone revenues of $17.1 million were above the high-end of our guidance range. Non-GAAP smartphone revenues accounted for 90% of total non-GAAP revenues compared to 81% for the first quarter last year.

New titles launched during the first quarter accounted for 16% of non-GAAP smartphone revenue, and as we mentioned when we provided guidance, reflected the backend release schedule. Non-GAAP gross margin of 90% was in line with our guidance. And due to our ongoing focus on controlling cost, we are able to report an adjusted EBITDA loss of $1.4 million, which was significantly above our guidance.

Lastly, our non-GAAP net loss was $2.3 million or a loss of $0.03 per basic share, which was also significantly favorable from our guidance. We had approximately 52.2 million downloads of our titles on the Apple and Android platforms during the first quarter, and our cumulative downloads are now at approximately 436 million. As Chris mention, our daily active users in the month of March 2013 increased to 3.9 million users, while our monthly active users were up to 40.1 million.

Summarizing the full results for the first quarter of 2013, total non-GAAP revenue was $19 million, which was above our guidance range of $17 million to $18.5 million. Non-GAAP smartphone revenue of $17.1 million was also above the high-end of guidance of $16 million to $17 million.

As expected, non-GAAP featurephone revenue continued to decline and came in above guidance at $1.9 million during the quarter. Our five largest revenue generating titles during the first quarter represented 42% of total non-GAAP smartphone revenues, and the details are in the supplemental presentation.

Our non-GAAP smartphone revenue by platform for the first quarter of 2013 was 63% on the Apple platform, 28% on Android and 9% on other smartphone platforms. By geography, the Americas accounted for 50% of non-GAAP revenue, EMEA 20% and Asia-Pacific 30%, an increase from 27% last quarter. Similar to the fourth quarter of 2012 APAC revenues continue to benefit from the investment in localization of our titles.

Our non-GAAP freemium smartphone revenues were $15.2 million and accounted for 89% of our total non-GAAP smartphone revenues during the quarter. During the quarter, we launched our first real-money gambling offering in the U.K. with Probability. And while we have seen steady progress with the game, we do not expect to see any material contribution during 2013, and our guidance continues to exclude any such revenue.

I am also excited about the further building up our relationship with Probability that Niccolo mentioned, and our press release disclosed today. We view our Probability relationship in the U.K. as a way to start addressing the real-money gambling opportunity both in the U.K. and more importantly in U.S., which we expect to further develop over the next few years.

During the first quarter, our non-GAAP gross margin was 90%, up from 88.4% last year and in line with our guidance. And total non-GAAP operating expenses were $19.3 million in the first quarter and approximately $1.4 million lower than the high-end guidance, reflecting continued OpEx management during the quarter.

The combination was slightly higher than expected revenue, along with management of OpEx resulted in our reporting in adjusted EBITDA loss of $1.4 million. This was significantly better than our guidance range of a loss between $3.3 million and $4.6 million.

As a result, we reported a non-GAAP net loss of $2.3 million or EPS loss of $0.03 per basic share, which also exceed our guidance of a loss of $4.3 million to $5.6 million or $0.06 to $0.08 per basic share. We ended the quarter with 66.4 million weighted average basic shares. Note that a full reconciliation of GAAP to non-GAAP measures was included in the press release we issued today.

Now, turning to the balance sheet. As of March 31, 2013, our cash and cash equivalents totaled $21.2 million, which was down slightly from $22.3 million on December 31, 2012, but still better than our expectations. During Q1, we used $3.7 million of cash in operating activities. We used $358,000 for CapEx purchases and $200,000 were used for a minority investment, a newly formed social mobile casino gaming company. These were primarily offset by $3.3 million received from warrant and stock option exercises.

Now, I'd like to finish with some thoughts regarding our financial outlook starting with the second quarter 2013. We believe that we are well-positioned to experience significant growth during the second half of 2013 due to our new internal studio titles and third-party publishing launches, and from improved monetization on our existing titles. We expect our second quarter to be negatively impacted by light release slate, as we have pushed two titles expected to launch in the second quarter to late in the third quarter.

