Call Start: 14:00
Call End: 17:06
Glu Mobile Inc. (NASDAQ:GLUU)
Annual Shareholder Meeting Call
May 30, 2013 02:00 PM ET
Niccolo de Masi - President and CEO
Matt Ricchetti - President, Studios
Spencer Tucker - Director, Monetization
Chris Akhavan - President, Publishing
Eric Ludwig - EVP and CFO
Drew Crum - Stifel Nicolaus & Company, Inc
Mike Graham- Canaccord
Sean McGowan - Needham
Darren Aftahi - Northland Capital Market
Niccolo de Masi
Thank you all for coming to our 2013 Analyst Day. We haven’t had one of these events for a couple of years and (inaudible) obviously evolved in Glu's business. Most excitingly for having to cover this morning, strengthened the bench, number of senior appointments, a lot of exciting things that are going to help Glu take the company fundamentally to the next level.
I won't read the entire disclaimer that you guys know that’s in here. We have to (inaudible) very much I think the overall revolution of the Glu story which I'll start with myself and we'll end with Eric but most of all we will be focusing this afternoon on what our new President Publishing President of Studios, it seems like the monetization can share with all of you regarding to increase monetization in Glu games, future Glu games and we are going to evolve into so called games of service.
(Inaudible) addendums around how we are improving efficiencies on user acquisition side, how we are looking to grow advertising revenues. In Glu’s 12 year history I am extremely confident and proud to say that we have never had a finer sea (ph) fleet lead the gentlemen we will be hearing from the (inaudible) background from pretty much all the great and the good of this sector EA, Kabam (ph), Zynga's, (inaudible) et cetera of the world Yahoo!.
And I'm a big firm believer that talent at the end of the day is the most important weighing machine for company’s results. Maybe you can’t always predict exactly what quarter you will get a hit, but on average talent wins in the long-term and we have spent a lot of our last six months improving what we have got and continuingly upgrading talent density and we are extremely confident the results are going to shine through.
Let’s now take a moment as we start today to refresh everyone where we were two years ago in the last Analyst Day and sort of look at how the company has evolved on a number of metrics. May 2011 was the last time we had an Analyst Day in San Francisco, and you can see where I circled that the yellow labels that’s the size of the Glu audience in Q2 2011.
We have grown DAU and (inaudible) base by over 2.5 times between then and now. And that more or less is not better than exactly what we forecast at the time that would happen. We are up to 40 million monthly active users now from a much smaller base, something like 15 million at the time.
In line with that we have moved sponsor (ph) revenues up by over a factor of 2x. Now that will bump in Q2 2012. It is obviously something we are focused on driving towards and above and that was driven by fundamentally what I would call a modest hit in Deer Hunter Reloaded, Big presence from Deer Hunter Reloaded in North American markets. You can see here as we have put out revenues by geography, how much it helped revenues particularly in Canada and the U.S.
Since the last Analyst Day, we have also seen a shift in our geographic revenue composition. Asia has come on in a strong, big and impactful way. We have seen a shrinkage in the fractional revenues coming from Latin America and a shrinkage it what’s happened in EMEA overall, which is feature phones plus smartphones. And we have seen that North America has been quite successful as an overall industry and replacing feature phone revenues with smartphone revenues, pretty much dollar to dollar. This is Glu back to IPO in Q1 2007.
Now the exciting thing for us is Asia has never been such a big chunk of revenues for Glu in our history and it’s really just getting done. Best of all what’s happening in Europe and happening in Latin America here is a long run trend that we expect to reverse. Latin America is behind Asia in terms of ultimately their conversion of smartphones penetration into gaming dollars, we fairly expect to see growth in emerging markets, growth in Latin America and even a return to overall growth in EMEA driven by Eastern Europe and the next billion smartphones and tablets.
And it’s our view in our view exception of who followed the story quite closely the last year and particularly last two or three quarters, over the last six months there was an intensive focus on what are called retuned. First priority bar none has been upgrading the talent in the company. We have done a number of senior hires, many of whom you'll hear from this morning. We have also done a lot of hires that have not been publicly disclosed. That’s not because they are not significant, it mostly significantly because we have poaching risks in our business over time. But talent tends to attract talent. And so I was wondering if you see today is very much represented with the kind of depth we now are bringing across our entire studio publishing monetization functions.
Internal studio let by Matt Ricchetti who has been here about six months now, has begun a shift in talent portfolio and expertise to vote for calling games-as-service and he is going to roll into this and quite a bit of detail in a couple of minutes. But fundamentally I would think of this when you think through the Glu as in the last year of having been kicked off by our games for acquisition and the middle of last year.
Games-as-a-service require robust certified infrastructure. We got that in place now, since then we have been following up one step more on quarter, mostly quarter-on-quarter with various milestones moving and evolving our product strategy into a higher monetizing game-as-a-service direction.
As you guys know from our Earnings Call, we are proud of the fact we have got a couple of strong ARPDAU funds. Heroes of Destiny and Dragon Storm have both set new ARPDAU records for Glu. We will tell you how and why in a few minutes. However, in the field we kicked off a third party publishing division. It’s a brand new business model. It leverages a lot of the fixed cost and expertise Glu hs.
Let me take a minute to drill into that right now. (audio gap). Glu, probably we just had just a single business model which is in the left, our first party studio and publishing type. This year we are launching about a dozen internally generated (inaudible) selected game-as-a-service. And of course what's exciting about this business is the leverage and the model for 92ish% growth margin business is huge.
Titles like GungHos Puzzle & Dragons and like Supercell Clash of Clans show you that $40 million of risk, if even that, you can generate $100 million, $200 million; maybe even $500 million title. And so the pieces of story which we believe is top of the list if we are getting enhanced by the measures we have taken in the last six months, or chances of producing one of those winners is greater now than it never has been and I believe those chances will continue to increase.
The fact that we are talk about potential upside in the hundreds of millions of dollars from titles; there will be a new phenomenon really in 2013 for this industry. A year or two ago in the mobile space, you had people talk about $50 million titles maybe $100 million titles. The Puzzle & Dragons and Clash of Clans have shown you can actually support more than that. Which means some of us, all of the growth on applications we have made in the last 14 quarters at Glu, are coming through and continue to.
The new business model for us is the third party publishing play. As we said in the last earnings call, we expect to launch five or six titles in this calendar year and we are going to be growing that and ramping that up next year.
What’s exciting about this business is that it has a reduced risk profile for us. We are not bearing all the development cost nor the opportunity cost of the time to generate these titles and we are keeping about half of the revenue in some cases more. But it's leveraging Glu’s office footprints, it’s leveraging all of our tools and technology and it's a leveraging platform store front billing an external third party (inaudible) chain expertise, there's a lot of inbuilt knowledge in Glu that you can't modify if you only put out a dozen titles internally.
But we are all going to monetize that by growing the third party publishing business. We have as a group of 600 individuals at Glu, of 550 (inaudible) and a lot of institutional knowledge. We know what works where, and translating that knowledge into dollars for Glu is something that will happen through third party activities and there will be a range of different risk profiles and a range of different types of the deals but fundamentally a range of activities that are not at 100% Glu risk.
The challenge of our business are strong as ever. When I started at Glu in the first time maybe, when you met me, there were maybe 200 million Smartphones in a row. It was early 2010. We were talking about, the first $500 million. What’s happened in the past two or three years, if we're now something like a $1.3 billion Smartphones and tablets are lowering on top of that.
So the bottom of the screen here you can see the tablets are beginning to build momentum. They are beginning to probably cannibalize the entire desktop, laptop, notebook space, on someday maybe, even bigger machines. But for gaming for Glu and the style of games we build, we over index here. So Glu is already making a greater fraction of revenues from tablets closer to say 40% - 50% than the sort of 20% - 10% device installed base you see there.
Tablets are a great tailwind for us. They are fundamentally turning an online business into a mobile business on a global basis. There are more and more people around the world as you think about the next billion gamers, next billion internet users. They are going to be getting a tablet first and a mobile internet connection first, particularly in emerging markets which is where the next billion users are. Someday it is going to be 5 billion addressable phones for Glu and there will be probably even more than that if you think about addressable tablets and beyond.
One of the exciting things that's pushing our business forward if you want to think about next two or three years is the start of some seriously interesting growth on the video app site. And you all know Video ECPNs and mobile are smaller than online, by a factor of three or a factor for four depends on talking what you read. In the long term what the majority of users and Facebook is been good proxy for this type, certainly like 50% of Facebook users are now logging on their phone. You'd imagine a majority of traffic is going to move to mobile devices, particularly given that in tablet phenomenon.
We are exceptionally well positioned with our 40 million monthly active users to see dis-proportionally interesting growth from that side. And things like our new appointment are projected on President Publishing, gentlemen, who used to be to be the number two is like a track toy (ph) which is one of the largest nonpublic mobile app played in the world right now and help ensure that we capitalize on that.
Things to look out for in the next sixish months at Glu, our first deep play in groups environments titled Plus Player Versus Player titled is called Sons of Guns and we expect this to be shipping by the end of Q3.
In future we’re also expecting our first card battle game which we’re calling Mobsters and Gansgtas. Our first two third party titles should be live by the end of Q3. And that (inaudible) in Q4 we had our first three game-as-a-service titles in these more of the full and complete functionality of centralized games by Gluon technology. We'll show you some demos of these a bit later on today?
Rise in advertising revenues, Chris will go into more details in about half an hour but you can understand that’s in last six months there have been a plateauing off of our results from the outside, we believe that there are opportunities to grow that.
Now in the last 12 years, Glu has been operating that business and sector which continues to grow. The overall gaming industry grows decade after decade quite relentlessly. What changes is where the growth is and where the consumers are playing and what countries they are in.
Devices, software, hardware, platform, all of this evolves and Glu has been keen to ensure that we are there at the start of new platforms, new opportunities, new hardware, new software that may well take off. We were there the first game on the Android ecosystem in 2008-2009. We were there early in ’09 on the iPhone. And we’ve been early in other places that make longer for some of them to grow into things like the Mac Store, things like Windows 8.
You’re going to see in next quarter or so our first title with Apple’s AirPlay functionality. So, Eternity Warriors 2 will be coming out with AirPlay as added on option for gamers. Now, this morning we announced something what we think is quite significant and that is a partnership to be once again the first mobile gaming company in the real money space, but this time in the skilled gaming space out of the game for chat or gambling space.
Right now, Glu has category (ph) in Plants versus Zombies slot out in the UK with our Probability PLC partnership and that’s something we’ve been working on six month but in fact that we’ve been looking for ways to accelerate opportunities in the U.S. in the regulatory framework of today as opposed to the regulatory framework to use from today.
(inaudible) testing is legal in 37 states today and it's going to grow from there. So, that means that unlike gambling in U.S. which one we’re doing (inaudible), skill gaining of addresses something like 180 million or more of our 300 million population and I expect to that to pick up from 37 states to 40 and beyond. It really as quickly as you’re going to see growth on the real money gambling games for chance front.
Why it is significant and I’m showing you some early screenshots here of Deer Hunter we loaded on Android adding in cash tournaments for cash prizes. Many of you and your children who have played our games over years have noticed that Glu has (inaudible) dominance in the action adventure skilled base gaming sector.
We were the first to get in, (inaudible) et cetera and these games have done a good job of driving tens if not hundreds of known of installed players to multiplayer games and we’ve driven something like 30 million to 50 million or more install since (inaudible) across iOS, Android tablets and phones.
The vast majority have been on games. So when you stand back some with ecosystem are quite sure dependent. Games like Contract Killer, Frontline Commando, they appeal to the so called console gamer or who is coming over to a tablet.
And the con of that model which is been high DAU and ARPDAU is the low ARPDAU fees. Now we've grown a strong team that will drive that ARPDAU up evolutionarily but things like skill games could be a true inflection point for Glu because all of a sudden we are turning one of the negatives of skilled gaming which is where I pride myself on being skillful enough having to pay for things to beat the game. All of the sudden on capturing that psychology and turning into something which we can monetize, which is I'm going show you on the ecosystem how skilful I am in these head to head tournaments.
So we're not currently guiding massive amounts for this and I will also run though that, but as an inflection point skilled gaming is probably more impactful and potential (inaudible) for Glu, than almost every company in the mobile space, because all of the top 50 grossing competitors of ours are mostly passive mechanics and off skilled based mechanics, there are often things that are more strategic and not synchronous, not time based, not head to head et cetera.
Twelve years into Glu we're up to covering three devices today, tablets, Smartphones and the Mac Store on laptops. Now you think that the two devices on the left are growing the fastest, and the last two years have borne out our predictions quite well, but as you can see from our hinting about a EW2 AirPlay release, we're very much a company that believes that the Apples and Googles and Microsoft’s of the world will be the winning hardware software platform players in our space and we're going to a have a quad (ph) screen store and a quad (ph) screen billing interface.
Glu is going to be part of that evolution and revolution, we're a company that's trying to be disruptive to the gaming space because we're built on the left hand side with a cost basis built on the left hand side and so it's a lot easier for us to move to the right than go vice versa for a company that's already build for freemium and we're evolving into games-as-a-service. And if variable computing and mobile computing in other forms becomes as big as some believe it could be, that will also be part of the Glu story.
Mobile computing is going to win. It's an end point business model I think for hardware and software, it'll be an end point business model for gaming and we're very much positioned to be that end point company; mobility in all of its forms, gaming in all of its forms on those devices. We will likely be first on much of this that we believe can be impactful.
Before I close, I want to highlight (inaudible). We've never had a stronger (inaudible). We've added two new presidents into the company. This is not (inaudible) so to speak. I believe this is one of the most impactful things we've done in the Company's history and will likely lead we believe to the next doubling or tripling in the size of the business as success breeds success and talent breeds talent.
Exciting things coming up. We believe we have laid the foundations for sustainable long term growth. We laid them and we also demonstrated that we can deliver upon that success. We have a track record of bringing in the talent we need to execute where the market is going. And this market evolves quickly. Both of you just saw Mary Meaker's presentation on the tube two days have seen the acceleration in hardware trends.
Glu is very much a company nimble enough to act on that. We are primed for those new inflection points. We have underlying technology which is we believe more efficient than pretty much every competitor out there specifically for mobile and for the devices that mobility will be about. We got a new third party publishing division. Different risk profile uses complementary assets. We got a first party studio strategy with a new talent, a greater probability of success with every shot we take, higher mobilization rate on every shot.
And so with that I'm going to turn this over to Matt Ricchetti. After he speaks we'll have Spencer Tucker, then we'll have Chris Akhavan and we'll have Eric Robert bringing up the end. We'll be back with some video demos and of course extensive Q&A.
Welcome everybody. Great to have you here today. I know it's a gorgeous day in New York City and you can easily be outside rather than here so I'll make sure this is a useful time for everyone. Grab the clicker.
So I'm going to walk through our product strategy as I'm still relatively new to the company, I've been here for six months and kind of walk through the product strategy, kind of through my own eyes as how I've seen it evolve as I've learned the business over these past couple of quarters and give you a perspective primarily on games-as-a-service. So there's a lot of exciting stuff to talk about and Niccolo covered some of the other strategic initiatives, but first party studio is all about the transition to game-as-service for this year. So I'm going to dig into that in greater detail.
The other thing I'll say before I start is that Spencer who's our senior director of monetization, wherever he is, is a real expert in monetization. He's a humble guy so he may not quite say just how good he is but he can both design and operate games for monetization, has done so for years. He will go into a lot of detail on monetization specifically so I'm kind of more of a overall product strategy. Spencer will go into something like tactical and stuff for monetization and some case studies there. So hopefully we complement each other well and we got both the Q&A session and the cocktail hour afterwards to ask any questions for stuff we don’t get to. So I guess we got to pick a slide. I’ll pick the side first to look at.
So I want to talk about four different things here. I'm going to uncover them all right away. So looking at Q1, we released a number of titles in Q1, seven games in all. It's kind of a good like state of the portfolio and where we were at in the first party side, and then I'm going to go into more on what do we mean by games-as-a-service and GaaS, I know we've covered it on our last couple earnings call but I want to be real clear about what it means and why it's important to the business, then also confirm background in games-as-a-services and then talk about making the transition at Glu like what that looks like, what we need to do to get there and then lastly kind of give you a glimpse into where we’re going with 2014 strategy.
