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Glu Mobile, Inc. (NASDAQ:GLUU)

Q2 2013 Results Earnings Call

August 6 2013 4:30 PM ET

Executives

Greg Cannon - Vice President, Finance

Niccolo de Masi - Chief Executive Officer

Matt Ricchetti - President, Studios

Chris Akhavan - President, Publishing

Eric Ludwig - Chief Financial Officer

Analysts

Sean McGowan - Needham & Company

Michael Graham - Canaccord

Mike Olson - Piper Jaffray

John Taylor - Arcadia

Mike Hickey - The Benchmark Company

Eric Wold - B. Riley

Adam Krejcik - Eilers Research

Operator

Good afternoon. My name is [Hope], and I will be your conference operator today. At this time, I would like to welcome everyone to the Glu Mobile Second Quarter 2013 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Greg Cannon, Vice President of Finance. You may begin your conference.

Greg Cannon

Good afternoon, everyone. And thank you for joining us on the Glu Mobile second quarter 2013 financial results conference call. This is Greg Cannon, VP, Finance for Glu Mobile. On the call today, we have CEO, Niccolo de Masi; President of Studios, Matt Ricchetti; President of Publishing, Chris Akhavan; and CFO, Eric Ludwig.

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Generally, these statements are identified by the use of the words such as expect, believe, anticipate, intend and other words that denote future events.

These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statement.

We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and in this conference call. These risk factors are described in our press release and are more fully detailed under the caption Risk Factors in the Form 10-Q filed with the SEC on May 10, 2013.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude the change in deferred revenues and deferred cost of revenues, amortization of intangibles, stock-based compensation charges, restructuring charges, changes in the fair value of the Blammo earnout, transitional cost, impairment of goodwill, release of tax liabilities and foreign currency gains and losses primarily related to revaluation of assets and liabilities.

Additionally, we will be discussing adjusted EBITDA, which is defined as non-GAAP operating income or loss, excluding depreciation. These non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and we encourage investors to consider all measures before making an investment decision.

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

Given the rest -- recent SEC guidance regarding the use of social media channels to announce material information to investors, we are notifying investors, the media, our players and others interested in the company that in the future, we might choose to communicate material information via social media channels or it is possible that information we disclose through social media channels maybe deemed to be material.

Therefore, we encourage investors, the media players and others interested in Glu to review the information posted on the company’s forum, the company’s Facebook site and the company’s Twitter account. Any updates to the list of social media channels we will use to announce material information will be posted on the Investor Relations pages of our website at www.glu.com/investors.

In addition, please note that the date of this conference call is August 6, 2013 and any forward-looking statements that we may make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events.

Lastly, this conference call is the property of Glu Mobile and any recording, reproduction or rebroadcast of this conference call without the express written permission of Glu is strictly prohibited.

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

Eric Ludwig

Great. Thanks. Before we get started, I want to provide background on the restatement that we announced today. In consultation with our independent registered public accounting firm Pricewaterhouse Coopers, we have determined that we should have been recognizing revenue generated from digital store fronts on a gross accounting basis.

What this means is that we are now including the 30% commission and fees at Apple, Google and Amazon among others, keep for their distribution and billing services in both revenues and cost of revenues for in-app purchases. Smartphone advertising revenues via third-party ad networks and feature phone revenues are unaffected by this and will continue to be recognized on a net basis.

This restatement has had the effective increasing revenues and cost of revenues immaterially for 2010 and materially for 2011, 2012 and 2013. This restatement and corrected revenue recognition policy has zero economic effects and there is no change to our gross profit, operating income or loss, net income or loss, any per share amounts, adjusted EBITDA or cash flows.

Also I would point out that there are no adjustments between the quarters either, all restated figures are increases to revenue and cost of revenues within the same quarter.

On our IR website is combined Q2 presentation with a supplemental section of the end. This supplemental data shows that GAAP and non-GAAP quarterly figures and metrics as originally reported the adjustments, and the revise and restated results and metrics for Q1 2010 to Q1 2013. Additionally, we have filed a Form 8-K with the SEC with additional details on the reason for the restatement.