We are currently only launching one title Zombies Ate My Friends, which we expect to release the last week of the second quarter. As a result, we currently expect our non-GAAP revenues to be in the range of $16.5 million to $17.5 million, which includes $15.2 million to $16.2 million in non-GAAP smartphone revenues. This guidance is down sequentially and year-over-year, primarily due to the dynamics I just mentioned.

We expect non-GAAP gross margin during the second quarter to be approximately 90.5%, which is slightly higher than the first quarter. Our non-GAAP OpEx for the second quarter is expected to be approximately $19.9 million. Given these expectations, adjusted EBITDA, which excludes $600,000 in depreciation, is expected to be a loss of $3.5 million to $4.4 million.

Similar to the second quarter of 2012, we will have a net $3 million GAAP income tax benefit in Q2 2013, which is the result of a $3.1 million non-cash release of certain tax liabilities upon the expiration of a statute limitations, but offset by a $150,000 of actual income tax expense.

For non-GAAP guidance purposes and when we report actual results for Q2, we will back out the one-time tax benefit from our non-GAAP results. Our non-GAAP net loss, excluding the $3.1 million tax benefit will be a loss of between $4.2 million and $5.1 million or a loss of between $0.06 and $0.07 per weighted average basic share.

Also excluded from our guidance for Q2 in the non-GAAP figures is, $1.1 million of amortization of intangibles and COGS; $495,000 of amortization of intangibles in OpEx; a $700,000 restructuring charge related to the cost restructuring that we enacted today; and $1 million of stock-based compensation. Finally, we expect our cash balance to be approximately $18.9 million at the end of the second quarter, down $2.3 million quarter-over-quarter.

Now, turning to the full year 2013 guidance. Let me first talk through our 2013 title release slate and provide some details on our third-party publishing business. We currently expect to launch 12 titles from our internal studios, seven of which have already been released and the remaining five will launch late June through the end of the year.

This reflects two titles that have been removed from the release slate, Age of Fate and one other unnamed title, both of which were scheduled to launch in the third quarter. We now expect to launch six third-party publishing titles during the second half of the year, up from our prior expectations of four titles.

I want to provide an overview of what a typical third-party publishing relationship will look like. There will be a revenue share arrangement, which will lead to substantially lower net gross margin contributions. Additionally, a typical deal may include a low-to-mid six-figure licensing fee or recoupable minimum guarantee.

Glu will also bear any marketing or user acquisition costs. However, the internal additional headcount to support the third-party publishing group is very small, and we've already hired them all. So we are able to leverage our internal central services functions, sales and marketing headcount and G&A, such that the scaled long-term bottomline impact will be in alignment with our long-term margin targets.

Our 2013 full year non-GAAP revenue guidance will be in the range of $84 million to $88.5 million, which includes $80 million to $84 million in non-GAAP smartphone revenues. Our non-GAAP smartphone revenue guidance for the full year of 2013 represents growth of 7% to 13% on a year-over-year basis.

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 88% for 2013, which is down slightly due to the inclusion in our guidance of the lower gross margin revenue in the third-party publishing business.

Operating expenses for 2013 will range from $83 million to $85.5 million, which is down from our prior guidance of $87.7 million to $89.3 million, primarily due to the reduction of headcount and ongoing focus on controlling cost. We expect our R&D operating expenses during 2013 to be approximately $4 million lower than 2012 full year levels, due to lower bonus accruals and due to the Q2 OpEx reductions having an immediate effect and the new hire replacements being spread over the course of 2013.

Adjusted EBITDA is expected to range from a loss of $4.7 million to a loss of $6.2 million compared to our prior guidance of a loss of $1.8 million to $7.5 million. And we now expect our non-GAAP net loss to be in the range of $8.4 million to $9.9 million or an EPS loss of $0.12 to $0.14 per basic share.

In addition, we continue to anticipate and in 2013 with at least $14 million in cash and no debts, and we are comfortable with that level of cash to operate our business. We remain confident with our strategy to increase monetization payoff, given the progress we saw during the first quarter.

In addition, we continue to be optimistic about our ability to resume topline growth during the second half of the year. We look forward to updating you again on our progress at our Analyst Investor Day on May 30, in New York City.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sean McGowan of Needham & Company.