So Q1, I won't go in all the details here but there are all seven of title we released. Probably everyone is familiar with these already. The important takeaway for me is it’s again the representative of Glu as a company. There is broad range of themes, a number of different studios, and number of different genres. We have a diverse robust portfolio and are able to build a lot of great games and kind of sustain a regular pace of mobile game development.
The takeaways for me, at least looking at the results, I kind of want look at two areas, reach and revenue. So kind of complementary areas. First on the reach side, we’re obviously a company that’s been to consistently attract mass audiences to our games and that’s no exception in Q1.
We seeing that all six of our seven games have DAUnloaded at least million new users in the first 90 days and several of them, many, many more than that; Frontline Commando is one of our biggest - if not our biggest DAUnloading title ever. It’s DAUnload ever more than since when I put the slide together. It’s probably well over 10 million users like to-date which is a staggering number. At point we had a million DAU in that game.
Four of the titles have averaged over 40,000 users a say which is also a pretty incredible number for first three months of launch and when I called a couple of titles on each of these slides, they didn’t do as well, so Dragon Storm, we kind of covered in the earnings call didn’t DAUnload as well primarily for personal issues that we’ve addressed and don’t expect to see these kind of issues moving forward.
On the ARPDAU side the thing I’m happy is to report for the day is that we’ve got a couple of records ARPDAU for Glu in Q1, so we saw with Dragon Strom even though was a kind of more niche title. We hit a $0.25 ARPDAU peak which is a good 4X over what we’ve usually see in our action games that tend to hover around $0.06, so that’s a massive-massive improvement and a good first two points for game service that I’ll talk more about our Glu and server platform later but Dragon Strom is kind of the proto-version of our central server platform and had many of the games as service feature that we plan to rollout across our portfolio through the year, so great to see that.
Here is a destiny which Spenser going to go into a lot of detail, we doubled our typical ARPDAU there and that’s game is not a game of server game at all just a single player game, but we did some of our first work on kind of what we’ve been calling our freemium to data economies and Spenser is going to go into a lot of detail here.
Well, it’s great to see that we held the monetization team. They have been here for few months. They have been able to move the needle a lot one the titles significantly. Small City game that didn’t monetize well that’s more about Casual City sim and you’ll see kind of in later slide that’s an area that you know strategically we’re moving away from that, that’s type of genre of game.
So, I am going to go through strength and weakness here. I just kind of talked about this. We’ve shown the investing in talent which is kind of what Niccolo was talking about and pays off immediately in some ways whether there is kind of a longer ramp of investment over all four games of service, but moving the needle on here where the destiny is great and somewhat obvious point but you know not every company has continued year-over-year to create original IP that you know chose the destiny is a great example.
We plan to continue to invest and use that game over the next couple of years. We can take that engine and all that we can take the franchise and sequel it best something we will continue to be great at Glu, you know, we will use licenses when we need to and we think it’s strategically important, but we will always create our own IP and own that wholly and be able to control our destiny and the revenues from that.
So weakness, retention, I talked a little bit this on the earnings call and I think there was some confusion about retention and monetization, they really one of the same thing, right, so you’ve got reach get players into game, you’ve got your ARPDAU which kind of reflects that you’re monetizing player, but it not as how long you’re monetizing them for, right, and when you do a good job of – we do a decent job of monetizing, I would say to be totally honestly and we’re doing better that’s what I’m trying to say in the first couple of slides, but we need to monetize our players for a much longer time and that’s where the service mentally comes in it’s kind of owing our customers and being able to support them over months and years and not just kind of days and weeks.
So kind of going into – the whole rest of talk is about games-as-a-services and how that can play into retention, yes, even within single player games. Spenser is going to get up talk about deepening investment and the economy side which we often group together with games-as-a-service, but it’s not strictly a service component just deepening investment with upgrade systems and incremental or consumable goods, it’s something that can a lot to retention and monetization in another itself and then obviously balancing those systems because there are a lot of complex.
I talk a lot about user experience because I’m a former interaction designer in previous life and a really important part of a service is we all use different services for movies, books, music whatever we often gravitate towards the one that are easy to use and are very kind of emergent client to the user.
So we wanted do that in our games as well and I’ll talk about more how we’re investing in that but again solving our long term retention problem is going to come from actually creating the service, providing the service features. So let’s talk about games-as-a-service.
So, I’ll talk a little bit about myself first. I haven’t said that much in earnings calls about this. I kind of had the good fortune to; I have never worked in console. So I came straight into EA and worked directly on Pogo.com which is a casual gaming site mostly for older women and initially I am not another woman. So when I first started working out there, I was not that excited about Pogo and I then learned that hey; this was before Facebook, before smartphone, a $100 million business over 10 years ago. So it has done over a $1 billion in revenue as a really vibrant online service.
So, when I started at Pogo, Clubpogo which was launched, which was a big subscription service, kind of back in early days of like EverQuest and other big western MMO subscription services. So pretty cutting-edge for what’s going on in the U.S. We looked a lot at Nexon and everything that was going in these stages of the time. So we built out chat and instant servers for players to play in, friend features like MetaChallanges for the service, synchronous play, asynchronous play, all kinds of stuff.
So, I spent five years there and then kind of saw Facebook going up, went over to Zynga, where I worked on both; actually, I wanted to work on mobile first but this was before In App purchases were even available in mobile and it was little early and Facebook was so exciting.
So I worked on several titles there but the important thing for Zynga for me was really learning that, and I think EA was very community focused. I learned a lot about what it takes to maintain a player’s engagement in games. Pogo was known as the stickiest site on the web. So on per player basis, people spend more time on Pogo in a session than any other site on the entire web, which was pretty amazing at the time, more than ESPN, more than Yahoo! all that stuff.
But Zynga was really looking at the data driven component of player communities, right. How do you take user behavior, analyze that data, find trends because there is some much data and actually leverage that data to optimize acquisition, retention, and monetization in games.
Zynga was very good at acquisition and retention. I moved DAUn to, Kabam which was fantastic at monetization. So I stepped in and ran the Kingdom of Camelot game on Facebook as the Executive Producer. There are six people on the game. I built that team up to 40 people, doubled the revenue and kind of put that game on a path being a $100 million franchise just on Facebook, then moved over mobile and founded Kabam’s business there.
It’s a kind of full vertical that did everything from building to operating and marketing the mobile games that we had. We released Camelot on mobile which was a proven monetizing game that we had to run operations and retool the game and rebalance it for that. We released Hobbit and Arcane Empire as well and I am sure those titles will do well over a $10 million as GaaS gains on mobile.
So what I have kind of seen on different platforms, different time, different demographics, different genres of games is that there are several things that all GaaS games have in common. The most important one that they are always was online and for people who are new to running service games, that’s a big change. It's that you have got players that want stuff all the time, 24x7, they want to play your game and you have to be prepared to operate that game, keep it running 99.99999% of the time and providing them with interesting things to do.
So players want to invest in a permanent world. They want frequently updated content and events. They want interact with other players in deep ways. So unlike kind of the Facebook, more light interaction that’s very asynchronous, I visit someone's farm, blah, blah, blah, real game in the service interaction is people you didn’t know until you start playing the game and you forge friendships in the game based around the functional value that those people have that they are in your alliance or they are supporting you in whatever endeavor. They are trading virtual goods with you.
And then lastly, you know as the operator again analyzing all these data and providing players with purchasing opportunities that make sense to them, where they are in their gaming lifecycle, what kind of player they are, are they social player, are they battler, are they a PVP player. So all of this takes a lot of investment in different aspects of central services.
I will talk more about the investment but just as an analogy that I think makes a lot of sense about games-as-a-services Amazon, if you think about retail, especially I was a big book purchaser. So I bought all of my books go to boarders and music too, you got record stores. I don’t do that anything anymore.
You go to Amazon, you go to online places. You may still shop around but these online services they are very much in other kind of markets outside of gaming that became the default way that the people kind of purchase goods and I think the same is true with gaming.
So you know Amazon, they did a fantastic job of analyzing lots of behavioral data, presenting you with contextual information, have ongoing relationships with customers. It could be subscription service like Prime, or Clubpogo but then there are also things like royalty programs, award programs et cetera and lastly doing a really good job of targeting different customers in different ways.
So, like I said this requires investment in a lot of functions that are relatively new for Glu business intelligence, customer service, community management, product management, central tech, all of that. I was starting to kind of touch on this point when I was talking about Amazon and Brooks, right. I think games-as-a-service just like Niccolo was saying that mobile gaming and mobility to gaming is more of an endpoint than kind of a pass through point.
I think the online always connected service element of gaming is also more of an endpoint than any sort of fad right because we have seen it in so many other markets like music, books and in other aspects of retail. So it’s not a rubix cube, it’s not going away and then on top of that we have also seen, that’s kind of the macro trend but even within mobile gaming itself we have seen the market mature where a lot of the more single-player games and even a lot of what Glu has made over the last couple of years, we could ride the growth in the United States in terms of geographies and the iOS in terms of platforms are sort of enough to sustain healthy growth but as the market gets more competitive we look at the top grossing games they are all game service online games. We need to be able to retain our customers.
So GaaS is key in this climate and I think another kind of important takeaway for us is that hey maybe we are not the first GaaS business in mobile gaming, but we can be the best because we have a lot of other advantages again things that we have talked a lot about in the last couple of earnings report, we have a massive reach, 3.9 million DAU in our portfolio, high production values. We make really fun games, we have mature studios, we can continue to make those games year in year out.
The missing layer that we need to add is the GaaS part. But I think if you look across other companies that do games-as-a-service and I have worked with a couple of them they didn’t start out as games-as-a-service companies. They learned how to do that themselves right and I think Glu, again as Niccolo said it’s a matter of talent expertise, bringing that into the company is what is going to enable us to learn how to do it here at Glu.
So making a transition, we have done a lot of things already and I kind of walked you both what we have done over the last six months and what we are looking forward to do for the rest of the year, four areas, organizational structure, which is a big one, talent density central technology and also kind of refining some of our development processes.
So structure. This one is primarily a matter of focus. In any rapidly evolving market and industry you can talk as much about what you choose not to do with what you choose to do and so for me I really want to be laser focused on games-as-a-service for 2013.
So we have done some things over the last couple of quarters to kind of refine our focus a bit and really free up our ability to deliberately and thoughtfully rollout games-as-a-service. So I’ll kind of walk you through an illustration of this.
In Q4 when I started at Glu we are kind of a hub and spokes type of organization. We have central headquarters in SF and then our various studios around the world. So we are got seven studios around the world, Essentially four central services in late 2012 with the two that I have dotted lines BI and Gluon being things that were sort of in the process of still being built out again I’ll talk more about Gluon.
So Gluon is our central server platform. it’s been a bigger investment since we bought GFT back in 2012 we have been investing in that central tech for a while now but we are getting ready to roll it out in our games.
So we kind of flipped the script here we are now a company in Q2 of 2013 with seven central services having added product management, customer support/community management and user experience design, we have also beefed up our BI function and are starting to use both new tools and new talent and then Gluon like I said is kind of now ready for primetime.
And in the chart we kind of focused in on our most profitable biggest studios that are most ready to immediately leverage our games as a service in the games that they are building coming up in the second half of the year and next year so four studios.
So we have cut DAUn the number of game teams a little bit and Niccolo sort of talked about fewer bigger better in terms of our games which is very much what we are looking at but we are also freeing up resources by doing that to invest in all these key central services I’ll kind of talk about some of this a little bit we have got in production and design the important thing there is bringing in more free to play talent even a couple of years ago when Glu started doing free to play there weren’t a lot of other people doing it and now the market is such that we could actually go out and acquire, attract and acquire really good free to play design and production talent.
BINOS we have a brand new BI Director from DNA who is super strong a lot of operations PM so I have talked about monetization product managers but product managers are also critical for our business in terms of running sales events and promotions and being the kind of similar on the pulse of what a game needs at a given time and Spencer will go into some of that.
Community managers to support, we are still sort of early in the community management front but as the year goes on and we bring our games, the service games to market, we need people to be ease with your players to explain to them, hype up your events and promotions, new content as they comes and offer to answer questions and solve problems.
User research is one that we haven’t really formalized in the past at Glu, so to me user experiences are and goes far beyond just making good wire frame in usability but it’s also thinking qualitatively about how we can improve our games because as much as the data can be helpful for us quantitatively about showing where the pain points, in purchasing or retention or acquisition are, we need to actually go to users to get the qualitative data, the behavioral data on why is it hard for them and what do we need to actually fix in the game to remove the pain point.
And lastly engineers for our central technology that something that will continue to be an important area to emphasis. So (inaudible) density, I think I kind of covered a lot of this. We have already built out a pretty strong monetization team. We have recreated free to play talent in the studios. I talked about our UX design function.
And another important point, we've got two American studios but the one studio in the United States is in Kirkland and that studio more than others is very self-contained. So it is important for us to get a really strong general manager for that studio, who have a lot of games-as-a-service experience, and we have that person in place now.
A couple of areas where we're still looking to further increase talent is even more free deployed talent especially in places like Beijing and Moscow where we do a lot of kind of oversight of our offshore studios from our SF headquarters.
We’ve strengthened that studio but it’s obviously more challenging to get free to play talent overseas but something that we are seeing some positive leverage on. And then also I mentioned server engineers. So we’ve done a good job building out a central tech platform. We also need to run it once it’s ready. So server engineers never go out of style in a games-as-a-service business and we made a few key hires to really build Gluon and we want to continue that with kind of maintaining and operating our platform.
So I'll talk a little bit more about Glu and if people have questions, we can talk about it afterwards, but it’s essentially kind of the evolution of our GST acquisition. So it’s server platform built in GST. It sort of emerged from a combination of things internal at Glu. So features were being bought for Dragon Storm, that’s kind of an MMO game and service game in and on itself, and then also GST services that we already had.
The real often thing about (inaudible), we have documentation; we have a service group attached to Glu that works with all the teams around the world. They have a set of APIs. They make a game, quarterly APIs and bam; they have really key GaaS features like leaderboards, chat, alliances, persistent player profiles, store front, all the things that we see in all the top gross games.
But having worked with several of these companies myself, I can tell you that, no one else has really figured out a way to really create a structural advantage around it with technology and being able to productize it across all their games. Glu has always been very strong with central tech. So even though, like I said we are not first in games-as-a-service, we have leveraged to scale GaaS very quickly once we get Gluon out in the second half of the year.
So it is rolling out, second half and Deer Hunter will be the first game that has GaaS, not GaaS, the Gluon features in it and it’s kind of a productive roll out. So Niccolo showed the other titles that are coming out, Enchant U, Frontline Commando, Eternity Warriors 3, and there is one more; blanking. But those games all have progressively more Gluon features and I think really when we get to our 2014 roadmap we can expect deep integration with our Gluon platform for all our games.
So the development processes, I will go through this quick but obviously when you got new central services you got new technology and some kind of refined organizational structure we got to be really delivered about making sure the teams are talking to each other and collaborating well.
What this means kind of in tactically and see in different ways, so we are making sure that the monetization team is actively involved in all of the green lighting of new games so nothing gives through a green light without a full monetization plan, a kind of premium to the other economy plan.
We have got active partnership with the Gluon team, so not only it’s a new game team sort of talking with Gluon about the features that they want to use from that central platform, they are talking to them about, 'hey here are the feature that we want to see in a future release of Gluon' and we have a central roadmap that we authored DAUn with studio leadership and talk about because everybody knows that the industry is evolving fast, what a service looks, evolve fashion, we want to make sure that our Gluon platform is number one asset that we can kind of role in new features as the market changes.
And lastly as we get games closer to launch we are doing a much more comprehensive job also in partnership with Chris’ organization on looking at how we will allow our launches. What’s the plan for event? What’s the plan for community management? Which territories are we going to go into? How we are going to keep those servers running? How we are going to hype up a launch, how we’re going to build the excitement about the world wide launch and all of that stuff. So, that’s again a kind of sensing about these different central services working together with the individual development team to make it happen.
So, I’ll now leave you with two slides on product strategy. We haven’t announced any titles yet for 2014 and I’m not going to do that just let is still kind of early. About that two slides, first one into the best sort of title developers social gaming 2.0 and I’ve talked a lot about games as a service and I want to talk also about – there is a lot else in our portfolio other than games-as-a-service.