In regards to the guidance for the year, our IR presentation is also been updated to provide reconciliations of our Q2 results compared to our prior guidance for Q2 on a net basis. Additionally, we have included a reconciliation for the full year guidance on both a gross and net basis compared to the prior full year net guidance.

Prospectively after this earnings call when we discussed revenue, cost of revenues and gross margin percentage it will be on a gross basis which includes the platform fees for digital store fronts.

I would also note that we intent to file the required amendments to our SEC reports contained in the revised and restated financial statements for the effected periods, as well as our Form 10-Q for Q2 2013 on a timely basis. If there are any questions on this topic we are going to address during the Q&A.

Let me now turn this over to Niccolo.

Niccolo de Masi

Good afternoon, and welcome to everyone joining us today. Before I begin, allow me to direct you to the supplemental presentation accompanying today’s earnings. It can be accessed via our Investor website, www.glu.com/investors. In addition to the presentation, you will find demo videos of titles that we expect to launch between September and December.

In Q2, the combination of successfully utilizing our live ops function, as well as honing our direct marketing and advertising revenues allowed us to surpass the high end of our revenue and adjusted EBITDA guidance ranges.

At the start of this year, I set out our strategic focus for 2013 on quality and monetization. I committed to holding and refining titles as necessary in order to ensure we delivered on measurable success milestones. We have always made decisions through the lens of maximizing long-term returns and are confident that our games as a service strategy is correct.

Our focus has been and remains on driving strong long-term performance in order to maximize shareholder value even at the expense of short-term volatility. As part of this philosophy, since our new President of Studios joined Glu, we have prioritized our best people and teams working closely with him on new titles to Green-lit.

Ensuring titles get off to the right starts is one of if not the most critical ingredient for creating hits. I’m pleased to report that the first four titles Green-lits under our new studio management team are looking extremely promising. We in fact believe that they have the necessary ingredients to become the strongest four titles in Glu’s history.

Taking each of these now briefly in turn, based on encouraging early results from beta testing in limited countries, we are very excited about the next release in our Deer Hunter franchise.

Deer Hunter Reloaded was Glu’s biggest 2012 revenue generator, despite being a circa 250-megabyte binary and thereby requiring a Wi-Fi connection or PC sideloading to install.

As an example of the product getting off to the right start, this October’s Deer Hunter title contains an initial binary download that is under 50 megabytes. This is a fantastic engineering and design achievement for a game that will exceed the production values of Deer Hunter Reloaded.

Eternity Warriors 3 and Frontline Commando 2 are the next installments in two of our most successful franchises of all time. Both titles are launching with advances and social features, and monetization underpinned by the investments we have made over the past year in server infrastructure.

Our final Q4 title is Motocross Meltdown, a stunning online only game that we believe has the potential to dominate the high fidelity social racing genre.

Those who attended our Analyst Day on May 30th in New York or have subsequently viewed the presented material would have seen the kinds of techniques we are employing to increase monetization rates.

Our continued focus on quality and monetization has indeed delivered a number of additional important milestones for Glu in Q2, which I’m pleased to now touch on. Our first major publishing title Black Gate: Inferno is live in the U.S. and Canada, and consistently exhibiting ARPDAU of over $0.20.

Tons of Guns, our re-works title with a deepened PvE system has shown positive ARPDAU progress as we continue to optimize it. By the end of September, we anticipate asynchronous PvP system being added to improve retention and bolster monetization.

Our first car battle game Gang Lords is in beta and demonstrating U.S. ARPDAU of over $0.12. All three of these titles have responded to optimization. However, positively impacting the trajectory of any title already under development is always challenging.

This combined with prioritizing our President of Studios’ attention, our newly Green-lit titles has led to the amplitude and timing of progress to be significantly weaker than previously anticipated.

Rather than aggressively marketing any of these in Q3 as originally expected, we are continuing to invest in improving their lifetime value. We are confident Glu now has the expertise to do so, with a number of success milestones under our belt. We intend to kick off our launched marketing spend in early October by which time we anticipate each title have reached a point, a refinement diminishing returns.

