Glu Mobile, Inc. Q2 2009 Earnings Call Transcript

| About: Glu Mobile (GLUU)

Glu Mobile, Inc. (NASDAQ:GLUU)

Q2 2009 Earnings Call Transcript

August 04, 2009 at 4:30 pm ET


Greg Ballard - Chief Executive Officer

Eric Ludwig, - Chief Financial Officer

Jill Braff - Senior Vice President of Global Publishing

Seth Potter - ICR


Justin Patterson - Morgan, Keegan & Company

Todd Greenwald - Signal Hill Group LLC

Jonathan Goldberg - Deutsche Bank

Brenden Smith - Goldman Sachs


Good afternoon. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2009 Glu Mobile Incorporated earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the conference over to Seth Potter.

Mr. Potter, you may begin your conference.

Seth Potter

Thank you. Good afternoon everyone and thank you for joining us on the Glu Mobile's second quarter 2009 financial results conference call. This is Seth Potter from ICR.

On the call today, we have CEO, Greg Ballard; CFO, Eric Ludwig; and Senior Vice President of Global Publishing, Jill Braff.

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the Company. Generally, these statements are the identified by the use of the words such as expect, believe, anticipate, and intend and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

We caution you to consider the important risk factors that could cause the actual results to differ materially from the forward-looking statements in the press release in this conference call. These risk factors are described in our press release and are more fully detailed under the caption "Risk Factors'' in the Form 10-K filed with the Securities and Exchange Commission on May 11th, 2009.

During this call, we will present both GAAP and non-GAAP financial numbers. Non-GAAP measures exclude acquired in-process, research and development, amortization of intangibles, stock-based compensation charges, gain or impairment of option rate securities, restructuring charges, non equity component of the MIG earn out, transitional expenses and foreign currency gains and losses primarily related to the revaluation of assets and liabilities. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and we encourage investors to consider all measures before taking investment decision.

For complete information regarding our non-GAAP financial information to the most directly comparable GAAP measures and a quantitative reconciliation of these figures, please refer to today's press release regarding our second quarter results. The press release has also been furnished to the SEC as part of a Form 8-K.

In addition, please note that the date of this conference call is August 4, 2009 and any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events.

Lastly, this conference call is the property of Glu Mobile and any recording, reproduction or rebroadcast of this conference call without the expressed written permission of Glu is strictly prohibited. With that, I will turn the call to the Company. Greg?

Greg Ballard

Thanks, Seth. And thanks to everyone for joining us on our second quarter earnings call. Glu had a strong quarter, exceeding our guidance on revenue, non-GAAP operating income, non-GAAP net income and cash generation. Today, Glu turned to generating positive cash from operations in Q2, a quarter earlier than we had originally expected based upon our efforts to contain cost in our higher than expect revenues.

Our revenues were $19.9 million for the quarter with non-GAAP operating income of $500,000 or 2.5% of sales. This is after an impairment charge for various licenses of $589,000. Our non-GAAP operating income before impairment would have been 5.5%.

We had a positive non-GAAP net income of $661,000 which was boosted by a tax adjustment and unevenly hit this quarter. The quarter was driven by higher than expected result in our carrier base mobile business, particularly with strong result in North America but all of our geographic regions either met or exceeded their targets for the quarter in the carrier business suggesting that this business segment continues to show and doing resilience even to face competition from various app stores.

We also had a strong release schedule of games for the carries this quarter, although much of it was back end loaded. We had a very successful launch of The Family Guy which has been a top hit especially in United States, Transformers: Revenge of the Fallen which has done very well globally including becoming the number one title on China Mobile and toward the very end of the quarter, Ice Age 3 which also is doing well in all regions.

At one point during the quarter, we set a new Glu record claiming eight of the top 25 sellers on Verizon attributed to the breadth of our product appeal right now and our success has spread with both Family Guy and the Price is Right, both of which went to number one. It was the first time in several years that Tetris and the Jewel have been displaced from their positions as the number one and number two on that carrier.