So, first slide is kind of talking about just in general where we’re going with our games in terms of accessibility and reach and then second slide is games-as-a-service. So I've got a little table here that kind of shows the few different axis on which we’re evolving our portfolio for next year. So, themes, Genres, Tech, Gameplay.
I’m excited about all these things. I think we have a really strong portfolio as it is and again and we’ve proven that and how many users play our games but there is some opportunities for us to improve even further.
So on the theme side, you got a good balance of casual and hardcore games in our portfolio but we’ve never done as much mid-core games as we could and by mid-core I really mean what in the genre is called. So, we could do more with strategy, RPG, card games, resource management games. Those types of games are tend to be very high monetizing, high arced out games. So, that’s kind of all in theme and genre side.
On the tech and game play those two go together. As we move towards games-as-a-service we're inherently going to see games that have smaller clients, larger kind of server side things and on the one hand that’s because there is lots of features that one of the server that deal with interaction. But it also lets us have some have smaller clients that are easier to DAUnload for people and can be DAUnloaded over 3G which is particularly important as again, we’re expanding or. We’re currently doing really in China and Korea and lot of places where market growth is highest people have lower spec phones broadband isn’t that stable, we want to make sure that we can continue to be very present in those markets.
Lastly, we’re very strong in 3D and not looking to abandon our leadership there, nor are we looking to abandon our leadership in shooters and action games but it’s kind of the matter of bending the stick. I think we could afford to bring a few more 2D and/or passive type gameplay mechanics into our games.
By passive I mean – Niccolo was kind of talking about it. You know lot of our games are heavy on the controls. You are playing a shooter, you’re sort of in a mission, it’s intense, you can't really put the game DAUn and you can't play the game while you’re walking DAUn the street, you can't pick it up and put it DAUn. So, we want to make sure again we’ve got balance in our portfolio of games that may be games you can play with one phone and you can literally be walking DAUn the street and crossing the intersections of New York City and not get run over by car a while you’re playing. So, that’s how people play mobile games.
So, that’s kind of where we’re looking at in terms of just general evolution portfolio on the GaaS side which really comes back around to what I started the learning from Q1 about which is improving long term attention, right.
So improving long term attention is all about, one, building the central server platform so that we can have the GaaS features, two having the talent and the organization to kind of execute and operate all the stuff and then three, instantiating all this into the product. So, I see GaaS kind of manifesting itself through our Gluon platform and our product in four key ways, really three.
Like the first one as I said, economy is something that’s not strictly about the service aspect but along with the service we’re revolving our economies to be less focused on durable goods. So, buying a gun, paying $5 and keeping that gun for the whole rest of the game to consumable goods where we either give you the gun or we sell you the gun for a buck and then you spend a lot of money and a lot of time upgrading that gun with scopes and magazines and what have you. That’s just one example. Spencer will go into more.
On the social side, this is where all the GaaS stuff comes in the play. We have some PvP in games like Indestructible and some Co-op in games like Gun Brothers 2 but we really want to get to the point where, if not every release, almost every release that we come out with next year has PvP or Co-Op in it and we’re really pushing not just kind of that wide asynchronous social that you see in Facebookings, visit your friend stuff but the real in game. We want people to make friends, want people to find people that they're going to get married to in our games, which is something I saw repeatedly at Pogo and Kabam, because that’s how invested people lot with their in-game friends. So, that’s again chat, alliances, messaging systems, group PvP and stuff like that.
On the tech side, I already talked about moving from the more client base to a server based model and number of things go along with that. The last point to make there is that the more server driven we are, the more we can update our games really frequently and that also helps to keep people retained for longer period of time.
Right now, we often tend to take a month or two when we do often updates with our really fundamentally change our games but it’s hard to wait a month or two or say hard to wait few months between updates. If we can do a month and do regular updates like that, that’s a really solid cadence in mobile and will keep people around for a long time.
Lastly Live Ops, we do, we do live operations which is kind of a games-as-a- service jargon for sales and promos. We do those now but what we don’t really do is kind of wrap those in with sort of greater hype and events.
So as we unleash our Gluon and GaaS stuff we'll be able to not only have a sale online but bring a tournament along with that or new content launch or whatever kind of hype that we want to build around our various channels we can use, push notifications, e-mail. So you get a lot more bang for your buck out of the content updates and the sales and the things like that, that you do.
So that's it, last two slides I'll go over again real quick. So evolving our portfolio with overall in some it's kind of, we do a great job at action, high production value stuff. We also want to sprinkle in some games that are a little simpler in there as well to balance our portfolio out, hit a little more mid core because it monetizes well and then bring in the GaaS futures on all of our games and again, starting the second half of the year, next year every single game has GaaS, it's hitting all four of these kind of columns here and we think that that is the missing piece to really take our portfolio from a place where we've been a very solid strong mobile company to one where we're outpacing most of the rest of the market and able to run our games for months and years at a time.
So I'm going to pass you over to Spencer and he's going to talk to you in more detail about our evolving monetization.
Thank you Matt for introducing me and thank all of you for coming out whether you're here in person or via the live web cast. So what I want to talk about today is definitely supporting the games-as-a-service vision but I want to talk about how we're going to monetize that games-as-a-service vision, what our strategy for monetization is, how we're evolving our monetization strategy based on the market changes that have already occurred.
So the topics I want to cover here are the product evolution, the evolution of the product offerings that we have, where that's going, our evolving analytics platform, how we're managing data, what we're looking at to derive insights and how we're auctioning the insights that we get out of that data. And then a brief look at some demonstrated early successes. Again these are not made on games-as-a-service titles. However as Matt pointed out I think it's very relevant to point to you some demonstrated success in terms of how we are evolving our monetization strategy and what the impact has been so far on the products that we already launched, and then I'll summarize.
So products evolution, what I really want to talk about here is what we're moving away from and what we're moving towards. What we're moving away from is a primarily durable economy and what I mean by that is a durable is something that you buy one time, there's no further investment necessary and when you combine that with a paywall, and by paywall we mean an engineered paying point within the game, that incentivizes people to convert and buy and then after that they drop off, what you have is a bell curve of performance.
So what you get is a whole bunch of people in which is one of our competitive advantages, is our ability to acquire a large group of users. What happens afterwards is they hit this paywall, the paying point they convert or they drop. If they convert they're buying something that typically provides more utility than is necessary for the rest of the game and what that leads to is a single purchase behavior.
So we want to obviously move away from that. We're seeing a lot of this with the top grossing games that are out today. We want to make sure that we provide the opportunity to not have a pay ceiling. Why would we want to restrict the ability for users to pay? We want to make sure that we give them the depth and the ability to spend whatever they have the ability to spend. So we want to cater, convert, invest the user, monetize them more over time.
Single player experiences are something else that I want to kind of talk about here. Now I'm not advocating that we move completely away from the single player experience, but what I am saying is that a single player tends to be complementary to multi player.
Multi player is a social element, the competitive element that drives people either through social interaction or competition to spend more money over time. We see in this in a lot of the top grossing games yet again and there's a reason for this.
So in addition to that we want to move towards a deeper meta and monetization system focused game. So we want to define the monetization systems to be deeper to be more progressive, to invest the user.
Again the concept here that we really want to go for is the frog in hot water what I mean by that as an analogy is we introduce the user as a frog into a fairly mild pot of water and we slowly crank up the heat until we boil them over time. They won't realize what's happening until they've already committed and we do this through investment, engagement, and then we monetize on different paths over time. So deeper monetization systems, deeper progression these are all things using socially competitive elements that we’re going to leverage in the future.
Games-as-a-service is supported by this and the reason for that is because our Gluon infrastructure, the service side support allows a number of things, it allows for better data analysis, it allows for us to leverage these interactions between users more effectively, it allows us to look as user behavior as a determining factor and how we're going to monetize these people over time, and we react to that. So again primarily consumable economies mean Razer Blade's model.
We provide the durable, we’ve even preserve some content to leverage as an incentive for that durable to monetize over longer period of time and once you get that durable you’re not done spending yet. What we’re going to do is we’re going to provider you different mechanisms within the gameplays itself, different systems to invest in.
We’re going to allow you to taste all of them and then we’re going to start to do shut doors and if we want to engage in all of the opportunity available to that durable item you’re going to have to invest overtime and continue to spend throughout the lifecycle of the game.
So these things are not very complementary of each other. You’re going to know that here I have this model acquisition, retention, monetization. Matt mentioned this earlier, very important principles, we want to engage the user, invest the user, convert the user, monetize them overtime, consume the durable contents so it’s not durable, so that we don’t have a saturation problem and then when we reinvest all over again. This also very complementary when we start doing product updates, we introduce new durables through these systems, we’ve have a rollout strategy, we can leverage that overtime as well.
So in order first to achieve this, we have to be better about the way we analyze data. We have to derive better insight and we have to look at behavioral data and interactions between users and the way the people engaging the game players itself to provide the insight necessary for us to make optimize changes.
We’re doing this in a number of way, so what this graph or this visual aid is just demonstrating this the new tool and the new visualizations that we’re leveraging through a couple of our new platforms that we’re using such as (inaudible) and then latest over here on the left we have economy balancing, mission inn and IAPs, or currency durables in mission action or currency in SC spends and SCB in soft currency.
What those things are representations of dashboard that we can construct, customize, and implement across games or again a standard process for business intelligence that we’re going to leverage once this proven success we apply those to additional games.
So some of things we can work at with this data and analysis. Sorry if you can’t see a very clear but I’ll kind of walk through real quick. We can look at user engagement. We can identify where people are playing where they’re dropping off, how engage the user is, how many actions they perform in each session, we can look at cohort-based analysis very important to us whether we define the cohort as install day or first spend transaction or both whether we define them as coming from a specific channel engaging in a specific system any of those things.
We can analyze data to provide us direction in where we optimize our games. We look at user progression that’s progression in game player that’s progression in the monetization system itself, so what we want to do here is we want to look at you know the way we monetize the same way we would look at game player, we’re going to optimize the same way so how engaged as a user in the progression mechanic that we designed both in metal game itself as well as the individual past for monetization.
So we noticed people aren’t upgrading past level then why, how can we create incentive to get passed that point, what’s the reason they’re dropping off these are types of things we want to be able to analyze and take action on then whether those are games or service events or actual events that we define as an action performed by user within a specific instance of game play.
We want to look at the action. We want to look at the event. We want to look at and drillDAUn pretty granularly although not too granularly. We don’t want get analysis paralysis but what we do want to do is be able to drive better insight again to make those optimizations.
Economy, very important in a game of service tile when you have a large user basis interacting together one of the best way to monetize those users is to have a free market economy between them and if we’re going to monetize that we monetize users who don’t’ typically convert indirectly, we also be able to analyze process, things, the flow, the burn rate of different materials whether those be consumables or currency. We want to look at the going rate for durable items.
This allows us to apply things more effectively. We can test the elasticity. There is a number of things that we can leverage when we’re monitoring the economy; anyone who’s worked in free the play multiplayer games like MMOs on the plane side on mobile knows that your economy is very-very important feature.
We want to be able to leverage that and play with that so we can set our price or item. We know what to offer during itself, run better live operations, and then of course the final where people come in front where they must sticky what’s the better source for us to put store for users acquisition.
This is something Chris is going to walk into a little bit more little later but again just another demonstration of the types of things we want to be able to analyze going forward. So I started back at the tail end of January early February and the product management and the team wanted to hit the ground running.
One of the things we want to take a look at is one of the game that’s in beta that’s on its way out and we want to analyze those beta different data sources that we had derive some sort of conclusions or some insights and develop action items out of those.
As a result of that what we ended up doing was rebalancing the entire economy from the roundup. We added more consumables. We improved the upgrade system that includes power distribution curves, difficulty, pricing between the different variety tiers.
We reduced the payrolls. We actually eliminated those which the pretty risk if you think about it for a game that’s developed with payrolls in mind, engineer pay points that we rely on converting what you don’t know after cycle of conversion is, how the rest of the game play, you know supporting the experience because if you can’t retain a person long enough, you can’t monetize them over the time, your LTVs are going to be shorter.
So, we were spending quite a bit of time managing the echo system for the game, deriving the insights and then optimizing based on this, you can see the impact here in the beta data as far as the success that we have had ARPDAU right now.
This isn’t necessarily indicative of what we will see out of the game but the trend is constant, right. So because the sample size is smaller, your ARPDAU is naturally going to be larger, when it comes out of the game what we do know is the trend is consistent. So, ARPDAU was higher than it would have been otherwise.
So, Early Success, so we are going to walk through a couple of case studies, for things that we done again not necessarily on the Games as a Service title, the titles that exist right now the impact these things have had, these are very-very fundamental, very-very early things that we have changed.
There is lot of sincere and a much greater success that is just waiting for us to open that up and that’s why we are building the platform for Games-as-a-Service, we are going to leverage our Glu-1 technology to do these things on a broader market, on a larger thing and the goal here ultimately is to take that bell curve and instead of having to taper-off and drop DAUn we want to extend that level (ph) and have a gradual inclines from the peak.
So, we are going to leverage the competitive advantage of better user acquisition that we have at Glu and we are going to monetize these users over time and retain them to increase LTVs and we expect to see a good deal of success in this.
So, Heroes of Destiny, we just talked about that a minute ago, it was released in Q1 2013, peak APRDAU about $0.14 after launch. That’s about 2.8 time’s average, $0.05 to $0.06 past release titles for action game. Its feature consumables as I mentioned has significant re-balancing in beta but it’s still to single player experience.
So, the goals with the most recent updates that we have applied were controlled content release, less dependency on Heroes and by Heroes I mean Heroes itself, Heroes being the durable items that essentially the Razer of the Razer Blade's model.
So, there are investments mechanisms with built into those Heroes that Heroes typically cost more and deliver that upfront revenue that we tend to rely on. So dependency on Heroes is a problem because once you buy a Hero, you don’t need to buy that Hero again and that’s an issue if we are going to continue to monetize the game and keep the LTVs high. So we increased consumable revenues, that’s one of goals; increased buyer conversion, obviously that’s a goal; increased APRDAU and improved retention.
So, how we are going to do this? The 1.1 changes introduced two new features. Anyone familiar with the Asian MMO Free-to-Play market is going to be very familiar with the first one. So this is a westernized spin on mystery boxes. It’s a probability based payout system that lowers the barrier of entry on highly desirable, durable goods.
So the way this works is we take some weapons, and in this case, the highest rarity of weapon in the game, actually have them withhold all of these weapons from the game, so that you could leverage them in the system knowing that we can drive more purchasing behavior and a higher LTV as a result.
So the goal here again is to have something that users want, something to chase after. The system itself is very similar to kind of like slot machine. So it’s a fun engaging system to actually interact with and we reward people for taking more risk by leveraging a bonus price system.
Over there on the right you can that. And the purpose of the bonus price system is a graduated spend. So what we want to do, is get people to engage and then get them to say oh you know what if I would buy this two more times, I am actually guaranteed to get that high. Every time they buy this two more times, the next tier up is only two more times away, the next tier up is only two more times away.
So there is a gradual cycle for graduating spend over the time which is very important to using the system because really in essence you always have two types of users, you are going to have risk averse and risk seeking users. So, over the time people become risk averse if they fail to get earns from a system and this bonus price system is to help kind of massage that out a little bit longer so that people tend to be more risk seeking and not risk averse.
Now if you are risk adverse, we do still provide you with a direct purchasing mechanism, you just can’t get the best thing. So you get the second best thing and that’s rotates and it’s an impulse but and it changes fairly regularly. So again incentivizing the use the system because we know it extends the life cycle of the content and we get more money and more importantly if you really think about it, the goal behind the system is, if I sell an item directly, if I introduce that item at whatever I assume that price to be, my goal for pricing the item is pretty simple. It's I want to hit the maximum number of people at the highest cost possible to generate the best results and the problem with that is typically with our view if there is 10 people willing to pay a $1,000, a 100 people willing to pay $50 and 10,000 people willing to pay $0.01 I have to come somewhere between and I am hoping the people move up from the bottom or move DAUn from the top.