Zombies Ate My Friends is the only internally developed title to receive a full launch marketing campaign in Q3. It has gotten off to a solid start in global release and is performing as forecasted. It is the first Glu title which has ever achieved the number one free ranking in Japan on iOS.

Today, we are launching a significant update to last year’s Eternity Warriors 2. EW2 Version 4.0 adds not only asynchronous PvP, but also is our first title that supports Apple AirPlay. This means that you’ll be able to play head-to-head against your friend and do so on any widescreen HDTV which has an Apple TV connected.

We had previously believed Black Gate, Tons of Guns and Gang Lords would be sufficiently optimized to merit worldwide release and marketing in Q3. As this timing has now moved to Q4, our forecast for H2 2013 are changing for proportionately. I’m confident in our ability to return to topline growth due to both the positive trends we are seeing in beta in addition to the early traction in our publishing division.

Moving now to Glu’s Publishing business. We’ve continued to build our pipeline and attract the talent we need to compete in our most important markets, China, Korea, Japan and Russia. As mentioned on our Analyst Day, our pipeline is growing and we are on track to launch six titles in 2013 with at least 12 in 2014.

While Black Gate: Inferno’s launch marketing campaign has moved out from Q3 to Q4, we nevertheless remained pleased with the long-term prospects of this business model, in fact, we have already begun exploring opportunities to work with proven talent and teams on titles which are significantly pre-launched.

Moving beyond publishing only proven successes, the incubating titles still in development, should enable us over the long-term to fully leverage Glu’s broad spectrum of global capabilities to capture more margin.

This year we are making significant investments in all of the technologies required to operate fully online games as a service or GaaS. Currently the Glu GaaS platform, nicked name GluOn is targeted at and tightly integrated with our internal themes.

Over the coming years we see this investment as engendering a sustained technology advantage which can be monetized in additional business model. Second and third-party publishing is a primary example of an additional monetization model for GluOn.

Long-term, we believe that the use of big data, machine learning and merchandising will progress to the level seen in firms such as Amazon, eBay and Google. We as such expect GluOn to become an evermore critical contributor to our sustained success.

The mobile gaming market continues to grow globally, particularly in Asia and emerging markets. Glu’s presence over the past couple of years has evolved accordingly, putting headcount and focus out of Europe and to Asia.

We launch all of our games in close to a dozen languages and anticipate benefits from our broad device reach accruing at an accelerating pace. We have also opened a new local office in Korea and in the process of opening a local office in Japan to further support our growth in these countries.

Arguably more than any other pure-play mobile gaming company in the world, Glu has demonstrated an ability to build long-term original IP value. This was a pillar of our strategy when I joined and future proves our business.

Few pure-play mobile gaming companies have delivered sequels and franchise extensions which demonstrate growth over the predecessors. We have done so reproducibly with title such Deer Hunter Reloaded, Eternity Warriors 2 and Frontline Commando: D-Day. We anticipate continuing this trend in Q4 with Deer Hunter, Eternity Warriors 3 and Frontline Commando 2.

We are confident in our expectation of Glu retuning to growth in Q4 and our transition the games as a service being fully active by the middle of 2014. So when we are beginning our 2014 strategic planning, with our strong fourth quarter release slates and commitment to manage costs, we feel comfortable that we will be overall cash flow breakeven in 2014.

Through our partnership with MGM, we currently expect two 2014 titles will be branded and released in conjunction with 10 full MGM properties. The first of these will be a game accompanying the February 2014 release of the new ROBOCOP with the second game accompanying August 2014’s Hercules. Q2 2014 will contain a number of exciting titles, including the next installment and the Contract Killer franchise which will be a fully online game.

I’m pleased to now hand you over to Matt Ricchetti for an update on our studio and portfolio.

Matt Ricchetti

Good afternoon, everyone. In our last earnings call, I reviewed Glu’s progress against the four pillars required for success in the mobile games market, engaging core game play, high production values, consumer reach and deep monetization.

As Glu did not release any new titles in Q2, I won’t review these pillars again on this call. Instead I’d like to report on the progress our Q1 titles have made since going live and look ahead to the rest of the year.