We have similar success in EMEA but not only these titles, but also with our perennial European bestsellers like Who Wants to be a Millionaire, Wheel of Fortune, Pro Evolution Soccer and Sonic. Our business in Latin America has continued its strong growth and our Asian business, particularly in China has performed according to our expectation.

This success, notwithstanding, we do expect that the worldwide carrier business will have a seasonal slowdown in the third quarter as EMEA experiences its traditional slow summer month and when several carriers including North America undergo platform changes and maintenance. While we expect a seasonal pick up in sales in Q4 that will coincide with the launch of what we believe will be a very strong fourth quarter title line up.

Last month, we announced the details of our license deal with Activision which involves some of their biggest franchises; Tony Hawk, the revival of one of their biggest sports trend in gaming history; Call of Duty, which is consistently been one of our top titles since we originally obtained the right three years ago; Blur, Activision's new driving franchise and perhaps most exciting for us, Guitar Hero 5 which we think will do exceptionally well as a mobile title. We also obtained the distribution right to another Activision mobile title, Crash Bandicoot, which we are releasing in Q3.

Other than the Crash title, we expect that all of these titles will launch in the fourth quarter providing the foundation of an exceptional line for the strongest season of the year but we loss on the launching in the back half of this year several of our other perennial hit including a new world series of Poker title and a new Who Wants to be a Millionaire and Pro Evolution Soccer titles in EMEA and our own Super K.O. Boxing 2.

We continue to believe that the carrier business has the potential for renewed growth although it is too early for us to give our detailed thought about 2010. The largest carriers appear to continue to invest in gaming as a strategy and many of them had made it an even a higher priority in the contest of Apple’s success with the iPhone. While many users have disappeared from their game platforms due to purchases of iPhone or other Smart phone devices that are not connected to their gaming platforms, many of these devices are actually still serviced to the carriers.

For example, according to news on mobile ratings, two of the top ten gaming handsets in the US are black gray models, positioned for games through one of several carriers. We take this phenomenon of carrier support for Smart phone content may actually increase and provide an ongoing source of steady revenue from the carrier business.

So far, the launch of non-carrier based app stores by companies like Nokia, LG, Samsung, RIM and others have not had a material effect on the business. Indeed, though it is still very early for these efforts, we tend to see them as additive to the business providing consumers another channel for discovery and purchase. In this sense, we think that they will coexist well with the carriers.

This differs from the impact of the iPhone marketplace. We have spent a significant amount of time and resource to developing for and setting the iPhone marketplace. During this past quarter, we released six titles for this platform and had substantial success measured in chart position. Of the ten titles we have now released, nine have made it with the top 100, seven have made it with the top 40, four have achieved top 10 status and two have been on the top three. We know from this data that we could make successful iPhone game.

Moreover, our titles have received critical success. PocketGamer, a website that does a terrific job of covering iPhone games just released a study that showed Glu as the third ranked company overall in product quality for the second quarter of 2009 measured by publish product reviews, among our leading rivals, only EA ranks slightly higher.

The challenge for Glu and many other publishers with regard to this platform has been the economic rewards for success. Revenue from this platform remains smaller than we would like given the incremental investment required. This is a function of below average price that had now emerged and the fact that most hits have a tendency to stay quickly after they are sent up the charts. So, while our title can become a hit for a short time, relatively few titles have been able to stay on the Top 40 for very long and while there, do not generate much money at $0.99 or even a $1.99.

But there are also many encouraging signs in this market. Apple's newer software 3.0 contains flexible pricing option that may very well enable publishers to extract more money over time from average users and Glu and other publishers are beginning to employ a set of specific marketing techniques that do appear to lengthen the tail of sales for individual titles. For example, one of our titles, Deer Hunter 3D, is now ranked number 10 in paid games. A series of marketing initiatives including the launch of a free version which itself has been downloaded over 800,000 times and now is set it to be the number 2 free game on the app store have boosted the performance of the game several months after its initial launch in May even though it is priced at $2.99.

Another of our success titles, Cops and Robbers, has shown a similar pattern but not quite as steep. These successful marketing efforts to boost the title after its initial launch from when it is faded suggest that the app store response of marketing efforts that are tailored specifically to the platform.