DAUn from the top, sure they are going to do that, but we are also leaving the money on the table. Up from the bottom is a little bit more of the risky proposition but that’s the kind of the goal. What you start doing it you start dropping price after that. What this does it allows us to lower the barriers of entry by making it a gambling mechanic. For the first time to engage in the system the cost is fairly low. We manage all the contents through an expected value system. The net result is people spend in proportion to their ability to spend. So hit our wealth, we hit our memos, we hit our targets (ph).
Daily rewards engagement tool the way it works, you log in you get a reward. The first reward we give you is a mystery box, reinforcing the system that we are delivering into the game and helping to introduce you to the concept of a risk-based probability payout system. So again this is pretty basic stuff as far as some of the MMO strategies out of Asia. We see a lot of this in top grossing game such as Puzzles and Dragons simply in the form of card packs. Card packs, item fusion, consumption are all very similar to this.
So what’s the impact on ARPDAU? Well we launched our 1.1 update and we saw 41% increase week-over-week in terms of total ARPDAU performance. You are going to notice there is a little bit of a dip right there. That’s actually a user acquisition experiment that we were trying that pumped a lot of users in that didn’t convert, didn’t spend and then dropped off.
So, you can see the trend is definitely on the uptick, it was trending DAUn and again that DAUn trend is a result of durable item saturation. So the two spikes prior to that are promotions. Those are Live Ops promotions. MATT talked a little bit about that. My team is also focused on running these Live Ops promotions and we want to get more strategic with those two.
So instead of just running a discount on that item, what we do is we look at where does the item typically tapper off in terms of sales, let’s offer the discount after that point so we can still capitalize on the initial value that we normally see without cannibalizing the effect and then convert and monetize or step people up in the form of an upsell overtime.
So, as you can see ARPDAU continues to grow. Right now a its slightly 10% higher. We do expect it to kind of taper back DAUn. Again still not a GaaS title still very, very single-player experience. The 2.0 we are designing for this game is going to be pretty awesome. It’s going to leverage a lot of this stuff it’s actually going to introduce some durable consumption systems. So that’s something to lookout for too.
Percent paying, again with a 1.1 update we see a pretty significant improvement in the total percentage of users converting and becoming buyers for the first time. So you can see it averaging between 4/15 and 5/3 at about 0.79% up to 5/4 to 5/22 that average is about 1% and you can see it growing. So this is pretty up-to-date, this is through I believe the 26. So that trend continues.
Lifetime values, when we take a look at the lifetime value we notice that there is a couple of key notes here specially on HoD. HoD is kind of unique. Because of those consumption systems or consumable systems that are attached to a durable item as a Razer Blade model what we end up seeing is that two-thirds of the spend occurs after the third day.
Typically within a Glu game the first 90% of the spend happens within the first three days. So this is a pretty significant change and gives us just kind of an indicator that we are making steps in the right direction. We expect the growth to continue and you can see the difference on LTVs 43% gain over 1.0.
So let’s look at total contribution of revenue by category. Hero purchase in 1.0 accounts for 44% of the total revenue. Now we talked about why that’s a problem. Hero purchases mean a durable you only buy it once. If it’s 44% of our revenue, that’s not a great deal for us right because as soon as saturation starts to take hold our total revenue declines.
Now with the update the price significantly changes. Not only do these mystery boxes now account for 46% of the total (inaudible) being spent in our game, hero purchases are DAUn to 16% but also upgrades which are consumables and reagent purchases which are consumable have doubled.
So will this continue, will those shrink will they grow, we will see but what I can tell say is that trend is going to be consistent. Mystery box is already a dominant thing that people are buying right now and we are actually going to another example a little later with a very similar system in a different game that have the same results.
So we will look Frontline Commando D-Day. This is one of our newer games that just launched, again released in Q1 2013 highest out peak 1.1 million on iOS and Android, primarily durable economy, skill-based third person shooter and a single player experience. So doesn’t necessarily exemplify games-as-a-service however it does put us at like a record DAU. So it just reaffirms that competitive advantage that we have and our ability to acquire users.
So the growth with our 1.1 update that we just launched where more revenue from existing packages that we have in the game, an increased ARPDAU, increased buyer conversion and how are we going to that? We are going to re-price all of our content.
Same thing we did on HoD. We are going to go in we are going to analyze some of the pricing metrics that we used at the beginning or the strategies that were employed before the thing launched and we are going to optimize this based on user behavior. We are also going to take a look at different points that we can introduce.
Try before you buy is a simple concept. You try the item in a mission. You pick up the gun, you give it a go. At the end of the mission, we try and upsell you for the gun at a slight discount, it's an impulse buy. The goal with that one being buyer conversion.
So how has buyer conversion has been effected by that change? Well you can see here with the 1.1 update that we have about a net 25% gains in those flattened out afterwards over the previous versions conversion rates and we expect to be able to leverage these types of optimization since changes in the future with future content to improve this even further.
So let's look at ARPDAU. You can see here version V1.0 to version 1.1, this is aggregated data. So it's important to know that we are looking after the 1.1 update ARPDAU, 1.0 and 1.1 aggregated ARPDAU are simply revenue divided by the total number of users in the game on the specific day.
So definite improvements. We see that upswing that we were hoping for but let's look a little deeper at actual version performance. So here is ARPDAU by version. You see the 1.0 sitting around $0.04 and the 1.1 at about $0.06. The new average is actually around $0.06 now as adoption picks up.
So clearly once again, we have some significant demonstrated impact and I'll just point out that these things are very difficult to move DAU 1 or a DAU 1 simply because the DAU is so large. So a lot of the other games that we see like in top grossing have much smaller base. ARPDAU typically is higher but the by-product of both the smaller user base as well as a reliance on wealth of spenders. So what we have here is more critical now so it's something to know.
Package optimization revenue; so what I wanted to illustrate here is even with 75% or sub 75% adoption of 1.1, see 1.1 revenue from packages has outperformed the 1.0 revenue from packages completely.
When you aggregate those metrics, you see revenue before and after from those packages; you see with the 1.1 release, there is a significant growth in total revenue contribution from those packages while at the same time there is actually less of the packages being sold. The reason for that is because we optimize the prices up.
So the increase in prices is actually countered the decrease in total number of packages sold. So this is a good point of reference for a lot of things that we look at. We typically say if we drop the price point, we are going to get more users to buy, so our net revenue will be higher. That's not always the case and this kind of proves the point there.
LTVs. So once again create the thinking over the 1.0 we can see significant growth here. We expect that growth to continue. We actually have a really robust 2.0 plan for FLC D-Day. We'll start with the 1.2 update. Then we will introduce some really interesting mechanics, a new currency. So we will follow that up with the 2.0 that introduces a way to burn that currency, earn that currency and leverage the currency in a consumable manner.
So let's take a look at some contracts real quick and what I really wanted to kind of demonstrate here is the evolution of IAP overtime as well as a kind of comparative look at similar timeframe on older titles.
So FLC D-Day have a large DAU As we've talked about, Large DAU is roughly $0.06 on average right now. FLC when it launched had about a million DAU. So it's actually kind of a slow to ramp up game; ARPDAU with $0.049.
CK 1 has a Large DAU launch, ARPDAU at $0.047. You can see here the evolution from FLC to FLC D-Day, not only has the DAU increased, the reach increased, the performance increased but ARPDAU has also improved significantly and that's again with pretty minimal kind of optimizations that we were very tacked on near the end. So we expect to have much better performance more time we spend with the product and that's the reason the product management group is getting involved with these products way earlier since involvement
Eternity Warriors 2. So Niccolo kind of mentioned this. This is a product that’s going to benefit from AirPlay shortly, AirPlay being almost a surrogate to the info services if you think about it because its introducing some PVP mechanic, the thing already has multiplayer. So we're taking these little baby steps. So let's take a look of the performance of the product and kind of how that's changed with a simple update.
So again released in Q3 2012 multi-player Co-op primarily durable economy. They are all actually more consumables in this game than most of our other titles and it is a skill based action RPG. The goals with the 3.2 with an increase durable lifetime increase ARPDAU and increase buyer conversion. They are pretty similar to our goals for our other products.
What we introduced was pretty simple, just a new ways to leverage the content that we're deploying in the game, nothing beyond that; very similar to kind of what we did with HoD, slightly different, same content, extend the lights of those durable items, get more money for them over a longer period of time and leverage to that content over a longer period of time which frees us up to do additional development like the AirPlay update.
So ARPDAU changed from 3.1 to 3.2 very significant growth here. You can see about a 60%, a twin fold increase continuing to grow. Revenues pre and post 3.2, you see how's that changed overtime as well, 3.2 update significant increase in revenue as we would expect to see with a higher ARPDAU.
The reason for that is the DAU is relatively flat. The sharing continues at a constant rate and there is two reasons I show you this. One is to illustrate that the ARPDAU increase is the behavioral change from our users who are spending more in a different way. The other is point out that the new content we introduced was really not new content at all with a new systems. So, we do see in kind of DAU spike as a result. We’re very minimal on there.
So, let’s take a look at our hard currency contribution or distributions after the change for EW2. So, this is prior to that new system that we just discussed. Again, you can see here, maybe you can’t, but I’ll illustrate for you, durables purchase makeup 37% of the total revenue contribution, upgrades purchase 60% and consumables is 3%.
So, once again we find ourselves in a position where we are kind of handicapped by the fact that durable items, one saturation is reached, don’t deliver the same results they are used to. So, luckily, we get a good number of new users into the games. So that is relatively consistent but still problematic for us because it means that we’re not maximizing our potential even in the current stage of game.
So, after that update, 50% of revenue is now coming from that new distribution method, 3% of consumables has not changed at all, that’s stayed the same, hard currency durables purchased has been cannibalized DAUn 16% which in this case is a good thing and hard currency upgrade purchases is still roughly 31%. So, it’s still floating roughly around the same place which is positively for us, especially considering the end out (ph) for lot of these consumables through this new mechanism.
So, let’s talk about Contract Killer. Contract Killer 2 was released in Q4 of 2012. Peak DAU was over 600k on iOS and Android has primarily durable economy, skilled based third person shooter and single player experience.
The goals with the 2.0 update was increased durable lifetimes, not dissimilar to what we’re trying to do on the titles. Unfortunately this one was very difficult to make those changes on because the team was relatively small to time but you’ll see what we’re were able to pull off and how we managed it. We increased user engagement and that's another goal, upsell spenders on better items, again graduated spend over time, increased ARPDAU and increased buyer conversion.
So, what have we changed? We added an Endless Mode; Endless Mode meaning that’s it’s never ending content cycle. It’s a single player mode that you can engage in and it’s just gets perpetually more difficult the further on you go. Now the benefit to a system like this aside from the obvious engagement benefits are that we extend the product's life, meaning that people are engaged longer. We have more opportunities to spend special considering the difficulty ramp. There is obviously more reasons to buy better stuff to further in you get and we leveraged event content for future updates.
So, here again, we’ve got another update planned that’s going to leverage this system, create some sort of tournament mode and offer awards based on how far you go to try and maximize the potential amongst stations throughout the entire game lifecycle.
New content and promotional tools, so this is where we’re trying to extend content lifetimes. So, upsell with feature packs additional IAP and VGP functionally, so we can message better and offer different rates and direct purchase incentives based on segmented user groups.
So, let me explain a little bit what we’re looking at here. So, we’ve got synergetic packages that we’re creating. So that let's say you got a sniper class, we are creating a package that’s going to be geared towards your sniper class. What we’re also doing is we’re adding content to that new weapon. So it's a new sniper rifle that didn’t use to sell. So, we’re adding a magazine that didn’t really sell very well, we’re adding consumable items that don’t really sell very well. And the goal here is to increase the cost. So we price that gun higher, we’d sell them more content. That increases the cost and value of that package even though it’s a perceived value, then we discount it about 10%.
So, our net gain is greater than what we would have had when we introduced it directly. It also gives us the flexibility to remove content over to over time or discount the pack itself. So, moving people purchasing behaviors over the things that we didn’t typically sell. We’re up selling them on something that they are.
The IAP and VGP functionality, here again it’s all about messaging and how we target the users – the goal here being that we can direct targeted purchase offers to specific user groups out a specific stage in the lifecycle within the gameplay.
Essentially the goal with that is when you push an item out and you put it on a discount, if people normally buy that item and it’s a hot selling item, you discounting it to everyone, no matter how much they would pay for it.
And again you know, we want to dial that back. We want to still coupe those revenues that we would normally get out of a direct sell for the item at full price to after the point where like 80% of our users have already spent on it. That’s when we introduce the sell and we offer discount to try and convert or upsell people that might be say don’t finish too well. So, whatever we define that to be.
So, ARPDAU's impact with the 2.0 update, couple of things to note here on the graph. One you see a promotion there, the talent of 2012 the beginning of 2013. That is a whole day promotion, pervious high ARPDAU. 2.1 we can see relatively flat. With the 2.0 update we see a 57% increase in total ARPDAU. Average monthly ARPDAU of 51%. New ARPDAU is holding higher, the trend is positive.
So, again this is something that we’re targeting, this is something we want to move to. These are points that demonstrate that we defiantly have the capability and the talent to monetize the products better. When you couple that with the ability to introduce these games-as-a-service, to have these socio competitive elements of game play in the games to drive spending between users, and you have the competitive advantage of pushing whole bunch of people in really early, you've got a pretty solid strategy for success.
So once again iOS contrast, late stage of life cycle, we're talking about 6-7 months in, CK2 large DAU, ARPDAU was roughly $0.06 average now, FLC, large DAU, so again it took a little time for ramp up. Now it's got large DAU, ARPDAU $0.04. CK1, medium DAU, ARPDAU $0.03. So you can kind of see the degradation over time of these other products while CK2 still continues to grow or at least remains flat which is exactly what we're looking for.
So in summary, what we want to do is, we want to move to a deeper vertical and horizontal stretch for monetization. We want to evolve our data analysis abilities, we want to monetize and design monetization systems that are complementary to core gameplay elements and mechanics. We want to invest the user, engage that user and then monetize them over time so we can boil them like a frog in hot water and then we're going to take our tools and tech and we're going to leverage that to create a really kind of comprehensive socio competitive element of gameplay and again when we say Gluon, it's essentially the glue that's going to bind all the users together and that's our retention fix. So the biggest thing that Gluon's going to do for us is leverage retention and engage users and then create competition between those user groups.
We're going to also support this with economies and meta games and again we're going to have to monitor these very closely to ensure that we take a look at the burn rate, saturation level, also derive insights like what should we price items at, what happened with this content that we released, was it successful was it not successful, how can we improve that and then the early results so far, higher ARPDAU, better conversion and higher LTVs.
So now I'm going to introduce Chris and Chris is going to walk us through the publishing and user acquisition changes that were made.
Thanks Spencer. Hi everybody. I'm going to change things up and stand on this side of the podium. I'm Chris Akhavan; I'm the new President of publishing at Glu. This is my sixth week at the company. I'm really excited to be a part of this very talented team. I think Matt and Spencer are good examples of the type of DNA that's been coming into the company over the past six months and fully excited to work with them and their team to take our efforts to the next level.
So model at Glu, I oversee a lot of the commercial operations for the company and today I'll specifically be covering three of those areas and our approach. Prior to joining Glu I spent the last 3.5 years at Tapjoy where I was part of the early team, 10 of us in a small room, helped grow that company to a $100 million plus revenue per year and 330 employees and during that time got to work with pretty much every major free-to-play mobile game developer in the space and learned a lot of the best practices and strategies that drive effective player acquisition and advertising monetization.
So I'll start with our approach to player acquisition, and Glu has historically spent a $1 million plus per month acquiring users from various channels for our games. So there is a great opportunity here to really take that to the next level, and we're really focused on creating as much distribution advantage and leverage as possible for the company, and currently we're focused on three areas, the first of which is getting DAUn to a much more data driven approach, getting deeper levels of visibility and optimization across every channel we work with.
We'll also be taking a much closer look at how we can better leverage our 3.9 million daily active users to drive effective cross promotions through our portfolio of titles and finally we're working on negotiating preferential terms with every channel that we buy traffic from.
So on that first point in terms of driving much deeper levels of optimization across every channel we work with, historically Glu's been spending across multiple ad networks including the ones listed here and countless others and sort of looking at data at a high level and deciding whether or not to increase bids, spend more, spend less, but the visibility has been very limited at that kind of network level.