Q2 is the first opportunity we’ve had to put our new monetization team to work optimizing live titles. Updates during the quarter to four key portfolio titles have shown that we can meaningfully move the needle on customer LTV, lifetime value.

Frontline Commando: D-Day our most successful Q1 title saw a 25% increase in paying users and a 38% increase in LTV after its first Q2 update. Here is the destiny our title with the deepest economy to-date saw a 27% improvement in conversion and a 43% increase in LTV after its first update post-launch.

Eternity Warriors 2 saw a 60% uptick in revenue with the release of chance-based purchase systems in its Version 3.2. In all three cases this data is a comparison of the two week periods before and after the product update.

Lastly, we added a live tournament system to Contract Killer 2 that has significantly lifted revenue each time an event has be run.

In addition to these successes with our Q1 tittles, we are seeing good progress optimizing revenue on our Q3 titles in limited release. Tons of Guns, Gang Lords and Deer Hunter 2014 have each seen meaningful increases in ARPDAU with each update release.

Bottom line, we are confident that we now have the ability to not only design better monetizing games as demonstrated in Q1, but optimize them effectively for topline revenue during beta and after worldwide release.

What we have not yet had the opportunity to do is release true games as a service, GaaS. Glu has not had the server I technology available to add GaaS features like persistent player accounts, chat, messaging, games and leaderboards. We believe that the social competitive features will take monetization of our games to the next level.

I’m very excited to say that we will be launching our GaaS server platform nickname GluOn in Q3. Deer Hunter 2014 will be our first game with GluOn integration, releasing near the end of the quarter. We will be using the Deer Hunter 2014 release to prove out the viability and scalability of the platform.

Then in Q4, we will launch three more titles that feature even deeper integration with the GluOn platform. All three of these Q4 titles will be online-only experiences and we’ll offer social competitive play either PvP or co-op and leaderboards.

Events, game data and content updates will all be driven from the server, allowing us to do more frequent updates and more dynamic game play. I’m very excited about display the Q4 titles as they are not only Glu’s first true GaaS games, but also the first titles by Green-lit when I came to Glu.

Going forward, all of Glu’s 2014 titles with a few opportunistic exceptions will be GaaS games. They will be online-only and feature deep integration with GluOn. We will also continue to invest in and expand the GluOn feature set, so that all Glu games can march forward together.

As Niccolo mentioned, we have consciously chosen the more deliberate strategy of developing a GaaS platform centrally rather than on a per game basis, because we believe this will create a sustained competitive advantage for Glu.

As with any major endeavor, we have encountered some areas that are more challenging or taken longer than we had hoped, but the winning strategy is never the easiest. We are on the right path and showing milestones to demonstrate this. Q4 will be where the rubber meets the road and Glu substantially completes its transition to a game as service company.

Let me now turn you over to Chris Akhavan.

Chris Akhavan

Thanks, Matt, and hi, everyone. I joined Glu at the beginning of Q2 and I’ve thoroughly enjoyed my first few months with the company. We have made significant progress across the organization and I’d like to update you on some of the initiatives that I oversee.

When I joined the company, one of my immediate priorities was to substantially upgrade the sophistication and effectiveness of our User Acquisition and marketing efforts. I’m please to report that our team has made dramatic improvements in Q2 that will benefit all of Glu’s titles from this quarter moving forward.

Having been deeply embedded in the mobile User Acquisition space at my prior firm, I can say with confidence that Glu’s User Acquisition capabilities are now on par with leading studios in the space and we are already opening up opportunities that I believe will allow us to build advantages over even our strongest competitors.

Our approach to User Acquisition is now completely data driven and built on deep analysis and diligence that allows us to deploy User Acquisition strategies that will maximize ROI. We have also negotiated preferential arrangements with a number of our most important distribution partners that will further amplify our distribution capabilities.

Another area I have focused on is increasing our advertising-based revenue by introducing new channels into our portfolio. We have rolled out a number of new revenue channels in Q2 that we’ll continue to build on throughout the rest of this year and we are already seeing a lifts from these new channels.