Data like this has led to believe that the iPhone will be a marketing intensive platform in which persisted attention to the details of a product's life cycle management becomes extremely important to the economic success of the title. With this development, the iPhone will have more of a barrier to success than it will be a barrier to entry which we view as a positive to those of us who intend to master the platform.

Part of this mastery will inevitably involve developing a marketing relationship with consumers who become engaged with either a title or in some cases, a company's brand. To that end, we find the development of active communities around iPhone games and on social networks like FaceBook to be increasingly important components of our business. Like many other game publishers, we have begun internal efforts to extend our efforts in the social network and expect over the next several months to be much more visible on our effort in this arenas.

As we enter the back half of 2009, we have much to be encouraged by; the carrier business which was in disarray at this time last year has proven to be more resilient than most observers have believed and the carriers in traditional handset manufacturers continue to explore ways to increase the success of the business. The iPhone has proven to be more complex with the business than those same observers believed but the complexity may very well be the way the market leaders will ultimately create advantages for themselves over more casual competitors and social network based games that have proven the people on the casual setting will consume games in huge numbers.

In short, we believe the games of mobile devices of all sort, in casual games and other platforms, have a robust future and provide a significant opportunity for profit.

With that, let me turn it over to Eric for a closer analysis of our financial result.

Eric Ludwig

Great, thank you, Greg. To reiterate your sentiment, we were pleased with the Company's second quarter results, which was highlighted by our ability to achieve positive cash flows from operations a quarter ahead of schedule as we exceeded the high end of our guidance.

Let me first review our second quarter results, and then I will go through our outlook. Starting with our second quarter income statement; total revenue for the quarter was $19.9 million, which was above our guidance range of $18.75 million to $19.25 million and compared to $20.8 million during the first quarter of 2009 and $23.7 million in the year ago quarter. the better than expected revenue was primarily attributable to ongoing strength in the carrier business particularly in the Americas region despite lower than expected revenues generated from the next generation platforms which continue to represent less than 5% of our revenues.

Reviewing some of the specific revenue metrics, our top 10 titles represent a 37% of revenue, up from 32% in both the prior quarter and the same quarter last year. The average revenue per top 10 title is $734,000 in the second quarter of 2009 which is up sequentially from $658,000 in the first quarter of 2009 but down slightly from $752,000 during the same period last year. Our largest title was again 5% of revenue which is consistent both with the prior quarter and year ago quarter.

Revenue from new titles represented 54% of revenue in the second quarter of 2009, compared to 51% in the first quarter of 2009 and 49% last year. We fought from the strength of our new titles, with seven of our top 10 tittles were new. The mix of revenue between license tittles and original IP was down sequentially with original IP accounting for 21% of revenue in the second quarter of 2009 compared to 24% in the first quarter of 2009 and 28% in the second quarter of 2008. This is inline with our expectations of original IP as a percentage of revenue for the remainder of the year in the range of 20% to 25%.

Our top four carriers represented approximately 43% of revenue in the second quarter of 2009, compared to 48% in the first quarter of 2009 and 42% in the second quarter of 2008. We had one carrier in the second quarter of 2009 that represented 10% or more of revenue, Verizon at 21%.

By geography, our revenue mix for the second quarter of 2009 was 49% in North America, 26% in EMEA and 25% in the rest of the world. Royalties in the current quarter were $6.3 million, which represented 31% of revenue, an increase compared to 28% in the first quarter of 2009 and 24% in the second quarter of 2008. Royalties during the second quarter included an impairment of $589,000 related in several movie properties. Excluding the impairment, royalties would have been 28.5% of revenue during the current quarter.

Turning to profitability, we will be providing non-GAAP measures for each second quarter 2009 expense category which exclude amortization of intangibles, stock-based compensation, the non-equity component of the MIG earn out, acquired end process R&D, gain and impairment of option rate securities, restructuring and traditional expenses and foreign exchange revaluations on certain assets and liabilities. With the volatility in the global economy including FX rate and our complex text profile, we believe that non-GAAP results most accurately tell how the core business is performing. Additionally, it shows we are driving leverage toward our long-term target operating model and is a best measure for consistently evaluating how we are managing the business.