What we're doing now is actually getting a much deeper level of data flowing in from all of these networks. It allows us to capture, a wealth of additional dimensions that really understand the users we're acquiring. So what device types are they on, what operating systems are they using, where they're located and what specific app are they coming from. So it’s not just knowing that users came from Flurry but what specific apps within Flurry's network are we getting users from, and it's exercise, we start to shut off the sources and dimensions that are driving poor quality traffic and really start tuning that towards much higher ROI, higher quality users.
We're ultimately taking that same data driven approach to leveraging our internal cross promotion power. Again with those 3.9 million daily active users we have very powerful distribution channel that historically we've not a great job of leveraging. So you can imagine us being able to do things like take users from a high reach low LTV title, bundle them into one of our newer higher LTV titles and drive really effective cross promotion through our own network of first party and soon to be third party title.
And finally we've been negotiating for preferential terms and just within the last six weeks of me being here, we've done that successfully with multiple player acquisition channels we work with, and these are really easy to structure as win-wins. They certainly want to continue to get our budgets and on our end you know getting discounts and bonuses from all these channels gives us a much better ability to drive higher ROI overtime.
Next, I will walk you guys thought our approach to advertising base monetization and if you look at historically I think at one point last year about 30.30% of Glu total revenue was advertising base and now I believe that’s floating somewhere around 16% largely that was due to changes in platforms policies specifically Apple then in the use of incentivize app installed advertising which was a meaningful revenue channel for Glu and all the other developers in the space.
The good news is though that in the last year a lot of new revenue channels have emerged that we’re not yet fully taking advantage of though we’re very actually working on implementing multiple new sources of advertising revenue.
So our current focus is really capturing the opportunity in mobile video as Niccolo discussed earlier we’re seeing robust demand coming to space that we’re not really taking advantage of yet but soon will be, we’ll be also launching an effort to work directly with somebody top advertisers out there. And we’re not going to go out and hire a sales team or anything but to the extent that will make sense to work with very top spenders I think that will be a strong benefit to Glu and we’re also experimenting with new advertising models that I’ll get into shortly.
So with video, we’re actively working on implementing multiple new video at demand partners. Over the last few years, this has been a very significant revenue channel for a lot of other mobile gaming developers. Initially this has been fueled by game developers promoting trailers of their game and more and more it’s shifting towards big brands coming to the space.
So you’re seeing moving trailers, CPG ads, auto all about flowing in and through working with multiple partners here we’ll start to capture this opportunity and see some good list. So, I mentioned direct deals, you know, currently Glu only gets access to an advertisers budget through an ad network which for the most part works well but in many cases it’s not only giving a rev share to the ad network, we’re also subsidizing poor quality apps within every ad network giving our use tends to be much higher quality and we’re competing with many other publishers in each network for that share of the advertiser’s budget.
So what we’re going to do is launch a very focus effort on working with the top 25 big spenders out there, capturing those budgets directly and that should lead to you higher payout again, and our user quality is very high so advertisers are willing to pay a much higher rate for our users as well as getting a larger share of their budgets. I referred to experimenting with new advertising models earlier. One model that we’re excited to role a test out with is what I call this new engagement based networks (inaudible) and Pocket Change are a couple of example, and I would think of these as sort of mobile loyalty point programs where our users in the very non-obtrusive, its fully opt in but our users will be able to for example get loyalty points for playing on a daily basis, finishing levels, unlocking achievements, they can eventually trade in for a Starbuck gift card, Amazon gift card or whatever they’re interested in and through that process of going towards redemption still also have the opportunity to interact with the brand advertiser. So the whole model is ad funded, we think there is good potential here to not only increase retention but also add incremental ad revenue.
And finally we also will be exploring opportunities to work with international network particularly across Asia where we currently are not working with any of them; we’re relying on U.S. based companies that might have an office in one of these markets but not working with local players that are probably be much position to monetize our inventory. So particularly in countries like China, Japan, Korea we will be looking to increasingly work with local providers.
And finally I wanted to walk you guys though an overview of our third party publishing program that we’re excited about rolling out. If you look at Glu I think we’re very uniquely positioned to be a compelling publisher of third party content when you can buy our 3.9 million daily active users, our strong platform partnership, world class UA team in combination with our game design expertise, monetization expertise, live ops, analytics, etc. I think we can put together a very compelling package to bring a developer’s content to a massive global audience multiple devices, operating systems, languages.
The progress we’ve made here so far the company hired a BPO of third party publishing earlier this year. We’ve signed two contracts and one binding LOI and the pipeline is robust and rapidly accelerating with opportunities all across Asia.
We expect to launch six titles by the end of the year and we’re really focused on targeting titles that are proven to be successful in other markets and in helping the titles to come to western and global audiences. And most of these titles that we expect to bring to market is game called Warriors of Meiji what’s really just exciting about this title is that it’s a good example of delivering on the games as a service model that we’re also pursuing for our first party titles and this game is a fully live experience, it’s an MMO with PVP elements where you have to play cooperatively with other players, play against other players, communicate in real time. So, definitely excited about this title and in addition to that it’s proven to be very successful in the China market. It has been top grossing title for multiple months, so we are not very excited to bring that title to western audiences.
So with that I will turn it over to our CFO Eric. Thank you.
Great, thanks Chris. So, first up I want to thank all the analysts and investors that have shown up for Analyst Day here. I think one the theme that you have heard throughout this day is that breadth and depth of the management team that we have now hired in the past six to nine months. I think this is the first time that Matt, Chris and Spencer have been able to talk to investors. So I think those that are here in person will get some good Q&A time both on the Reg FD form as well as offline as well.
So what I want to do is I know most of these analysts and investors that here but there are some that there are some that are new and some on the phone, they don’t know the company. So what I wanted to do is go through book my background and then I will talk to you with the slides that may be old news for some of the investors but for new investors’ kind of get in some backdrop and explanations. So I have been at the company for eight years, I have got 24 years of experiences in Silicon Valley, spend five years at pricewaterhouse, spend 11 years in two enterprise software companies and I am here at Glu for eight years, CFO for five years.
So, we will start and let me go through about 10 slides on the business overview from a financial perspective. The first is some other big public companies in the gaming space that are going through pretty big transitions themselves. Transition to total digital, some big public companies that are only 40% in digital transition away from console, other companies that have highly invested on the Facebook gaming platform, over 80% of revenues on the Facebook gaming platform, has a big transition to go through. Glu has already been through its own transition. We have been mobile for the last 12 years and we transition from feature phone gaming to smartphone gaming about three and half years ago. And you can see our overall revenue didn’t decline in depth but about two and half years ago we started to bottom out and are growing since then. And so you can see that transition is well behind us.
And then secondly in this quarter we supplied what you will see here this is really showing that our smartphone business is now over 90% of our overall revenue, coming from the start, so this transition is well behind us a opposed to headwinds that are coming towards us.
The other transitions we have made, has been a transition from branding contents, licensing other peoples titles, Activision’s Call of Duty, Transformers from Hasbro, creating games, launching games, I mean cutting a big 25% to 35% of royalty check back to the brand holder. And over the last three years we transitioned to where it has been our own IP and you have seen that transition bearing out in our gross margins. We have increased gross margins by 2000 to 2100 basis points in the past three years because of this transition as well.
So moving on this is more of a financial snapshot on the balance sheet. We have got a healthy balance sheet, $21 million of cash at the end of March, and no debt on the balance sheet as well.
So, as we are here at the Analyst Day, I want to go through two corporate governance slide updates as well. The first is on the board of directors. So we have a amicable leads from the board of directors about a month ago with Matt Drapkin, who stepped off the board, we brought on board as he stepped off Lorne Abony.
So Lorne has got a great experience as a CEO and co-founder in the digital media space as well as a background in some of the earliest of online gambling software where he was a cofounder of the company that went public and was one of the earliest vendors in that space back in 1999 and 2000. So we are very excited about Lorne coming on board and the breadth and depth of experience in digital media that he is going to able to bring to the company.
So, next I want to talk through, as we have our annual shareholder meeting next week and there are three proposals on the docket, two of them are very-very standard, the first is the reelection of three board members, Niccolo being one of them. Bill Miller has been on the board for over seven years, independent and outside director and Brooke Seawell of NVIDIA. Then the third item is the ratification of Pricewaterhouse, are very-very standard as well, they have been at our firm since inception. The second amendment is just increasing our option pool by 7.2 million shares and three years ago we went to shareholders at the same timeframe and also look for approval for an increase for our option pool and what we told investors then that this was going to last for three years and it lasted for three years and so forth as we think this is a very important for retention and attraction of the talent since we increased pool. We have also agreed voluntarily to virtually all of the ISS requirements around fungible ratios, no reprising without stockholder approval et cetera. So we look forward next week shareholder meeting, look forward to having in this passed but if any shareholders that are (inaudible) that have not yet voted would seek approval along manager’s recommendations.
So talk to you on guidance. Let me just go through the first. We are reaffirming today our Q2 guidance that we gave just three weeks ago and then secondly we are also reaffirming our guidance for the full year. so you can see here, this has a marginal loss on an adjusted EBITDA basis and total revenue 84 to 85 or 88.5 million. And you will see that the top-line revenue at the high-end is a slight growth 1% growth. But you have to remember we are since our last year where the feature phone business had some going from material to immaterial numbers, so we were $13 million last year on the feature phone business. We are guiding to $4 million that business line is finally getting down to a nub. But this is a $9 million decline year-over-year which still has as impact on a year-over-year basis. At the high-end we have got 13% year-over-year on the smartphone, 7% on smartphone at the lower-end. So I wanted to give some more clarity, so that high-end of guidance that we just reaffirmed what I wanted now that we are talking about this third-party publishing business I want to break that guidance down a little further and to talk about the economics of the two lines of businesses that we now have.
The first of the business we have always been in which is the first-party business the studios run by Matt Ricchetti, optimization is driven by the Live Ops teams and Spencer’s teams and that’s a business that’s been generating 90% to 92% gross margins, we will continue to. We are doing any we are doing very, very little licensing in that line of business so very, very high gross margin business. That’s why it burdened all of our G&A all of our, some of the marketing as well so you will see it’s got a big OpEx number in there but it’s at the 90% gross margin perspective and that will be 92% of total revenue. And in the third-party business what I said in the last earnings call, is that this business would have low overhead in terms of headcount, but would also have lower (substantial) to lift those margins. And just for putting a pin in what the numbers could look like, you can kind of assume that we are targeting at least capturing 50% of the economics. So we will take top-line revenue of that and then the royalties that we paid back to third-party game companies like Warriors of Magi, the owners of that game, they will get the 50% on average we are obviously trying to get as much as possible but on average about 50% of economics.
And then it still is in our guidance well do all durable marketing. So this business line has a handful of people it’s five or six people today so most of the OpEx that you will see here is in some fixed headcount as well as some variable marketing. So this line of business though shows for this year being slightly loss making. We do have the leverage in the model as we get more scale on the top-line. And I feel very comfortable that the overall long-term margin target looked the same from both lines of businesses on the long-term. So going with that, let’s talk about the long-term model as well. So you will see kind of three buckets here and first is last year’s actual and you will see last year we had a 100% of revenues coming from first-party business. It was at the 89% to 90% of gross margin and on the bottom-line we had about 3% EBITDA of loss. So we were buffing along right along a breakeven on adjusted EBITDA basis. This year we got about that 92% coming from the first-party, 8% is from the third-party with that margin profile we just talked about in the last five. So a slight degradation on the overall gross margin primarily due to the third-party publishing. And the bottom-line and guidance being 5% to 7% adjusted EBITDA loss, a slight degradation from 3% last year.
And then our long-term model is roughly 50-50 and this is not next year this is -- not the next year after that but it’s roughly 50-50, and the overall blended gross margins will go down into the low 70s due to this inclusion of the third-party publishing business. But we are having a consistent low-end long-term model of 22% and have slightly uplifted our prior long-term model at the high-end of, what previously was 26% up to 27% so for our 500 basis point swing from low to high on the long-term targets. So lastly, for those investors that are not in the stock or are likely in the stock, this is a stock that trades a lot of volume. In the last 90 days on average we have been trading 4 million we have no debt and are right about $160 million enterprise level. And so with that I am going to call Matt Ricchetti back up and Matt’s going to go through or Matt and Niccolo will go through, we get about five or 10 minutes of demos and we will bring the whole team up here for Q&A. Thank you.
Hi we are going to give a sneak peak at what’s coming up in the second half of the year while Niccolo gets set up, oh he is set up alright. So I am going to try to talk a little bit more about the game as a service features in the game that (come up) and the game play since you can see that so first game here we go. So first game is Zombies Ate My Friends, which is still primarily a single-player game, good story line, obviously theme involves beating up zombies with the various items. This game has some (tab) lighter asynchronous social elements. And representing the more casual part of our portfolio, you see some kind of simple twitchy mechanics in terms of timing your attacks lots avatar customizations. If you guys are familiar with Stardom, you can tell it’s built off of the Stardom engine but a pretty significant evolution of the Stardom engine towards a more kind of male oriented game. This is Tons of Guns, so this game has both PVE and PVP. It's got short session, intense compact a lot of different weapons, hence the name, and then an upgrade system so this is where the kind of deeper premium to that of economy comes in the play. The PVE and PVP will be supported with an advance system which is a kind of a new game; there is service feature for us and there is some Glu on technology in this game.
So it allow us to run a bunch of different either sort of tournaments the elements or you battle the players or single player events we kind of quest to get through certain campaigns. Now the campaign app right out there. It's got a very short of tongue-in-cheek over the top style to it. This is Warriors of Magi which as Chris and other folks have said is a full MMO kind of diablo style action RPG. You can drop in, drop out, Co-op so you see multiple players there, playing together, a lot of different class choices so there is sort of really deep investments in this game as you can play multiple characters, multiple different classes, collect gear, upgrade the gear and many different ways, almost all the Chinese MMO's have pretty sophisticated upgrade systems.
There is also PDP, real time PVP in the game which is not sure and here this is all Co-op style. It's got a huge variety of level, creatures, environments, gear. Then of course kind of the dilute rarity and collection element. The Mobsters and the Gangstas, this is an interesting game, kind of represents more of our ships in the portfolio sort of the midcore, so this is a game I would classify as midcore as a Battle Card game with a twist. It's got a tactical pop down view, so it's still 3D.
But you run its squad of five characters, battle of the people, it's PDE as the outset, we would love to add PDP to it but it's got an event system that also works with Glu on to make the PVE campaigns dynamic. And again there is a lot of different characters; a lot of the final art is not showing here so there is hundreds of different characters that's kind of more representive there in the loading screen as a variety of characters. So a lot of the events will be about driving players to collect and upgrade different characters, like we have seen in other games like Defender of Texel, Bubble Dragon. Quick teaser for a game that is really obvious Deer Hunter. This is our first Glu on game; so first Glu on game coming out in the second half, obviously it's been a great franchise for us; we've done really well in the single player game. So we are really excited to see what we can do as Deer Hunter as a game with some co-operative and social elements there. Thanks that's it.
Niccolo de Masi
Okay so we run pretty much exactly on time, we are good to go for as long as you guys would like to. We are going to think about 50 people on the phone who can’t ask questions so hopefully you guys can represent them on the questions. First up.
Drew Crum - Stifel Nicolaus & Company, Inc
Drew Crum from Stifel, can you guys talk about what the characteristics or attributes you're looking for in the third party games as to Asia?
Niccolo de Masi
Sure this is a (inaudible) question so we will start with him.
Yes so I think what we are looking for our game sort of proven successful, you know whether it's in China, Korea, Japan, for that supposed that means if you gain to tell the top growth positions for an extended period of time. In addition to that, I think we are also looking for games that really fit the same characteristics that Matt and Spencer walked through with our first party title. These games should all demonstrate the games and service, be life, have PVP element in most cases. And again, I think we are really just looking for games that have proven some measure of success on another platform or another market.
Niccolo de Masi
We are very, very choosy on this program so as you can see the small number of title is a high bar. Long term, we will going for scale, we're going ultimately for titles that have the best prospects of exceeding but also ones that can benefit the most from Glu, because ultimately you are looking for a mix of low risks but also interesting commercial term. And those two things will have to be balanced, kind of an art overtime.