In particular, we’re seeing strong early results from video advertising that we launched in our titles at the end of Q2 and believe we can continue growing revenue from this channel.

Our third-party publishing program is off to a good start as we launched our first third-party title Black Gate: Inferno at the end of the quarter. The title is taking longer to tune than expected and is now performed, as well as I hoped at launch, but we are nonetheless pleased with our internal operations and capabilities being proven out with the launch of this title.

We just launched our second title, Odyssey: Age of Gods last week and have three additional titles signed and five other titles currently in the long form agreement stage. One title we just signed last week features real-time player versus player game play, and we’re looking forward to bringing it to a global audience across iOS and Android.

We are on track to deliver six live titles by the end of the year and our pipeline continues to build globally. We have found developers to be very receptive to working with Glu and believe our strong global brand will allow us to continue expanding the program in many key markets, including Asia, Eastern Europe and North America.

Finally, I’d like to highlight our expansion across Asia, which continues at a rapid pace. We have recently established an office in Korea and have hired a country manager in Japan who comes to Glu with deep expertise in the Japanese market having previously served in roles at GREE and NAMCO Bandai.

Additionally, Glu continues to benefit from a strong position in China, driven by our office in Beijing. We recently deepened our relationship with Qihoo 360, who operates one of the largest Android app markets in China and we will continue to pursue distribution relationships that will allow us to capitalize on the tremendous mobile gaming market growth in the country.

According to a recent China gaming industry report released at the ChinaJoy Conference, China mobile gaming revenue is growing at 100% year-over-year. I’m highly optimistic about the growth opportunity that lies ahead for Glu in the country.

Looking across Glu’s organization, I believe we have built critical foundations in Q2 that will position the company for growth in the coming quarters and I look forward to working closely with our teams to build on this momentum.

I now turn you over to Eric to review Q2 actual results and forecasts.

Eric Ludwig

Great. Overall, I’m pleased with our ability to exceed our expectations across all of our financial metrics during the second quarter. I’ll first detail our second quarter financial results on a net basis and then compare against the net guidance we previously provided. I will then refer to key Q2 results on a gross basis. I will then provide our outlook for the third quarter and full year 2013. For actual results starting Q3 and for guidance now and henceforth, I will be utilizing gross revenues and cost of revenues.

Summarizing our key financial highlights for the second quarter of 2013 on a net accounting basis, total net non-GAAP smartphone revenues of $16.3 million were above the high-end of our guidance range.

Net non-GAAP smartphone revenues accounted for 92% of total net non-GAAP revenues. Net non-GAAP margin of 90% was in line with our prior guidance.

Due to our ongoing focus on controlling cost, we were able to report an adjusted EBITDA loss of $2.9 million beating our guidance.

Lastly, our non-GAAP net loss was $3.8 million or a loss of $0.05 per basic share which was also above our guidance range.

We had approximately $40.8 million downloads of our titles on all smartphone platforms during the second quarter and our cumulative downloads an hour at approximately 477 million.

Our daily active uses in the month of June 2013 decreased at 2.9 million, while our monthly active users were similarly down to 29.4 million, both expectedly down due to no launches in the quarter.

Summarizing the full key results for the second quarter and for comparative purposes and explaining how we performed against our prior guidance on a net basis, total net non-GAAP revenue was $17.6 million which was above our guidance range of $16.5 million to $17.5 million.

Net non-GAAP smartphone revenue of $16.3 million was also above the high end of our guidance range of $15.2 million to $16.2 million. As expected, non-GAAP feature phone revenue continued to decline and came in at $1.4 million during the quarter.

We did not release any titles during the second quarter, reflecting a move into Q3 for Zombies Ate My Friends, which ultimately launched in the middle of July.

Our gross margin non-GAAP smartphone by platform for the second quarter of 2013 was 63% on the Apple platform, 31% on Android and 6% on other smartphone platforms.

By geography, the Americas accounted for 46% of gross non-GAAP smartphone revenue, EMEA 21% and Asia-Pacific 33%.

On a gross basis, we reported total non-GAAP revenue of $23.2 million consisting of $21.8 million in non-GAAP smartphone revenue and $1.4 million in non-GAAP feature phone revenue.