All comparisons will be using the non-GAAP current period result. Non-GAAP gross margin was 69% in the second quarter of 2009 which is down from 72% last quarter. The sequential decrease in gross margin was due to $589,000 royalty impairment that I previously discussed. Excluding the impairment, non-GAAP gross margin would have been 71.5% during the quarter.

Total non-GAAP operating expenses in the second quarter of 2009 were $13.1 million, down from $13.6 million during the first quarter of 2009 and down 26% from our $17.7 million during the same period last year. The decrease was primarily due to our continuing efforts to find additional operational efficiencies in our business but was benefited by a $120,000 VAT refund related to our Superscape acquisition. It should be noted that the FX rates have moved significantly in June and early July in the currencies but we have material foreign operating expenses.

Accordingly, if FX rates remain at current levels, our quarterly OpEx will increase by approximately $600,000 a quarter in Q3 and Q4 from the second quarter levels. During the second quarter, our expense levels determined on a non-GAAP basis were as follows. R&D was $6.4 million or a 32% of revenue, up from 30% last quarter. Sales and marketing expenses $3.2 million or 16% of revenue consistent with last quarter, G&A was $3.5 million or 18% of revenue for the quarter down from 19% last quarter.

Our non-GAAP income from operations for the second quarter is $500,000 exceeding our guidance of a loss of $200,000 to a gain of $200,000 and represented a non-GAAP operating margin of 2.5%. It should be noted that the $500,000 of operating margin was negatively impacted by the $589,000 royalty impairment. In the second quarter of 2009, we invested over a million dollars of our R&D spend on the next generation platforms including the iPhone which had a less than 5% contribution of revenue in the quarter.

That means that our carrier base business had non-GAAP operating margins in excess of the 2.5% overall operating margin. With our lower operating sales profile, we have continued to use the carrier business to fund the investment on the next generation platforms while still generating an operating profit this quarter. During our first quarter 2009 conference call, we explained that our first quarter results included a $1.2 million tax expense for which we expected a similar side tax benefit in the fourth quarter of 2009.

We ultimately realized that tax benefit this quarter ahead of schedule. Income tax expense during the quarter was comprised of $730,000 of foreign withholding taxes and a net income tax benefit of $1.2 million for a total benefit of $464,000. Included in the form of withholding tax was $200,000 related to our repatriation of $4 million of cash from China to the US in May at a 5% withholding tax rate.

During the second quarter, our non-GAAP net income was $662,000. Based on $29.8 million diluted shares outstanding, non-GAAP income per share, including the impact from the higher than expected tax benefit, was $0.02 per diluted share favorable to our guidance. In our earnings release as a full tabular reconciliation to our non-GAAP results and our GAAP results which include amortization of intangibles, stock-based compensation, the non-equity component of the MIG earn out, acquired IP R&D, gain and impairment of option rate securities, restructuring and traditional expenses and foreign exchange gains and losses primarily related to revaluation of assets and liabilities.

Turning to our results on GAAP basis, which include $1.5 million related to amortization of intangibles, $764,000 related to the allocation and stock based compensation, $219,000 of earn out expenses related to the MIG acquisition and $513,000 restructuring charge and $759,000 related to FX gains to follow on expense levels determined in accordance with GAAP.

Cost of revenue is $7.7 million, R&D $6.6 million, sales and marketing $3.5 million and G&A $3.9 million. The restructuring charge we realized this quarter of $513,000 relates to our unused second floor office space in our San Mateo headquarters that we abandoned last December. At that time, we expected the sublease space by the end of the third quarter 2009 and that we would recruit the full lease expense including common cost.

Due to the deteriorating sublease market in the bay area, we now do not anticipate sublease space until the first quarter of 2010 and we only anticipate recouping the base rental rate.

For the second quarter, GAAP loss from operations was $2.5 million and net loss applicable to common share was $1.5 million. Based on $29.6 million basic share outstanding, net loss applicable to the common share was $0.05 per basic share. A reconciliation of non-GAAP to GAAP expenses and income from operations can be found in our press release and current report on Form 8-K filed with the SEC.