Sean McGowan - Needham & Company

A couple of questions. One, could you be more specific about what the team execution issues were, like how does that show up to the consumer and what really was the issue there? And then second, more broadly, I know you're saying that real-money gaming stuff won't be material to this year, but can you help us sort of bracket, what your expectations are for what the kind of normalized opportunity is there? I mean order of magnitude, what are you expecting and how does that arrangement work with Probability?

Niccolo de Masi

Let me tackle the real money first. So there's no doubt that there is an exciting opportunity here as states with significant populations in the U.S. liberalize to allow some form of interactive gambling. Right now, its poker only in, Nevada, and it is a number of games in New Jersey. However, there is a requirement right now to partner or have a physical presence or i.e. physical casino.

So right now, we have a revenue opportunity in the U.K., and with our partnership we have a revenue opportunity possibly in another European geography or more. But it is an arrangement, as I said on the last call, whereby we are doing very little actual work and we're mostly getting paid effectively royalties from the use of our IP.

I won't get into the exact royalty amounts, but with the current products and slots, it is a minority, not majority of the revenue for the White Label casino suit that we announced just in the last half an hour. It would be the majority of revenue, but we would also be responsible for marketing the product. So bracketing is very difficult for 2014 when we think these things can begin to grow due to geographic spread, but 2013 I think they're excited. It's not in the guidance, so it is effectively a deminimis-ish number right now.

On the team execution issues, we had this namely in one or two teams, which we have ultimately acted upon as part of the reduction in force and restructurings we've implemented today. Execution issues typically fit into a couple of buckets in our business. There is pacing issues. There are design challenges. There are technology challenges. That game if you played, the ones we mentioned, Dragon Storm, had a great working functionality, the technology was fine. The product launched in great shape, at least we saw it was a great shape.

And ultimately there were a number of features I think that became more apparent over time as hurting the game and being a little bit awkward, and there was possibly also some issues around user interface and user experience. But ultimately, we looked at this as a successful launch of a product that hit a record ARPDAU. The team execution issues impacted retention. Things like user interface, user experience a part of the several functions that Matt Ricchetti is bolstering. And we're pleased with the advancement of service side infrastructure and technology, which we're able to carry across into feature launches in H2.

Eric Ludwig

If I could add to that, in addition, we wanted to be able to not increase overall OpEx and losses and so we wanted to free up resources in dollars to further investment in monetization, live operations et cetera. So that was the other addition as to why we made these actions today to allow that to be free up without going backwards in terms of losses.

Operator

Your next question comes from the line of Michael Graham of Canaccord.

Michael Graham - Canaccord

Couple of questions. The first is just a broad level overview on the competitive landscape in iOS and Android app environments like is this business getting easier or harder from the perspective of crowding out or lack thereof from other publishers over the last year or two. I'd love your thoughts on that.

The second one is, can you just kind of conceptualize for us, when you push out games from late Q2 to Q3, what kind of things are you hoping to gain by the extended development time. What are the shortcomings you see and what you hope to gain by keeping them in the studios a little longer? And the last quick one is, you're making some investments in some centralized GaaS functions. Does the third-party publishing business leverage those or not?

Niccolo de Masi

I'll tackle your first one, Matt will take your second one and I shall tackle the third one right now, which is the third-party publishing business leverages pretty much of what Glu does frankly from G&A to sales and marketing to a number of centralized other services. It is highly efficient with regards to scalability with headcount usage. However, it's not infinitely scalable.

So we're scaling the organization for 2013. We have an aggressive growth plan as I mentioned to get to a 50-50 title split by volume for 2014. And so there will likely be some more additions in the third-party publishing division, but they are modest compare to what it takes to drive, even one full team as an internal studio.

Let me go back to the question on app stores and crowding of the publishers. There has been, is, and will continue to be a relentless march of volume in app stores globally. When I started Glu, and we started on the smartphone transition, there were under a 100,000 things in the Apple store and there were around 100 million smartphones in the world.

Today, there are 1 billion plus smartphones, but the Apple store is heading towards a million apps if not already there of which 30% to 40% are games. Other markets after the U.S., has fewer localized apps, so there has been more open space there. And it's been a good fertile room for Glu to grow and get early market share leads and by localizing titles as we've mentioned in the past year.