Mike Graham- Canaccord
It's Mike Graham from Canaccord; your full year guidance implied a steep brand in (bookings). And so I just wondered if you could characterize like how much are there monetization metric that you could share that you could have to hit in order to hit your guidance or could you maybe try to characterize what you need to do in the second half between sort of games and volume versus monetization or price or just kind of give us a feel for what's embedded in that guidance against the framework you guys have laid out here.
Yes sure Mike, so as I have to told the most (investors), we don’t model the business internally on ARPDAU times price per and up number of gallons. So we're more back into it on new titles and launches and initiatives. So it's hard for me to answer by giving any; we've got to improve ARPDAU by X or DAU by Y. But really the back half of the year, I had two big devices (inaudible) one is improvement on motivation on the catalogue of our own title, so I think Spencer talked to all of the things that we have now been doing that we were under optimizing before have now higher theme numbers, are getting improved points on monetization that we’re going to apply against the current catalog.
Secondly are the improvements in the new title that we are launching on the internal studios. So, titles like Tons of Guns, and Mobsters and Gangstas, and Deer Hunter and other titles that coming out in the back half of the year. I think the third might be this rule would be the third party publishing. So, I think it’s a combination of those three that are happening in the back half of the year that it does have a significant ramp although that we’re confidence throughout it.
But the best thing we keep track of for you guys obviously is the store. So, we have a lot of science on the stage here that we believe can ultimately take players that come in the door and keep them longer and get more of them to pay more often, right. So, it’s always as unquantifiable piece which is will the fundamental concepts and the mechanic in content be, this popular or this popular or this popular and that’s a sort of most difficult head driven piece of this business.
Historically, we’ve proven ourselves quite good in getting the installs, getting the audience, getting the people through the door. So, as we’ve said, in the last six to nine months, this year and henceforth is really about can we (merry) the two up. I would think about the guidance in terms of the top 100 grosses of certainly and not – but not top ten grosses and probably not even top 25 grosses right now. But over the rest of the year we need to get titles in the top 100 grossing on both stores and we’re probably to get some that are close to top 50 than top 100 kind of broad and hold longer than a day.
As you guys start to focus on gas and these sort of more immersive and sticky titles that give people to monetize more with your consumables. You mentioned, you kept through it going back as it need to monitor and manage sort of the experience. Do you anticipate that that will require sort of longer extended cost per title as you sort of have to maintain these sort of communities in games and content provide new sort of features and updates more than you would have want some of these version one and 1.1 games that we saw.
I’ll take that and maybe if not then something in that. First, I think it’s important to talk about GaaS in context. So, started doing GaaS almost a year ago, this is when we acquired GameSpy. So, we saw the need for having multiplayer games, we have those titles in our portfolio already and we knew that can either build or buy or acquire buy it on our licensing bases or acquire as we ultimately did. So, I don’t want people to think that GaaS is a new pivot this year. It’s always (inaudible) doing that’s really not a monitor that we’ve given towards multiplayer games.
So that’s our point number one. Our point number two we’ve always talked about our R&D, our Matt Ricchetti’s (themes) as themes were dedicated towards titles. So, in the single player titles, we would have themes that worked for nine to 12 months on the title, they would not have title maybe 1 or 1.1 and 1.2 and they would move on to the next title and that title who have a catalog that title would stay on the deck forever, if there is zero hosting cost or zero real cost to deliver in service revenue. Where we are now going and the titles in that themes and move on to the next title. What you are now seeing from us is titles that have much more real time multiplayer they have wide operations, like Spencer’s team is going to be doing but how we decided to be on a wide, whether we keep that theme on that title and keep doing lot of ops is classic ROI. So, obviously we will have more cost on a title if it’s a successful title over time, but we would expect revenue to be substantial higher as well. And then, but those, because those titles are live operations, they have hosting cost, you’re going to see an ongoing part and you’re going to see us probably turning some on failing titles ops as a pose of the single player titles that if we leave them on deck forever. Matthew would add something to that.
Yes. I think you nailed a lot of it estimates the (microphone) on. But I would add that, we’re not planning to increase our development cycles at all. So, we’re solving the, like you hit on a very important point, so how do you do the single player part now to average other stuff on top of it. We plan to solve that problem primarily through the initial investment in some of the services that I’ve talked about. We are focusing our studio down on our best kind of may see over the cost, the across the whole of the company and those two are also the most mature and the largest and have the most economy skill internally they kind of do that (GaaS) work.
Sorry, just to clarify though, with the pervious titles it’s been a relatively short timeframe in terms of once they are launched and maybe doing the version 1.1. Once the investment is been made and the title is been launched, essentially done from sort of financial purposes it just can be each contributing it. But would we see them maybe a slower sort of ramp as you add in sort of expenses to build up your user base so that it becomes more revenue over time. I mean I think you wouldn’t necessarily expect a slower ramp, you would expect a longer tail as (Eric) was talking about. So, that’s a good problem to have and we’ll, that’s a kind of problem you can sort of across as you come through it.
So, it is an art managing multiple games teams out, figuring out when the right time to kind of add more people to the title, take people off the title, but it is very much a thing that we talk about frequently within the studios is helping define internally what those thresholds are, but we will expect to add games as service title pass sustaining (till) we will keep you longer it'll make our (inaudible).
Niccolo de Masi
This is a fewer, bigger, better game right now, right? So, we're not shipping twice as many titles as last year. It's more concentrated but it's more scientific we believe it'll lead to better chances of a hit, definitely better chances of the portfolio doing bigger revenue, bigger lifetime revenue (inaudible), it's just as much matching of costs or it has been in the past, but certainly over the life of the game, yes the total costs will be higher than we expected for the revenues to be (conventionally) higher.
We've been saying that for the last two quarters so nothing that Niccolo just mentioned is a new theme or thesis, but every title had an ROI that we decide when it's time to pull the team from a title like DragonStorm, we did exactly that in the second quarter, how the title was not cutting its weight and we cut the team and we cut the cost.
Thanks, couple of follow ups to some of the other questions, but first on ARPDAU, not sure if there was a specific target in mind, I know it's kind of hard, in terms of the different genres that you guys crossed, I mean looking at some of the early data Spencer that you were sharing it seems like anywhere from 20 to 60% kind of increases, but is there something that we should be thinking about and also could slice it another way, we saw lot of iOS data, how is it monetizing on Android as well? And you know when you build a game from the ground up, because it seems like a stuff that we're seeing today now in retrofit in effect. So when you're green lighting now with that monetization in mind, how should we be thinking about what that ultimately looks like?
I'll take the first question and Spencer and others can chime in there, I think we look across the spectrum of games, freemium mobile games, you've got multi dollar levels of (inaudible), you've got the very, very casual massive user bases that typifies Zynga type games with millions and millions of DAU but pennies $0.01-0.02-0.03 of ARPDAU that's kind of one end of the spectrum, then at the very high end the spectrum, on the other side you got titles that are these smaller thinner audience games, that have $0.25 to $0.75 ARPDAU, MMO type games and I think there was a article just yesterday about SuperCell having classic (inaudible) having a $0.25 ARPDAU. And that's off a very big user base as well in that title’s (instance), our titles in a single player mode have been in the $0.045 to $0.065 on single player relatively large DAU base so as start to add PVE elements which allow for longer retention and henceforth more LTV as well as getting much more immersive PVP or getting PVP and or immersive PVP and or shorter or longer session times with ingame communities we think that number will go up, we're not giving a specific target that we want to go (inaudible), we're going to have a broad portfolio that may have a range of 50%, one way or the other of what, where that target would be, but I think the point is we think we can, we may have a smaller DAU rate but we're trying to target overall ARPDAU times DAU equaling a much bigger number. So with that maybe I'll turn the rest of the question over to.
Let me say a couple of things, I think Niccolo kind of touched upon that question in terms of targets by mentioning top 50 to 100 grossing (inaudible), that's sort of the ultimate proof of the pudding and it doesn't matter sort of per se what the ARPDAU is. But I did mention we're shooting more for some kind of bending the stick more in the direction of mid (core) titles and those kind of monetize better. I'm definitely of the school of thought, I think Spencer is as well, that it's a little bit easier to control monetization if you're building the game from the ground up, versus kind of retrofitting an existing title that is clearly just a single player game. So once we have games as a service come online, we're building games from the ground up, we feel like it's easier to control revenue than sort of control like what people lost which is more the reach element and we've got the tradition of being good at that so I think we're definitely going to try to go after titles that are I wouldn’t say revenue over reach but we can certainly afford to bend the stick in that direction, right.
But if we'd asked you a quarter ago if we'd be happy with things here at (destiny) doing two or three (inaudible) average I think everyone in the room would say great. So those are the targets, but you're right, Spencer and team are moving the stick so to speak with updates like (10s) of percent but they can move the stick probably for new games by 100s of percent.
So just to kind of address the question about building the stuff from the ground up, so when we're in there early really what we're trying to do is shift, kind of the way we think about monetizing product and make it a core element of the way we design these games so what we want to do is we want to introduce these mechanics and the strategy extremely early in development.
So as Matt mentioned kind of earlier in the slides, we've actually developed as part of the green lighting process a check and balance for how the games going to monetize and all that stuff goes through my group. So we're hoping to design the systems, we're hoping to define how the systems play with the meta games itself. So this isn't something that we just want to tack on, this is a foundational change that we expect to of course see significant results with but I want to stress that this is something that we have to do to be effective, have to be in there from the beginning and we're really thinking of those pillars of ARM, acquisition, retention and monetization at the start from concept to conception.
And one follow up if I could, in terms of clarification with 12 development teams now but you’re also talking about multiple updates instead of once a quarter or possibly even every 90 days. So from a capacity standpoint of your development teams where does that leave you exactly? I mean, Niccolo I think you’ve said quality over quantity in one way shape or form rather but is the goal than to still have 12 plus games a year that are first party or how should we’ll be think about it as we’re looking to 2014?
Niccolo de Masi
That’s what we believe is likely to happen for 2012 and 2014 but as we’ve said probably in every earnings call it’s a high class problem before telling you that next year we’re shipping nothing new. That’s a massively grate news, that will be all 10 or 12 teams or whatever are working on $50 million, $100 million successes and there is nothing better to do than sort of feed the beast. It will always be someone between realistically but in terms over to math or sort of growing all a bit more. But I think we’re trying to get through revolution this year, our best prospect probably will be becoming out late this year and in the next year. And so you know asking this question maybe the next Analyst Day and we’ll be talking probably different numbers hopefully feeding more successes and shipping fewer than 12 things.
So if could you jump in real quick there is one other I thing I would point out which is the goal here is to standardize and make things modular that’s kind of the point of the Glu want system aside from obviously the user engagement social elements. So what that means for us is we invest once and we replicate across the portfolio. So that is a way to manage that cost overtime right, so we have demonstrated success, we make sure that we can componentize that success productize that success and then we had API plug in or whatever the tools are that we’re using we leverage that across all the games that we’re launching. So instead of reinventing the wheel every single time, we’re doing it once, perfecting it, and rolling it across products?
Last think I would add there is you know we’ve made some organization adjustment over the couple of quarters and Eric mentioned in the earnings call that we’re guiding plan on personnel but we basically as I said in my talk freed up the capacity to invest in central services so that we can support both the launch of all these new themes and the ongoing operations. So we feel like we’ve kind of solved that problem for 2013 and then in the future in 2014 as Niccolo says, it’s you know, there isn’t really a one side it’s all solution because games can be various levels the hits given to that, big hit may require 50 people on the title medium hit may require 20, it’s kind of all over the place so it’s all about being nimble on us to respond to those changes.
The launch from structure this industry is pretty clear which is, you know, the company that have billions of dollars of market cap equity value, have very few concentrated monster titles. So we would get more efficient with one or two of those and the company concentrated behind it as opposed kind of being in hunting mode almost exclusively at the moment. The (K2s) have one title, actually we got two, (Gung-ho) got one, Supercell got one et cetera. So I would want a game as service title is basically its complex to run as a lot of other companies that operate outside of the gaming space for the entire company. If you think about the things that go into a Pandora or a Rap City or a RDO service, I mean the complexity on that is not greater than a single one of the things that we’re shipping every year. So you can imagine the efficiency will be in the company in the long term model if you’re able to concentrate further than even 12 year.
Sean McGowan - Needham
I have couple of questions that border on the psychological/legal if you will and they both expensive, first on these mystery boxes, is there some history of that being kind of a problem bordering on gambling in itself?
Let me clarify by gambling, I’m talking about probably based mechanics, there is actually no real money trade happening at all. So what we’re talking about is leveraging very kind of binary systems that are actually in aspects of the game play. So for instances there are games that don’t even monetize these systems running these right now in the consoles space and on the client and MMO space. As far as I am aware there haven’t been any legal issues whatsoever and we see a huge amount of the stuff in the client and the browser space right now as far as these probabilities based mechanic systems. So mystery box is specifically already in use all over the place, Nexon uses them, every $0.10 every single top grocery game.
Sean McGowan – Needham
I think there was something in Japan like,
That’s pretty different again that’s specifically to Japan we’re not even doing that at all.
Sean McGowan - Needham
That takes care of legal, now the psychological about the analogy of boiling the frog. So how do we keep the customer feeling like a boiled frog because the customers (inaudible) instances where you know somebody like feel like, oh should have just spent money (like per se) or you know if you did get something after the point most people who have brought it and they didn’t feel like should have waited or why did I spend the full amount.
So really what you’ve got I think about is a plan also lesson for content right and so you have to have a strategy that you’re going to allow, but most important thing to keep in mind is that we’re talking about utility over time. So there is really a benefit to users to spend this money and the goal is in when we say a frog a hot water or boiling water, we never really want to cook them all away, right. So it’ll only be a twitching in the pot, and it’s comfortable, we are good. So I know that’s a little graphics but so the concept of psychological concept here is, if you are providing a really, kind of engaging experience that feels rewarding to you and you are rewarding that progression and your time small micro-transactions to that but you can really think of that is kind of like cable TV with on-demand features. So what we are really doing is we are expanding and enhancing their experience by providing more options to the user and they have an opportunity to partake, but really critical for us and for us to be successful because we have to make those experiences engaging, and we have to continue to make those engaging over the lifetime of the product. So that’s (inaudible).
And let me add one follow up to that as well Sean, I think you if you got to also look in Japan most of the big premium game companies in Japan about 10% of the user spend money, in the U.S., it’s about 1% to 2% on average for some of the bigger games as a service companies, we are trading at about 0.5% so one in (kio), so it’s very small number of people, that’s 1 to 100 of our user bases actually (parting) on cash and that is you remember what the FUN was important for premium games. Can you just download organically, include legally as that we have $50 million a quarter of which we spend very little on these (inaudible), we are acquiring about 5% of the users through pay channels. So what you (see in) there, the retention were average or slightly worth of that average, the amount that converts were (weak) and for all the people up here that we are working to transitions to, and the amount we extract were also be the mainly because of that single player yield-base player economy and that’s why we (don’t do) transition toward, so I think (upto that) a lot of those people are the people that are getting boiled and that actually converting the small amount and the amount of spending, we don’t have a lot of ways that (inaudible)
Sean McGowan - Needham
And presumably they are happy to do so. One point of clarification for you Spencer, you used in many of the slides giving examples of how things work, you said increase durable lifetime, and then I thought that was the opportunity of what the idea was to actually have them expire soon as by March.
Sure so what we are really talking about here so when you think of a durable item, I talking about increase the lifetime of the durable is the tell in terms of absolute revenue potential from the initial purchase of the (laser) right not necessarily the investments that goes in afterwards. So we actually want both. What we don’t want to do is go out of the gate with all of our inventory on the table knowing that we are only going to sale the top 10% or bottom 10%. We want strategically release contents and then when we release it we want to make sure that we leverage the contents in such way that we can derive the greater value over the time for the durable piece, and additionally monetize on the systems that support that durable so it’s kind of both on vertical and horizontal evolution.
Now despite the analogy, Spencer is not originally by biologist or a veterinarian. It’s actually been the banking, but let Spencer run through his bio because it’s so interesting, he actually hasn’t give anyone that.