Let me now turn to the balance sheet, cash and cash equivalents were $12.8 million as of June 30th, 2009 compared to $14.7 million at the end of Q1. During the second quarter of 2009, the Company generated approximately $1.1 million from operations, which includes $2.9 million in royalty prepayment made in the second quarter. Additionally, we used $70,000 related to CapEx and experience a $38,000 gain to the foreign exchange translations on foreign cash accounts.

During the second quarter, we drew down an additional $50,000 on our line of credit and repaid $3 million to the MIG shareholders for a total net decreasing cash of $1.9 million. Accounts receivables at the end of the quarter were $16.9 million, down from $19.7 million at the end of the first quarter.

Let me now discuss additional details related to our capital structure, including a review of our obligations to the former MIG shareholders.

To-date we have paid the entire $14 million in principal due to MIG in 2009, which includes the $5 million installment of principal paid on January 1. In addition, at the end of the second quarter of 2009, we had $4.5 million outstanding our line of credit with Silicon Valley Bank and we were in compliance with all financial covenants related to the facility. So that you can update your models for our cash flows related to MIG, the remaining $11 million of principal is due $2.4 million on March 31st, 2010, $2.4 million due on June 30, 2010 followed by payments of $3.1 million due on September 30, 2010 and a final payment of $3.1 million due on December 31st, 2010.

We maintained a cushion with respect to our bank covenants this week. We exceeded our second quarter non-GAAP operating income guidance. Remember that the covenants are on a rolling six-month basis. During the second quarter of 2009, we achieved EBITDA as defined by our lender of approximately $1 million and when combined with our first quarter 2009 EBITDA of approximately $1.3 million, we reported $2.3 million of positive EBITDA for the 6 month starting January 1st, 2009 and ending June 30, 2009. This is comfortably above our covenant of an EBITDA loss of $812,000 for the same six-month period ending June 30th.

To help you with reconciling, our second quarter non-GAAP operating margin of $500,000 to the second quarter EBITDA as defined by our lender of $1.004 million, you need to back out $585,000 of depreciation expense, $589,000 of royalty impairment and add $61,000 of interest income and then back out the $513,000 structure charge and $219,000 of MIG earn-out expense.

In regards to our EBITDA covenant for the 6 month starting April 1, 2009 and ending September 30, 2009, the positive $1 million reported during the second quarter will be applied to the six month our covenant of $1.572 million.

We currently expect to end 2009 with a cash and equivalent of over $10 million, which includes the Company drawing down a total of $5 million on our line of credit facility compared to our prior statements of ending the year with $11.5 million which assumed a line drawdown of $7 million. Due to our ability to generate positive cash flows from operations one quarter ahead of schedule and our continuing focus on controlling cost, our need to utilize the line of credit has been reduced and our net cash to errand is anticipated to improve by $500,000.

We remain committed to achieving positive cash flows from operations for the full year and expect the Company to remain cash positive from operations for each of the remaining two quarters of the year as well.

Turning now to guidance, for the third quarter of 2009, we currently expect the revenue to be in the range of $18.75 million to $19 million. This is down sequentially by approximately 5% and reflects continued quarter over quarter subtraction in the carrier business due mainly to the slower summer selling environment in EMEA, the general business backdrop and a more focused deployment on our part on the carrier business and offset by ramping revenues in the next generation platforms including the iPhone.

Non-GAAP operating loss is forecasted to be in the range of a loss of $100,000 to a loss of $300,000. Our income tax expense for the third quarter is expected to be $440,000. Non-GAAP net loss for the third quarter is expected to be in between the loss of $800,000 and $1 million or the loss of $0.03 per basic share. The non-GAAP loss excludes $1.5 million for amortization of intangibles, approximately $707,000 of anticipated stock based compensation and a restructuring charge of $596,000 primarily related to our transition agreement with the Craig Ballard.

Weighted average common share outstanding for the third quarter of 2009 are expected to be approximately 29.8 million basic and 31 million diluted. GAAP net loss for the third quarter is expected to be between a loss of $3.6 million and a loss of $3.8 million or a loss of between $0.12 and $0.13 per basic share.