During the second quarter, our non-GAAP gross margin on a net basis is 90% and in line with our guidance and on a gross basis non-GAAP gross margin was 69%.

Total non-GAAP operating expenses were $19.5 million in the second quarter and approximately $400,000 lower than our guidance, reflecting continued OpEx management during the quarter.

The combination of slightly higher than expected revenue, along with management of OpEx resulted in our reporting an adjusted EBITDA loss of $2.9 million during the quarter. This was better than our guidance range of a loss of between $3.5 million and $4.4 million.

As a result, we reported a non-GAAP net loss of $3.8 million or EPS loss of $0.05 per basic share, which also exceeded our guidance of a loss of between $4.2 million and $5.1 million or $0.06 to $0.07 per basic share. We ended the second quarter with $69.8 million weighted average basic shares.

Excluded from the non-GAAP figures I just discussed, but included in the GAAP results, was a $2.9 million income tax benefit. This benefit was due to the non-cash release of pre-acquisition tax liabilities for MIG, following the exploration of the statute of limitations. Note that a full reconciliation of GAAP to non-GAAP financial measures was included in the press release today.

Now I’ll turn to the balance sheet, as of June 30, 2013 our cash and equivalents totaled $19.1 million, which was down from $21.2 million at the end of the first quarter, but still better than our expectations.

During Q2, we used $1.9 million of cash in operating activities and used $2.2 million in investing activities, primarily related to the restricted cash deposits on our new facility leases and CapEx. These were partially offset by $1.9 million received from warrants and stock option exercises.

Now let me finish with some thoughts regarding our financial outlook. On slide 32, of the IR presentation we have provided a bridge from our current full year mid-point guidance from a gross basis down to net basis and we compare that to the May 30th net basis full year prior guidance.

As a reminder, the restatement that we just talked about today, only impacted revenues, cost of revenues in gross margin percentage and had no impact to any other bottom line number no to the restatement impacts or reduced guidance.

Turning to guidance for the third quarter of 2013, while we continue to believe that we are position to experience significant growth during the fourth quarter, our third quarter and second half 2013 guidance are being reduced to reflect two key trends that Niccolo talked about.

The first relates to our first party titles that we are launching this quarter. We are giving Tons of Guns which has been launched globally, but it’s not been marketed heavily yet and Gang Lords more time for monetization and retention improvement.

The second big impact to the third quarter is that our third-party publishing titles are ramping slower than originally forecasted, due to the product tuning and westernization of the products taking longer. This does not lessen our result for the third-party publishing division rather we were just too optimistic in our ability to execute quickly out of the gates.

During the third quarter, we currently expect our gross non-GAAP revenues to be in a range of $19.6 million to $21 million, which includes $18.8 million to $20.2 million in gross non-GAAP smartphone revenue.

This guidance is down sequentially and year-over-year, primarily due to the dynamics I just discussed. At the mid point of the range, this $20.3 million total gross non-GAAP revenue guidance would have been $15.25 million on a net basis.

We expect non-GAAP gross margin on a gross accounting basis during the third quarter to be approximately 67%, which is slightly lower than the second quarter, primarily due to the third-party publishing royalties.

Our non-GAAP OpEx for the third quarter is expected to be approximately $20.8 million, an increase over Q2. This 6% increase is driven by higher third-party variable marketing spend as we launch no titles during the second quarter and a modest increase to hiring key monetization heads, which will slow dramatically after the third quarter.

Given these expectations, adjusted EBITDA, which excludes $700,000 of depreciation is expected to be a loss of $6 million to $6.8 million. Our non-GAAP net loss including a $120,000 tax expense will be a loss of between $6.8 million and $7.7 million or a loss of between $0.10 and $0.11 per basic share. And excluded from our guidance for GAAP purposes are $1.1 million of amortization in COGS, $230,000 of amortization in OpEx, $1.3 million of stock-based compensation.

Finally, we expect our cash balance to be $11.5 million at the end of the third quarter, down approximately $7.6 million quarter-over-quarter, $5.8 of which is due to the operating loss and $1.8 million is due to CapEx purchases, one-time CapEx purchases for our two office moves in San Francisco and Kirkland.