Sure so I guess I put that real quick. So, I worked with Wells Fargo for about eight years, banking operations and sales. Then I came over and actually made a complete career change to gaming for area of game. So, then (free to play) publisher and what that really did for me so having an analytical background coming to the free to play space and specifically free to play east Asian with the global presence. It allowed me to kind of see everything from across the globe, from western developers, eastern developers like what works and doesn’t work so publishing all kind of stuff. So you can see what works and doesn’t work, you can take that out, you can understand it, you can analyze it and then you can make a module and then apply it elsewhere. A little more difficult to do if you are publisher, a lot easier to do if you are developer and if you are a developer that can leverage that in addition to publishing and then you can kind of draw the lines as far as where you can with that.
Niccolo de Masi
And obviously in the long term and Sean hit a good point here to Eric’s response, you know higher percentage of people are paying in Japan than they are in the U.S. overall, not just for (Glu overall). But this is a great additional actually tailwind for our sector but probably for the next five or ten years. Now there will be gradually more and more people that are used to more and more complex mechanics in game and so you will probably see in addition to the tailwinds that describe, improving retention and higher ourselves slowly but surely.
Darren Aftahi - Northland Capital Market
Just a couple of first for Spencer, you talks about standardization from the Glu on components, how realistic is that to standardize, monetization in theory if you could do that across the board but it seems like with different types of genres of game, you have a certain level of customization.
Sure, so I think it actually be surprised of how similar these things are when you boil them down to the basics. So what you are compontenizing or standardizing is essentially the engine of the car, right. So the way the car looks on the outside, it’s going to change but the fundamental mechanics probabilities or the design features, catalogue services, how you leverage contents, all of these things are going to be pretty consistent. So what I am talking about standardizing is the, basically the model for the thing, it’s the fundamental backend, the map, the kind of tools that need to leverage so if we are going to hook into a game and use specific features we have to know how to code those and the parameters have to be in place once you do that if you have an API plug-in you can create a UI experience around that that supports the aesthetic or whatever the demographic you are targeting is but essentially fundamentally works the same. And you can still even modify your strategy across titles again in some cases it’s more how far up you turn the dial rather than changing the dial entirely. So and you will see some of that even in the space that we are in now so Candy Crush Saga you are going to have a very different kind of (monetization) outlook in terms of total aggressiveness and kind of incorporates a social elements to be willing like a puzzles and dragons but not their cores are the same thing.
Niccolo de Masi
The thing I would add is that Spencer has kind of talked about the monetization specific features like a probability based payout (system) or a let’s say a certain (store promotional) feature that you know all the games in your store so you can do like dynamics sales or something like that in any game but there are also other components that grew on that chat. Maybe chat doesn’t work in every game, you don’t want to necessarily chat while you are playing a shooter it’s too hard, but Candy Crush Saga that you chat and that’s something that’s kind of expansible (across) games. So it’s kind of about building a tool belt and the important thing about that is (inaudible) how critical is analytics to monetization so you simply can’t standardize monetization across everything so.
Niccolo de Masi
Yes I mean there is sort of broad genres as maybe you kind of, to me everything in free to play is a fall right so you can start with users how many then are coming in and are paying I think genre is the same thing, like you have got strategy games and to some extent Clash of the Titans and Kings of (inaudible) are the same game but then as you dive in deeper you have got things that are suddenly are not so subtly different so I could abstract (in order to) achieve a lot of the math that’s similar in those games because they are both, they are still being upgrading based modulation systems. But I wonder Tower Defense that is a much more (inaudible) is much more of a passive (inaudible) game so it kind of all depends on what you are building and et cetera but you may definitely, we are getting at a point where the market is maturing enough where there are some broad genres in the games that kind of have core sense of monetization systems that design them that repeat across all iteration.
Forward portfolio balance here also right you can reuse more with maybe a team that’s less talented than the team that’s maybe more ground how much of the portfolio do you want to be taking a risk breaking brand new, et cetera et cetera et cetera so just the constant balance for year in year out right because we can’t be a company that’s exclusively reusing and not trying to break new ground nor can we be the opposite.
Niccolo de Masi
So if you I mean again just to provide one more specific thing if you look at a game like Mobsters and Gangstas that’s not a brand new monetization design in that game that’s something that’s in a lot of other (crave) out games but it has a thorough (instantiation) within Mobsters and Gangstas.
Darren Aftahi - Northland Capital Market
Just two more maybe one for Chris you are talking about prospecting with third-party publishing prospects sort of timelines and how fast kind of you close deals and what your kind of pipeline looks like in terms of the processes are going in terms of looking at I guess both geographies and just types of games let’s say?
Could you take the question about like the timeline and what that looks like for the programs.
Darren Aftahi - Northland Capital Market
Yes like how quickly do you theoretically close (inaudible)?
Yes I think the initial titles we focused on were again just very specific high LTV proven top grossing title and in that situation you are talking probably about three to six months to get that game from initial discussion to live. Some of the titles that we will be looking at more closely moving forward are going to have probably timeframes of three months where project developer three months later we are going to have that title live in multiple markets. So I think that’s going to evolve and timelines will continue to become shorter and shorter as we expand the program beyond this very narrow focus that the program started with.
Darren Aftahi - Northland Capital Market
Maybe one more for Eric, so you talked about long-term sort of 50-50 split were you referring to third and first-party games and then are you referring to actual games or the amount of revenue?
Yes so that was first and third-party on revenue as opposed to volume of games.
And we really end up being more right. I mean we are really not sure yet exactly what the hit rate would be (inaudible) developer relations for (capsulate) until six weeks ago and that was an enormous developer program obviously ride hundreds if not thousands of developers. So we are starting very small we are starting very focused geographically kind of performance metrics we are looking for. But I mean to Darren’s point of course we are going to consider and think about where and how we could flex a model to possibly roll faster in the future but baby steps for -- we are walking before we run.
Hi (Derek Routs of Cohen & Company), a conceptual question in your competitors latter there is going to be a lot of consolidation space over the next few years based on the promise that companies with high LTV portfolios are going to be able to spend a lot more on customer acquisitions. That is going to drive up customer acquisition cost for everybody and make it impossible for, coming to the low LTV portfolio sustained (gain). Obviously you have always wanted low customer acquisition cost and got a lot of downloads but the flip side is you haven’t really top 20 type of titles. So I am just sort of curious how do you think about that whole the evolution of that as the space continues to get bigger and the dollars continue to go up as people try to attract customers how does that potentially affect your business?
Niccolo de Masi
I'll start on that one; I think we all got an opinion. What I would like to sort of say when we get into that question and popular one is, I don’t know any CEO of any content company that an investor day would say I am going to win because the costs of getting people to send them out from my movies is lower than yours and my movie has a bigger lives and value. Right in. End of the day there is a class of players that are playing games, spending a lot of money in them, lot of (will) but in relatively small down numbers, right? So you got to gains of $0.70 (inaudible) maybe half a million people playing it.
There is a billion Smartphone's right now. There are interesting titles like Eric was mentioning like Clash of Clans that have pretty good ARPDAU maybe $0.20 and it got pretty big down now, millions of DAU. And Candy Crush Saga and the Clash of Clans; those titles were probably in the middle right now, they are popular and really quite good out there. That is more likely to be what Glu will look like overall than being a company with tiny DAU or a company with the sort of Zynga like DAU slightly a balance and I think the middle ground is going to be the most possible place and sustainable place since where the winning title will be built. End of the day you can't force to sort of square peg into a round hole. So it's just not true to say this game is an action RPG, fantasy whatever, everyone wants to play that, it's just not true, right? It's at some trunk of the audience and those companies can be successful and so can the Candy Crush Saga game right?
And so ultimately across the whole spectrum of this, it is true that people will bid up until the incremental lifetime value minus customer who (inaudible) as zero and those guys can go higher but they are reminded that one of the things that makes Glu so interesting is the business is that $50 million organic installed so $40 million whatever it is. That's a sort of organic co-efficient of interest in our title and what you will know when you start to spend money on a title is that the people don’t want to play it because the theme on mechanic is not as the billion, that's something else. You will have to spend more to get that customer so there is a sort of not virtuous circle here between niche and higher lifetime value meaning you have to spend more to get the user in the first place. Does that make sense? Okay I think maybe Chris and Matt should probably go to theirs.
I can speak a bit more just specifically user acquisition costing over; (inaudible) prior firm I was very close to that and consistently we have always heard, concerned to getting eye control this way and it never really happened right? Other than, I will say that the time when it did happen was about a year and a half, two years ago, when a lot of the Japanese players came in like the Grease and D&A's it started backing up the truck and then eventually it pulled back, right? And so since then things have actually stabilized they are not who we're seeing that sort of continue it actually stabilize and through the things that I mentioned I think we can actually continue to become more and more effective on a user acquisition costs.
Niccolo de Masi
I think it is stabilized because the conference a year or two ago when I think a couple of years, you were asking, zombie-telling us it's got huge lifetime value like, great but no one wants to play it. So you can spend $5 million buying customers for that but like for downloading for even a day and you still won't get the down number over ten thousand, twenty thousand, all right so they eventually stopped because every company has a limit.
It’s a perfect question and I mean that question and the other question about player behavior which to me is ultimately I didn’t chime in on that but I think it’s a very interesting kind of still a thoughtful question at how to play right like how do you balance fun and the need to have people pay money, right? And that's why we (inaudible) clearly running the monetization group, but you think of how we monetize. We have a lot of other people in companies who think about fun and just like and this question is the same way, the people that think about user acquisition, people think about our DAU and having worth it both companies that have had high DAU and on one hand and a high, ARPDAU or LCD, on the other hand, the grass is always greener, right? And I think Nicola really answered the question in the right way, is that ultimately, you got to find a way that either play in your niche because I think one thing that just abundantly true about gaming in general is becoming everybody plays games, (inaudible) all the different platforms who got games that are really-really niche, I mean the fact that you can play like a real (inaudible) or you can play; I mean just everything onto the start so there is a lot of room for different types of games and we have to kind of force that path aftermarket as well.
But the other thing that I would adhere to that that's kind of very (inaudible) games have served as a big part of us, retaining our customers so we have the customers now, we need to make sure we retain them and I think that's the single most important thing that we can do in a sort of focusing so much time and energy on it.
Also our international growth, we're expanding localization, we're expanding our reach into not like publishing but our first party presence especially in Asia where most of the growth mobiles happening so after party ahead of that increasing.
Niccolo de Masi
So those of you that saw; Matt may I join (inaudible) this great framework that Glu have been working on for six months now. I think we put in our earning DUC early February and sort of like make sure that the comic can expand then move on to monetization and then move on to potential et cetera-et cetera; social features, e-commerce features and all the stuff in it; exactly what we have been executing on and we will continue to do.
Two follow ups here; first if we were starting from zero, I think the question (inaudible) would be all different one but we already 39 million monthly uses of that. There is a (map) of assets as I said before, they were acquiring about 5-8% of a quarter's user to be a pay channels in the rest of organic either from classic cost promotion where featuring or everything else is of that help. So, in that point number one and then second one which is kind of you talked about philosophical which manages about that balance of fund versus monetization and Darren had asked about this that how standardized can you make Gluon to where you can plug it in. And if you had game teams and the whole game team is responsible for that fund and the monetization you could imagine either a title being rarely on fund but they try to monetize a lot and it has low doubt or you get the opposite where you get a great free premium games that doesn’t monetize at all.
So, I think by building this abstract layer of Gluon taking all of those components that can be (inaudible) by the game team that is focused on the fund can plug into that toolkit integrated combination and I think that really where they’re trying to find out right balance.
That where you show 5% paid and (inaudible) it’s probably like 50-50 on the higher sort of new share titles at some companies in terms of titles as the factor of ten difference in unattractiveness but also a factor of ten difference in high or less than value in our (inaudible).
And we’ve been saying, last six months is the same is the team to the next six months which is keep the fund, hold the DAU, quarterly ARPDAU, that’s a winning formula because the hard part which is sort of art what we’ve been mailing. The clients we haven’t been mailing but we’ve got the people now to do better job in mailing and eventually cross it.
Sean McGowan - Needham
One quick question for you Matt. When you were talking about user research, do you mean actually communicating almost in real time with users and ask them on surveys or just extracting from the data.
It’s getting more of the quality and stuff, getting down and talk to the users so that kind of comes into play from everything that bring people in, play early, build those games they’re doing remote testing, sort of hard to do on mobile but possible to doing surveys more quantitative user research.
Sean McGowan - Needham
And then for Niccolo, GaaS is not a new concept it’s been around a while. So, what do you feel like you have now that you’ve bought this team out but nobody else has or it’s better than what everybody else has?
I think what we’ve got is complementary skills and we have frankly all of what you need to grow everything from the ad revenue to the IT revenue. So, what’s unique for me when I look at the Glu DNA is that we can keep the fund going, we can add in social features, monetization et cetera et cetera and we can keep growing other pieces of the Glu formulated that got up here.
So, ours is the management team out there this is holistically well rounded in all of these areas, certainly of our size, I mean the Bazingas and (inaudible) I’m sure they’ve got it all. But they’re dramatically larger companies than us right now and we measure. I think we’ve got the best chance for our company to call it round numbers, $100 million revenue size of being that billion dollar revenue company, (inaudible) size but has this effectively call it Warren Buffett weighing machine of talent density.
Sean McGowan - Needham
My last question is follow up to the response you gave before Spencer about being able to replicate success, finding something or is been replicating it. I find that a little not confusing but I’ve talked to a number of executives over the years who have thought they had that, they had a game which was a hit and so a here is why that game worked and it didn’t work the next time and maybe it’s because they misidentified what were or maybe it’s because what were exchanges.
So, how do you get comfortable in it and what you are trying to replicate is actually going to work the next time whether it’s because it’s the right thing or because of the market change.
I think something are kind of as you go back to the question over here – some things are really, really tightly kind of attached to the core or gameplay and some things are little more attractive. And again this industry boxes are account based mechanics I mean a slot machine is the same thing that you point in Vegas. So it is buying a card and read major (inaudible) so playing amateur boxing here as testing. Another good example as you know, look at royalty programs for United Airlines or Subway, I mean now we have points you all select and you all get free cards after certain amount of time.
So other types of systems are very universal outside even like a lot of gaming companies have to be (inaudible). But you know kind of looking across services in general and seeing how people retain and reactivate consumers. There are a lot of things but they’re kind of at a layer off the distribution and I think it’s all talking about with.
But there are others things that (inaudible) we would need game teams, Niccolo said like the there is a big reason when I came at Glu and I think I’ve said on the first earnings call that I actually select the art part of making games is the harder thing to do. It’s just like film or like music like creating an estimate and creative enterprise was incredible this call and there are very few companies in the states that have been able to do it kind of over the years. I think the other part is more of an expertise challenge, I don’t think we actually have to be the best of game to service, I mean I would love to be and I prepared in my presentation but we’re good enough or maybe better, we're so good on our side is that we’ll need to be pretty decent in service when we got a whole lot time.
Sean McGowan - Needham
Most of that sort of time side explanation went wrong kind of a thing is funnel problem, so I like in Glu to sort of the web model, which is people are going to our website, are we maximizing how long they stay and much they pay when they're there, there is science to that. I’d say that as a (inaudible), definitely science to that, more science than art kind of thing. The funnel problem though does change, our peoples tastes change, you can build a car that works at a great price point that no one buys, just don't like the way it looks, we tested it but as it turns out the guys that happened to be in the sample just didn't reflect the greater market, that problem never goes to zero. And so a lot of the explanations you'll get from a guy like me on the stage will be trying to rationalize they are all plain (inaudible) or whatever because of this when the reality is you might be the first to market, it might that there are 10 other films out and that every kid in America had this, there's a whole lot of things that play into the consumer trend. That piece of it doesn't go away as a risk, but what do you when they download the game and they get through the first minute that's the piece as Matt put it like, we can be a lot better than we are even if we don't have to be the best in the world, that makes sense.
And so (inaudible) replication, it's the stuff that happens after they've joined the game, it's not his problem to figure out if you're going to get into the game but it's just only to figure out if he can make money and maximize like they are once there.
So hopefully that answered your question.
Sean McGowan – Needham
You nailed that.
I don't need all four or five of you to answer this number, you can if you want.