For the full year 2009, we are increasing our revenue forecast to be within a range of $79.1 million to $80 million and our non-GAAP operating income is forecasted to be between $2 million and $4 million or non-GAAP operating profit margin of 3% to 5%. Our income tax for the full year is expected to be $2.4 million and includes $1.7 million related to former withholding taxes, $200,000 of withholding taxes resulting from our repatriation of cash from China in the second quarter and an income tax expense for the full year of $539,000 which includes the income tax benefit in the second quarter of 2009.

We expect the non-GAAP net income and loss for the full year of between a loss of $1.6 million and a profit of $400,000 or a loss of between $0.05 per basic share to income of $0.01 per diluted share which excludes $7.3 million for amortization of intangibles, approximately $3.9 million of stock-based compensation and a MIG earn out expense, a restructure charge of $1.2 million and $298,000 related to unhedged foreign exchange gains.

On a GAAP basis, we expect a net loss for the full year of between $11.8 million and $13.8 million or a loss of between $0.40 and $0.46 per basic share. Weighted average common shares outstanding for the calendar year 2009 are expected to be approximately 29.7 million basic and 30.5 million diluted. We are reiterating our commitment to be in cash flow positive from operations for each of the third and fourth quarters of 2009 and for the full year of 2009 and believe we remain well positioned to take advantage of the mobile gaming opportunity as the traditional carrier business continue to stabilize and the next generation platforms gain more transaction.

Before turning the call with the questions, Greg has a few closing remarks. Greg?

Greg Ballard

Thanks Eric. I did want to add one final note. As you all know, a few weeks ago, I announced my intention to leave Glu when my successor is found. Search is going well with many qualified candidates expressing interest. It is difficult to know exactly when the search will be completed but there is a good chance it will happen before the next earnings announcement, in which case, this will have been my last such call.

Let me just say that it has been an amazing experience, one that I have been fortunate to have experienced myself. I thank you for all the time that you have spent with us learning our business and giving us occasional words of encouragement and feedback. It has not always been a smooth road but we have accomplished much more than I would have thought possible six years ago when we were 25 people with just a handful of games and contracts with just a few US carriers.

I want to thank my senior management team for their hard work and determination and all of the worldwide Glu team for their exception effort and the highest level of integrity and perseverance. I am proud to have been associated with you.

With that, I will turn it over to the operator for question. Operator.

Question-and-Answer session


(Operator Instructions). Your first question comes from the line of Tavis McCourt - Morgan, Keegan & Company.

Justin Patterson - Morgan, Keegan & Company

Thanks guys this is Justin Patterson on behalf of Tavis today. First, Greg, if this is your last call, thanks very much for everything and best of luck with the future. Moving on to the questions, just regarding the $5 million MIG payment assuming nothing else, you have got about $7 million or so in cash after July. Can you just clarify how much of that amount is unencumbered?

Eric Ludwig

Sure. That is the correct number. As of July 2nd, we had about little over $7 million after making the $5 million payment to the MIG shareholders. Of that, $4.5 million is line of credit draw down from Silicon Valley Bank and they we have also given guidance that we will end the year with $10 million on the balance sheet with only drawing down an additional $0.5 million. So, the additional generated cash from operation would also be unencumbered cash flows with basically half of the cash at yearend being drawn down from the line of credit and the other half being unencumbered.

Justin Patterson - Morgan, Keegan & Company

Okay, got it. Thanks. Then just regarding the games environment, it looks like Deer Hunter went from about $6 to about $3 fairly quickly after launch and most of the stuff on iPhone is sitting around in the $1 to $3 range. Can you give us a sense just as to what type of unit economics you need for this to become a profitable platform for you?

Greg Ballard

Well, it is clearly heading in that direction. I mean I think the ability for us to bring a game like Deer on our back from heading lost its momentum into the number 10 slide which is today, generating fairly substantial number of unit. At $2.99 is I think a very positive indication of the ability to market effectively on this platform.

The investment that a particular game takes varies dramatically from what that game is developed uniquely for the iPhone platform or whether much of the game play in artwork existed on another platform and we are, I will not say porting it but merely adopting it for the iPhone.