But the simple fact is as I mentioned in the last call, the number of apps in the eco system are growing much faster than the amount of discovery space and the amount of credible publishers in the world and this has been a primary driver of why it is that we've launched, a third-party publishing division and why that we believe that we're going to be successful this year and into next year.

We have all the publishing infrastructure you need for distribution reach and frankly depth, not only in the global app stores, but on a local basis and with things like localized career distribution in China, localized career distribution in Korea. And this is a unique Glu footprint. There are not other publishers that have the market strength that we do, not only in the U.S. markets, but also in China, also in Korea and these three markets are, three of the four top, frankly largest leading markets in the mobile gaming ecosystem.

So in short, yes, the number of apps is increasing faster than number of new consumers, but that's going to put value into the publishing set of infrastructure resources Glu has and we intend to tap into that. Let me pass it to Matt now to talk about what we hope to gain as we hold titles and keep them in the studio for longer.

Matt Ricchetti

And I think I can try to tie those two questions together, so as the market matures, that's very much the reason that internally we're making this timid transition to games-as-a-service, right, because we need to be able to have our games comes come out. We clearly can drive a lot of players to our games for the reasons that I talked about in my remarks that high production values engaging game play, strong reach and the other kind of structural advantages that Glu has that Niccolo touched on.

But we need to be able to keep those players on our game for a long period of time because of the market is becoming more competitive in the western and the kind of race for users becomes more competitive as well. So that's kind of the overarching strategy there.

And so when we look at specific games we look very much at, are they ready to retain and monetize players over time. And if we feel like they are not then it doesn't make any sense to launch a game, have a lot of users very early on from featuring and marketing and everything else and then have the game sort of kind of tail off quickly.

So much of our games-as-a-service strategy is about creating a longer tail on all of our products. And I guess the other point I would make there is that with games-as-a-service we're moving forward a number of things all the same time, which I also think I touched on in my remarks, we're moving forward our server technology, our monetization strategy, our actual live operations support, so how we release games, how we kind of interface with our players and run our events. So this is the first product cycle where we're asking our teams to kind of do all those things at once.

And we're going to need time to learn and that's why I think this transition will take us the course of this year to figure out, and again, I would rather release games when they are ready rather than, in my experience I know when a game is not ready. But as I also mentioned in my remarks, the titles coming in the second half of the year, the ones that have had more time to make this transition and will continually show improve monetization and kind of that operational retention that I talked about in the kind of the beginning there.

Operator

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

Darren Aftahi - Northland Securities

Just a couple and then one for, Eric. On the publishing, can you just kind of give us some characteristics as to what you're looking for in a partner? I think in the past I've heard you talk about focus on the Asia-Pac. Number two, I think Eric mentioned, you made an investment in the social mobile casino gaming company, if you could give a more granularity on that? And then, Eric, if you could talk about I think your restructuring cost for 2Q guidance?

Eric Ludwig

Let me pass the publishing question to Chris Akhavan and I'll come back to you on the social gambling investment.

Chris Akhavan

In terms of what we're looking for, we're really looking for titles that have proven some measure of success whether that would be on a particular platform, in a particular region, and Asia certainly a focus for this program and really we're focusing on finding high LTV titles that set the future strategy of the titles that we're also building in-house in terms of the games-as-a-service, that's really the core focus here.

Eric Ludwig

And Darren, on the gambling front, we're very early to real-money gambling in all markets, but particularly the U.S. We have pursued in the past couple of quarters a multi-pronged, call it, exploration of how we want to participate in gambling and casino. What the regulatory environment is and ultimately there is a constant debate over where freemium meets real money in the casino space, what's the best way of deploying good resources and assets to tap in that opportunity.

So we have a number of explorative operational bet so to speak that are going. One of them is in a small minority investment in start up that we made before end of last year actually on the Blackjack Facebook space coming to mobile and was founded by a number of individuals from Zynga Austin with casino backgrounds. We continue to look at freemium opportunities in a similar fashion. But we obviously think that the reilluminating factor to see revenue pickup is what happens on the regulated side of the real-money stuff.