Sean McGowan – Needham
I just wanted to go back to the advertising initiatives that you outlined.
Undoubtedly a Chris question.
Sean McGowan – Needham
You said like advertising had gone from 30% to 16% so one question would be do you expect it to go back up to 30, should it grow faster than game bookings, but then how are going to manage not getting involved in ad formats that end by getting whacked by Apple again or just how are you thinking about that.
Niccolo de Masi
Second part of that question, we highly value that relationship, if there's anything we do there's a constant communication back and forth that's how it will address that make sure that anything we're implementing still has a full stamp of approval from the platforms we work with. In terms of the opportunity to ramp up ad revenue if you look at right now we really only work with two ad networks and so the opportunity to me is very clear and one reason excited about joining the company. Video alone is a huge growth opportunity that today we're almost not touching at all, I don't know I can't give you a specific figure, my goal is to get us back in the range that we were earlier last year.
Sean McGowan – Needham
I guess that answer implies that you got extra inventory, you got plenty of inventory, you just need to align it with some new sources of demand, is that the case.
Niccolo de Masi
That is effectively the case, if you look at a lot of our titles there're consumers that will interact with ads all day long to earn currency and specifically the model that got banned in incentivized app installed worked so well because installing a free app to earn currency is a great experience from user perspective, so that do that all day long, when that went away, now users, the options they have to interact with their things that are more complicated like sign up for a free trial of service like Netflix for example, there's more friction in that process, but as we introduce low friction advertising like video where I can just watch a free video, video's done I got my currency, again (inaudible) doing that all day long, so it is a problem where the demand for advertising in our games from users is really high and we actually don't even have currently enough inventory to satiate that.
Sean McGowan – Needham
I just wanted to ask one more on demographics but I think you're player conversion is lower than average and I'm wondering if that's because your demographics is too young to buy stuff or not, what are the explanations behind that, but as you kind of go to different genres of games, are you giving a lot of thought to the demographics that you're targeting.
Yes, I think it's, let Spencer talk on this one too, I think it's a mix, I think you're right that, which again is why kind of calling our core teams with games that it inherently monetize better, I am sort of in the mid core gaming demographic as I grew up playing all kinds of videogames, and I spent a lot of money on mid core games myself, so you find people that are over 20 or over 30, the key tends to be the 25 to 50 year old who have leisure in common on the iPad, spend on those game. So I do think that what the super dexterity oriented games tend to be skewing younger, but I think the other half of the equation is just sub optimal kind of on the Spencer side of things, what can we do to drive our conversion.
So, just quickly add to that so from my perspective what we're looking at here, aside from the obvious kind of differences between the demographics that you're targeting, is the fact that we're engineering paying points to convert right, so there's an inherent problem with going out of the gate with the intention to create a bad experience and expecting the user to then invest and then continue to do so in the future. So we're obviously moving away from that and again I think there's a lot here that we can learn from the retail space but there's also a lot here that we can kind of glean from best practices used elsewhere as well, its personal experience that's proven, and given us data points to identify conversion tactics, are independent of the core monetization, so what we're trying to do is identify points where we don't introduce a paying point but where we introduce a benefit and then we make a sale based on that benefit. So what we do is we allow the user to engage in a system, enjoy their actual engagement and then that’s when we position them for that self. So there is some stuff like that, there is price optimization is obviously another again if you’re not doing that you’re going out of game and your least expensive thing is like IAP, you’re naturally going to run in system to misuse but at the same time you don’t want to jump past 99 of IAPs because then you’re limiting yourself in terms of how much potential revenue you can get out, so it’s really targeted segmented and kind of very specifically driven instances of conversion that should result in that result for us as far as absolute conversion method.
So no doubt the recent element as there always in Glu’s business is going where the money is. We’re not making as Eric said a couple of times, we’re not making much of any money also well, no that spend five figures in Glu games right now. So there is a class of people that I think Matt is certainly targeting with our portfolio in future which want different kinds of mechanics no doubt about that.
I will be dealing if fourth person answers this question and add a little more color lastly, I think when you compare our conversion rates of point five or so percent to other you’re comparing against other inherently social EVP style game, so it’s all a bit of disconnect that look at a completely single player game to a bunch of games, so I think it’s important to remember that as we get a year from now our games are truly games of service, you know, I think we should be then comparing ourselves maybe up a small database but in the higher ARPDAU but the conversion will become much higher.
That could subside opportunity, there is no doubt. We believe we can do better. There is no one on the stage so the Glu does get to do better. Last thing I'll sort of just chime in on Chris ad response to your question, you know, part of our sort of interest in bringing Chris into this role is old adage around if you want to figure out if you’re code maker or go higher or great code breaker, right, so we’ve got someone been on this side of the table for long time and still a lot of that, we’re extremely confident that he and we know where any of the lines are going to be for Apple policies, Google policies that are we don’t expect to have any whipsaw around in the future, but we do expect these already demonstrated last six weeks, great ability to like they put it, don’t kid the kidder with regards to where the best inventory is whether the better demand is, where the best users are, best networks are et cetera. So we have priority on total revenue of Glu always and if it turns out we can make more money of IAP and absolute terms and the ad number that’s what we’ll we do, so we’re optimized the two as a balanced to try and get the biggest dollar number in the quarter.
Niccolo de Masi
This is probably our only deep dive of the year in this format so please do avail yourselves of the entire team here, so Haggy here we go.
Can you talk for a moment about the creative process you guys have initially when you’re thinking about making a game and then your green light process, I know that you said monetization was important to any game green light?
Niccolo de Masi
You know that’s very timely question because we really haven’t green with that many games since I’ve been at Glu because of just the way that themes are kind of punched up. We’re actually going through an exercise right now, you know, traditionally we’ve done more of the producer comes up with the idea that they like not totally subjectively but they saw and you know what’s they are seeing in the market and we’re trying to kind of open that also a little bit more and have bit more of a hit orientation process or multiple people are pitching multiple ideas and then there is kind of round where those pitches kind of get riddle down to a couple of four ideas those ideas then go for like proposal stage where they may or may not be a prototype that’s goes long that and then you get to a business case so that you have – there is sort of I also talk about in there because it touches in like how do you transition from one product to the next and that touches all the stuff about free to play, life cycle was you know how do you most efficiently use the resources you have to kind of get some game one to game two when you may not really want to abandon game one completely because stood out license it, so there is a lot of kind of intricacy that coming around there and what we’re trying to do is bring more of the you know just kind riddle down as I bring of the design upfront with a small number of people who can essentially kind of embark out from the previous game figure out what they want to make and then when they’re ready and they kind of better the process with sort of multiple levels of design business then they kick in with the bigger team and start making the game.
There is much more rigor to this than we’ve ever had in our history Eric and I can certainly assess that so that’s brought the whole concept of the business case and this has been something our teams have grasped it too quite nice the last six months.
And I think of an access how much (inaudible) said why it was about the fund to the monetization recurring some of our failure last two, three titles or titles that the core fun team did a phenomenal job and it’s a three of four months there is only nothing done around monetization half of the title being developed then they try to parachute in monetization technique and obviously you don’t have that sort that plays out whereas now on that front in that design phase that now is talking about, they are talking about in great detail what the compulsion looks are and the choke points that we had a (inaudible) sort of speaking in terms of other games and stuff. So it’s much more on the front end and we know how that game is going to look and before a year ago.
Niccolo de Masi
It’s a benefit of concentrating resources on pure, big or better and continue to upgrade talent and when I think back to what Glu was when I joined we were 400 people, today there is 550 or something like that. There are very few people that are still here from where we were really a mobile company today we are really a game company.
It’s actually – I don’t to want over answer the question but I still talked about they are kind of bottoms up process to that I see kind of game pitching as there is a top down and a bottoms up process involved and all of that. And I am the kind of the keeper of the top down process. So, like I said there are few certain things across the portfolio so what might be good for a certain game team may not be good for portfolio at the certain time. So things kind of, they kind of to meet in the middle work, idea is to come up on the game team, because it’s critical that you are building an entertainment, creative product that the team is fully invested in and making it, they’re passionate about their idea, they think they can monetize, they have got proof that it can but then also other potential (inaudible) you need to be able to say, hey, we need 2D game or we need another game and it’s not coming from anywhere else from the studio, so we could drop a little bit, a gesture idea.
Niccolo de Masi
You know all the central expertise whereas making sure that there is more science in the green light process, to the extent that there can be science we feel like we are getting closer to the incremental or maximization of that. We know what kinds of things will monetize; we know what deep PvE means now, largely (inaudible) team and we are starting to get arms around PvE+, PvP someday.
Do you guys have a Chief Creative Officer or you play that over to that process?
I come from a design background myself so I guess I like to think of myself as that in person. But we also, I think we kind of talked about this little bit before, you know again I think creative process is something that I can’t go out there and mandate and it is also kind of not really my job and in the sense to get back and to lead so we really empower the focus at the producer level, we hire a very creative producer essentially. Like there is a reason we have producers and designers that are kind of embedded in game team and then a centralized monetization team. So we see the primary function which has always done really well, clearly its building great original IP FUN games, don’t want to blow that up, so that’s worked very well. The producers kind of own the ultimate vision of the FUN, the creativity, the kind of addictiveness of the game, the monetization team consult, that’s all.
Niccolo de Masi
Now there are many people if not more in the team creative are design producer functions then there are and all of the centralized monetization and over-site combined. So you are seeing the tip of a pyramid here and we're driving the company with more science around it but remember 500 people plus the Glu would got the creative piece nailed pretty well you know Mike two or three weeks ago, Matt had a (inaudible) he was the Chief Creative Officer now President Studios without (inaudible). And also an essence of it, the beauty of Glu’s order structure and the challenge in the sector is how do you get the business in creative to meet. And I think we have had the creative going fine, we haven’t had it meet the business piece. And that’s what we are really trying obviously emphasize structurally as well as on all processes.
But then we've seen a lot of companies with chief creative officers, have that person be too prescriptive, but my role is to say hey you guys are making the same game, that’s probably not a good idea or you are building a power defense game with the, I don’t know whatever a super and edgy theme like it’s high school kid. So (inaudible) when I come in but I am a facilitator and you are not a mandatory.
And then I think of, can you just give us a look at how you see your competitive profile I mean obviously we see the public companies but what about within your community in San Francisco where do you see from the (inaudible). There is still lot of growth and studios, they are still seeing a lot of private capital trying to fund new ideas.
Niccolo de Masi
(inaudible) private capital trying to fund ideas. I think it’s very fair to say that the venture money got pulled out in 2011 right. So you started to see in the last few months company is being allowed to effectively expire and we have long predicated that as this year goes on, there is going to be more and more of that not less of that, so there is a, there is an evolutionary thing going on right now. As we said three years ago, Glu taking a step in part of the future, we are doing at again and revitalizing. But this is a consolidating space but a lot of consolidation is happening from companies appearing as oppose to getting bigger of been required, sure.
Consolidating and subject will still be (inaudible), this is not Zynga or Facebook when they hit a billion users there are 2 billion internet users in the whole world, we’re at a billion five mobile device, crossover the device in this (inaudible) across the globe, so we are still in the first third of that life cycle.
Niccolo de Masi
Probably with the 1930s and 40s and 50s not the 1900s not the 1990s.
I want the (inaudible) guys to come work for us I mean the guy that I hired to be the GM of Kirkland is a really interesting buy because him and Spencer both worked in that area before he is a very quantitative guy but he was running, he was trying to do his own start-up initially and I spent weeks talking to him about why he is better off being at Glu and had a better chance of success and then I would give him the freedom he needs creatively but supporting him with all the essential service Gluon and monetization expertise et cetera. So I think the game industry in evolving more that way again kind of like making a film where it’s just a little bit harder to go your own, there always will be people who play on the margins with very unique stuff and that super important for I think the overall industry to see people who think way outside the box and push us all but I think there are a lot of great opportunities and we have got the three threat again from building a lot of original IP that great people want to work for us.
The constraint created freedom on the one hand with the stability of a recurring paycheck is a compelling combination often.
Niccolo de Masi
It’s also mailbox constraints right, if you have no constraints it’s really hard to do many things.
With the $160 million market cap so the upside opportunity is there we are already (inaudible) stock that’s also the advertising for any in these listening that are…
Niccolo de Masi
No I think we have talked about this in the last quarter we have had a lot of success I have seen more success in the past six months than anytime I have been at Glu on the talent work topic and it’s precisely because of the combinations of things you just heard there. You have the upside but you have stability you have created freedom but you have support. Our company has been around a long time but it’s early in the sector and there is still a factor of (inaudible) growth to be part of driving and benefitting from.
Speaking of incentives how would you structure incentives for example the fellow you brought in to GM in one of your labs or and then that you might acquire ownership of or published your title?
Sure I will take that (inaudible) so everybody in the studio has a cash bonus plans we pay competitive salary and then we have a cash bonus plan based on their individual studio. So it’s not in about a team or it’s around our studio because the title themselves are done in that studio and it’s an overall result which are quarterly revenue goals I think interrupt a 40% of their annual salary over the course of the year plus that that’s kind of component number one. Component number two is in North America we have stock in our queue that we can deploy as well because they are able earn upside opportunities in stock (inaudible) through equity as well. So I think those are the two biggest components that we are putting into the suite so.
Niccolo de Masi
We haven’t done a lot of the sort of Zynga Aqua hiring kind of thing then lot of hiring we have done a couple of acquisitions and one of them still working as something like 3.5 earn out but right now I think in our focus is we have an attractive mix of short-term and long-term incentives and compared to all the companies they are very attractive between the risk profile and start up and no money and EA so to speak. So we are going to keep pushing hard on the talent density and the hiring topic it’s sort of talent brief topic here so I think we are over the hump in my mind of do you have the top winner of management sorted out we showed up the (inaudible) well it’s a case of continually refining and improving everything else.
What is the size of the equity pool and as in two options that you have available for that type of incentive?
Yes we have got about 90 million shares so 90 million options at the equity pool that either already granted or investing in granted or (inaudible).
Can you speak to how much of that is unassigned?
Right now it’s very (inaudible) so we are going to back shareholders as I mentioned in the prepared remarks (inaudible) we therefore after we are going to shareholders before additional 7.2 million shares of option for the next two years so we came to shareholders three years ago looked to start to increase the flow we did that and spent about three years, its lasted just three years and now we are speaking of the 7 million shares after the next two years.
For current employees?
For the skill based wagering could you just give us an idea how you see that market taking shape and how the economics of the game are just going to work and I think you are first to market on this domestically how do you kind of maintain that sort of first to market advantage?
Niccolo de Masi
Alright a few questions there economic wise as you can imagine we are revenue sharing with our partner of skills we haven’t disclosed what that is but you can guesstimate it’s like with every third-party partner we work with Glu tends to keep really healthy share of the total pool. Ultimately the revenue for the skill gaming comes from as you would expect from everyone organizing tournaments some sort of share or rates so to speak of people depositing money and competing and not all of it being paid back in prize money ultimately right. So it is exceptionally early days we are definitely keen to keep people updated on how our first game performed and whether or not retention of DAU do both get up with it. We have the ability obviously to expand it on android to half a dozen or more additional titles if we see an interesting ROI on the work that goes in that. we obviously cannot assure ourselves that we are going to maintain status first and only because there are some other data partners in this skills, for agreement skill just trying to be like ARPDAU and the companies, a third party (inaudible) that has broader adoption. So it’s preferential for the terms perhaps for Glu at our scale and so it will allow us to, I believe get to market faster and more gains that people care about in terms of DAU but ultimately we're infused by anything that can turn that $0.05 or $0.06 ARPDAU with whatever retention is into something higher, will probably return on the effort to do that. So as I said, to my own preparatory remarks if you just think about the volatility coverage of this and if you think about the fact that it can appeal to both some of the same people that might in the real money gambling space but the same time a much better fit for Glu who has $3 or $4 million daily active users, a lot of which you could argue the playing skill based games but has no premium casino play. This is quite an interesting synergy ultimately overall. Did I cover all three of them. Okay. And we also have questions on gambling, real money skill wagering, new platforms, inflection points, cocktail, stretching, where the restroom is.
All right well thank you very much for everyone attending, we are going to be moving around here for another hour or two. We look forward to see you again and thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!