Having said that, think of investments somewhere between $30 million and $100 million for that platform and you can sort of back end to the unit volume that you need to be successful on this.

I think for Glu right now, we are coming out of the investment phase and starting to look towards the return phase where we expect our title depth are generating positive returns but still depends a lot of unique things that are happening. I think it is $2.99, we standout a little bit on the top 10 right where the average price is probably closer to $1.25. So, the ability to keep price point high for as long as possible is clearly an important part of the key to success on the iPhone.

Justin Patterson - Morgan, Keegan & Company

Right and you have mentioned offering the free version of the game for that and that is helping to kind of improve trends and raise awareness. Can you provide any sense as to what the attachment rates from say downloading free version to purchasing the full price version was?

Greg Ballard

We are not getting at the specifics on that but I will say that the conversion rate from free to paid is actually much higher than we would have expected coming on this platform. It is higher than what we have seen in other experiences with the carrier base products for example and we are very pleased to see that.

Interestingly enough and I think others have experienced the same phenomenon, we are also seeing a fair attach rate when we take people from the free Deer Hunter game to others of our games and the ability to drive people for the free applications to many other paid applications. We think it is going to be a key part of the success for this platform going forward.

So, without getting at the specifics, I think we are pleased with the conversion rates that we are seeing.


(Operator Instructions) Your next question comes from the line of Todd Greenwald.

Todd Greenwald - Signal Hill Group LLC

So, you talked a little bit about pricing on the iPhone platform, I was wondering if you talk a little bit about pricing on the carrier business which tends to be holding up well and as the carriers launched and seems to be copying some of the Apples model and some of talks that is going ahead with 70/30 revenue split which would be good for you, what happens to pricing then both from their perspectives and also from the consumer who seemed pretty well telegraphed that, games are being sold for $0.99 and $1.99 as consumer holed up in the carrier model? Are consumers be willing to spend five bucks or seven bucks on a game as they are now? Thanks.

Greg Ballard

Well, I think that is a very good answer and right now the volume on India the individual App Stores other than Apple is relatively small. So, we have not seen a lot of pricing pressure coming from those App stores and you are right the splits that were being offered by and large on those App stores are much better. We hope that part of the App stores tends to proliferate to the industry and the pricing model tends to stay a little bit more isolated. But it is hard to say exactly what the impact will be today. We are not seeing a whole lot of pricing pressure back into the carrier business and obviously we like the prices that we are getting on the carrier business and you are right consumers do perceive that they are getting a $0.99 game on the iPhone but the flipside of that is it is also true that they are paying $19.95 and sometimes $29 for DS and PSP games.

So, right now, the world of video games in general is experiencing a lot of conflicting trends on pricing. We are personally of the view that the higher prices should prevail as the quality of the games on all of these platforms goes up and as the investments did publishers like us are party into it necessarily goes up, we think that the prices ultimately can see more upward pressure than downward pressure.

Todd Greenwald - Signal Hill Group LLC

Okay. Can you say what your average price is in the carrier business and also maybe what proportion is subscription versus non-subscription?

Eric Ludwig

Hi Todd, this is Eric. On the subscription versus one time download in the carrier business, it still consistent at about 25% of our global revenue is subscription based and that is predominantly the North American where over 40% of the North America is rather subscription based. And then in regards to global pricing, we have not seen price trends significantly coming down but actually we feel kind of eased up a little bit and on the carrier business in the North America ranged about region while in North America it is, Jill, I believe it is about…?

Jill Braff

It is about, $349 is at roughly for subscription and as high as $899 probably even higher for the Guitar Hero in the US and outside of the US, we have actually seen pricing slightly edging higher in general.


(Operator Instructions) Your next question comes from the line of Jonathan Goldberg.

Jonathan Goldberg - Deutsche Bank

Just a quick question, sort of expanding on what you have said before where Verizon now is moving to 70/30 revenue share models, do you think that is going to be universal as they are going to be a lot of nuances to that at Verizon and then beyond that you think other carriers are going to pick up kind of economics?