Turning to the full year guidance. We continue to expect to launch 14 internal titles during the year, nine have already been released and the remaining five we will launch by the end of September through the end of the year. In addition, we expect to launch approximately four third-party publishing titles during the same period with the majority now during the fourth quarter.

As a result of the lower revenue for Q3 and the impact of those titles in the fourth quarter, we’re adjusting our 2013 full year gross non-GAAP revenue guidance to be in the range of $96.8 million to $98.9 million, which includes $92.3 million to $94.4 million in gross non-GAAP smartphone revenue.

On slide 32 at the quarterly IR presentation, you will find the details of the prior full year guidance from May 30th to today’s figures but adjusted downwards to a net basis for comparative purposes. Accordingly, our full year apples-to-apples total non-GAAP revenue on a net basis is coming down from a mid-point of $86.3 million down to a mid-point of $73.8 million.

We expect gross non-GAAP gross margin of 68% for the year, which is down slightly from 2012, due to the inclusion of the third-party publishing business and non-GAAP OpEx will be $81.5 million, R&D is $46 million, sales and marketing $22 million and G&A $13.5 million.

Adjusted EBITDA is expected to range from a loss of between $11.6 million and $12.9 million compared to our prior guidance of a loss of $4.7 to $6.2.

The $6.8 million degradation at the mid-point of both figures is due to a $5.5 million decrease in higher gross margin first-party titles and $1.3 million due to lower revenues in gross margin from the third-party titles.

And just to reiterate, none of these expectations are due to the restatement that we announced today as everything was non-cash and just have hit the revenue and cost of sales volume.

We expect our non-GAAP net loss to be in the range of $15 million to $16.4 million or an EPS loss of $0.22 to $0.24 per basic share compared to the prior guidance of $8.4 million to $9.9 million or a loss of $0.12 to $0.14.

In addition, we now expect to end the year with at least 19 -- $9 million in cash and no debt, while this is lower than our prior expectation of $14 million, we remain comfortable with our ability to manage the variable levers of our business such that we can operate that level of cash while executing our strategy.

We are just starting our 2014 strategic planning but with our strong fourth quarter lease slate and our commitment to managing costs. We feel comfortable that we’ll be overall cash flow breakeven in 2014.

But to be clear, we are disappointing with the short-term revenue guidance reduction, but you remain confident that our strategy to increase monetization will payoff given the recent progress we’ve seen. In addition, we continue to be optimistic about our ability to resume topline growth starting this fourth quarter and into 2014.

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

Question-and-Answer Session

Operator

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

Sean McGowan - Needham & Company

Yes. Thanks. First, kind of a housekeeping thing regarding this restatement, was there statement unique to Glu about why this needed to be done this way because not everybody is doing in a wrong gross basis?

Eric Ludwig

Yes. That’s a great question, Sean. Let me kind of give some thoughts on that. It’s a pretty long topic but we felt Pricewaterhouse Coopers is our independent auditors since 2003. And when we went public the industry standard was for feature phone carrier based revenue to be net recognition and when we went public and when JAMDAT went public both have been revived by the SEC.

JAMDAT got up by EA back in 2005 and Glu used that revenue policy for digital storefront starting when the app store came out in 2008. And Apple and Google became meaningful to us back in 2010. We specifically evaluated that accounting with PWC and jointly determine to continue using net accounting revenue.

Recently this past quarter, as we were getting ready to launch what we believe to be online-only games that we felt should be gross accounting, we went to Pricewaterhouse National to get concurrence on that perspective treatments and during this discussions PWC review our historical accounting, PwC National and that they’ve previously audited, as well as the Apple and Google contracts. And then we’ve determined that we should have been doing correct accounting shipment of gross revenue.

So, that’s why, we’re revising and restating the results. But you’re right; there is disparity in the industry, but us being the one mobile company with the most mobile revenue compared to the other public company is that mobile is less. I think we had to take the first step at getting the revenue on a gross basis.

Sean McGowan - Needham & Company

Okay. Thank you. And then now further like a more real question.