And there is a number of mechanisms, which maybe employed between today and on eventual liberalization that is legal in various states, things like skill-based gaming and so on. And those will be other areas that we may choose to explore. But fundamentally, here we're looking at finding the thing that will allow a market entrance of Glu in a big way and also a high returning way not so early that there is a zero revenue opportunity for few years, but obviously not so late that we miss the opportunity.

Eric Ludwig

And Darren, I am not sure if you had multiple numbers you're asking about, but the restructuring charge for Q2 will be $700,000 that relates to mainly people severance cost for the folks we let go today, was there another number or numbers you want me to jump into?

Darren Aftahi - Northland Securities

No, that was it.

Operator

Your next question comes from the line of Mitch Bartlett of Craig Hallum Capital.

George Kelly - Craig Hallum Capital

This is actually George Kelly on for Mitch. I had just one question for you. Thinking about as we move through 2013 and into 2014, as the focus shifts to the more GaaS games, wondering if you could talk a little bit more about just the development process with the games, specifically what's the timeframe for a typical game there and the dollar investment?

And then another question, a follow-up to that is for 2014, if you're looking at a 50-50 split for first-party and third-party game, do you expect a lot fewer than '12? I am not going to hold, it's too early to tick in an exact number, but should it be significantly smaller number than '12 new games this year?

Niccolo de Masi

So there are a number of pieces to that. I will cover a bit and then I'll pass them to Matt thereafter so to dig into the GaaS development process. There is no doubt in our mind, running a game-as-a-service means that there is sort of fair costs year-in and year-out is the sum total cost of obviously launching and operating these games. So I think the sort of sensible thing to do is to take our R&D budget ultimately and divide it by the number of games whereas maintained at the same time. And it gets you about a $1.5 million to $2.5 million probably of costs to get the most games launched and that's the case of how are you supporting them thereafter.

In terms of the timing, we're aspiring to produce games from soup to nuts in round about the 12 month development time period. But as we've always said, there is a success factor here and the more successful we are, the longer we update a title that's kind of a high-class problem, but it then means the team doesn't recycle and produce more games in a short amount of time the next year.

Let me pass this to Matt for some more detail on GaaS and then I'll come back to you if you want to dive more into kind of the cost somewhere.

Matt Ricchetti

So I think that was an important point the Niccolo made on a game, kind of, to go back to one of the last questions, want to make sure that the game has a long tail as a service when we release it and then at that point, its more traditional retail model is to release the game and essentially let it go, and even over the last couple of years at Glu, we haven't done that. We've been very diligent in updating our larger titles and continuing to kind of bring in new users and deepen monetization.

I think the difference now is that we're just taking that kind of an order of magnitude deeper and as we have games that can kind of show the retention in the ongoing monetization to match the initial retention and acquisition in monetization, then we will continue to support them for as long as it makes sense. So it's not a one-size-fits-all answer. It's a very much an ad hoc question based on the performance of the game when it enters the market.

In terms of the development process earlier on, we are bringing our monetization folks into the process very early, which is a new thing. So developing the kind of long-term monetization strategy in parallel with the core game play and then that same thing happens on kind of the server platform side, so developing a whole strategy for the social features.

So I would say that biggest difference in the process is that kind of moving from more of like one train to number of trains in parallel, which is why we're really trying to focus on our core studios that have been making gains, the longest and the highest quality and making sure that the teams have the extra resources to be able to undertake that kind of parallel development.

Niccolo de Masi

And just tackling your last one there on the sort of split for titles next year, as I said, it's a high-class problem if we don't shift this many titles in 2014 as 2013, because it will mean that the stuff we shift in H2 '13 has been highly successful and merit substantial updates thereafter.

What we do control with a greater degree of certainty at this point, is constantly increasing the run rate volume of third-party publishing titles. So I would say, it's more likely for successful in H2 '13 that we have an even greater split than 50-50 in favor of third-party publishing in 2014. We're really picking a base case here of 50-50 right now.

Operator

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

Niccolo de Masi

All right, well, in closing, I'd like to thank my colleagues for their efforts and our shareholders for their continued support. We are confident in the strength of the foundations we are laying to drive long-term, robust, sustainable growth. Thank you again for joining the call.

Operator

This concludes today's conference. You may now disconnect.

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