Greg Ballard

Could you repeat just the last part of that?

Jonathan Goldberg - Deutsche Bank

Do you think other carriers will follow in that model? Can you see that the big trend now is going to 70/30?

Greg Ballard

We have had obviously conversations with most of our partners on the last few months about the 70/30 model. There are some of them who understand that it is the new trend and who are internally trying to figure out ways in which they can themselves offer that sort of a package to people like us. There are some of the carriers who are completely resistant to the notion of changing their margins with us especially I would say in Europe where we tend to see the loosening of the margin structure is in new areas like App stores when they get launched by carriers or by OEM.

We are seeing some margin improvement elsewhere with the carriers that I do not want to create the impression that suddenly the entire margin structure of our industry is going to sweep to a change of 70/30 in fact it is going to be literally on the margin that that happened with the new App stores they get launched and with new programs with these guys developed on their own. My guess is not through the based business nearly as much.

Jonathan Goldberg - Deutsche Bank

Okay. Do you think there is much to this notion of, I mean we have with iPhone 3.0, we have new payment message, do you think this is going to be a big trend? Do you see yourselves moving more in that model, we are still going to be sort of download, pay for download being predominant revenue for the future?

Greg Ballard

Well, I think to say yes to both of those. I do think it is going to be paid for download for awhile because I think the carrier business is going to continue to be important part of everyone’s business on the mobile business. I mean our two largest competitors continue to have the vast bulk of their business coming from the carrier business as do we and I do not think we are going to see huge innovations coming from that side of the business in terms of pricing structure.

But on the new platforms like iPhone and certainly on some of the social network sites the development of alternative pricing message is likely to be profoundly important. We do not know yet how big it is going to be on the iPhone but we do know the people are planning to use that part of the 3.0 capability as we are and we have already seen the importance of that pricing strategy with regard to FaceBook games and MySpace games and of course anybody who follows what is going on in Asia cannot help but notice that the way in which games are priced there is dramatically different and how is done here.

So, we would see that is a profound and very favorable trend but it is probably going to take awhile for it to work its way into the mainstream of the mobile business.


(Operator Instructions) Your next question comes from the line of Brenden Smith – Goldman Sachs

Brenden Smith – Goldman Sachs

Just a quick question, can you give us an updated total for the Company’s statement in federal NOLs?

Eric Ludwig

Sure. As of December 31, the Company at NOL carry forwards approximately $55 million for federal and $54 million for state and in the UK we had $92 million carry forwards. In addition to that we had some R&D tax credit carry forwards of $1 million for federal and state and $1 for foreign tax credit carry forwards. If you want, you can find more details in the NOLs kind of expiration dates and the actual deferred tax assets in the notes of the 10-K.

Brenden Smith – Goldman Sachs

Just on the second half title slate, you just had a lot of titles coming out. Is there any in particular that you feel are going to be pretty well received on either iPhone or the other official carrier deck?

Greg Ballard

I talked a little bit about that Brandon, in my text because we are very excited about the back half title plan on both the iPhone and on the carrier side of the business but also I have Jill talk just a little bit about some of the highlight of the roadmap we have.

Jill Braff

Well, I would say some of the titles to look for in the near term are Super K.O. Boxing 2 is coming towards the end of Q3 across all platforms on mobile platform which will be a global game day launch for us on September 21st. We are already well under way in terms of speeding, marketing and pre awareness particularly around the iPhone marketplace. In addition, Family Guy which launched in Q2 in the carrier business is coming to the iPhone in September as well and we have already received very good preview comments and then as we head into Q4, we have all the Activision titles that Greg mentioned in his prepared remarks coming to the carriers set up so other app stores outside of the iPhone and there is a few additional titles coming in Q4 that we have yet announce on various platforms including both branded and original IP. So, I think there will be more to come shortly.


At this time, there are no other questions.

Greg Ballard

Okay, then I thank you all again for joining us. We look forward to engaging with any of you over the course of the next several months of conferences and we wish you the best for the quarter. Thank you.

Eric Ludwig

Thank you.


Thank you. This concludes today's conference call. You may know disconnect.

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