Niccolo de Masi

Yeah.

Sean McGowan - Needham & Company

In terms of releases for the third quarter, are things taking longer because there is problems that you’re -- there are problems that you’re encountering or things that you thought would go faster or is it because you see a better opportunity for taking that extra time or is it some combination?

Niccolo de Masi

I’ll hand this over to Matt respond on it.

Matt Ricchetti

I think the right answer there is that it is the combination of both. So on the one hand we’ve started to release games that have deeper economies and therefore require more tuning, which is kind of something a trend we’re seeing throughout the industry. And I think Eric, kind of, mentioned that, we were more optimistic that we could come out the gate with a near perfect or completely balanced economies in some of these games.

And we’re finding that when we go and we optimize kind of version over version, there is actually a lot of gains for us on the revenue side. So it doesn’t make sense to push the game out at a kind of lower performing state when we know that there are -- there is still some big upside in the game. So that’s a kind of -- it’s kind of the both sides of that question you’re asking.

Sean McGowan - Needham & Company

Okay. Which leads into the next question and I know you’re not sharing 2014 guidance in any kind of detail but you must have had some expectation in your minds about how ‘14 would look. Is the broad progress that you’ve made with monetization and the confidence you have in the fourth quarter slate. Does that make you feel like whatever number you had for total non-GAAP revenue in ‘14, is that diminished or actually do you feel more encouraged about that?

Eric Ludwig

Yeah. Sean, this is Eric. Maybe, Niccolo and I can take this accommodation. Obviously, we’re not going to talk about 2014 yet other than really giving a statement about cash and cash flow breakeven. And we’ll manage the business to make sure that happens. But it’s probably too early for us to talk about that but I certainly feel very confident in the pipeline of titles in Q4.

If I look at the Q4 release slate, we have five titles being released. Three of them are big franchise extensions, two of those three will be online-only games, leveraging all of the games as a service and one other being a new games as a service title as well. So I think we’re more encouraged by all of the work that Matt has done, having greenlit some of these titles when he started, having them being fully GaaS games as well coming up in the fourth quarter. And these are being -- these are franchise extensions and sequels of titles that we have 20, 30 and 40 million downloads in user base out there.

Niccolo de Masi

So the only thing I can add to that, Sean, is that we prioritize, as I said in my prepared remarks, making sure that all of the new stuff that [Matt Remlat] was as good as could be and we prioritize all of the best and brightest we got working on the new titles. Now we always believe this year that our Q4 titles would be the strongest fact of the year. And we continue to believe that.

The Q3 movement of three titles, marketing launch from effectively the summer to sort of fall, hurts us in Q3, undoubtedly is disappointing in Q3. However, if you move things to the right, obviously it is probably neutral depositor for 2014. Matt’s comment on it being a mixture of continued improvements as well as the improvements taking longer, we believe is a one-off impact in short.

So our overall optimism for the business is as high as its been with the sort of bump in Q3 being a bumper but fundamentally what we look at stuff it’s been greenlit further are father -- further into Matt’s tenure here. The product quality is continuing to ratchet it up. So when we reference things like the next contract killer title for next year and exciting titles for Q2 next year, I mean those are going to be improvement on what we see -- we believe those are the improvements on what we’re shipping in Q4 ‘13 and on and on every six months and every product cycle.

Sean McGowan - Needham & Company

Okay. Thank you.

Niccolo de Masi

Thanks Sean.

Operator

Your next question is from the line of Michael Graham with Canaccord.

Michael Graham - Canaccord

Hey guys. Thanks. Just two questions, one is you had a good quarter in Q2 relative to your guidance on release slate that was sort of less than we expected. What was strong in the quarter that helped you -- kind of do better than your guidance just a little color on that?

And then is kind of related to the previous question, just thinking back to the Analyst Day and just trying to get a handle on how confident you are now that you actually hit your launch schedule?

It seems like we’ve had fewer launches sort of at the tailend of this quarter than you guys thought. And I know going back in retooling but it just raises the question like as move forward. How super confident that you’re going to sort of have the games where they need to be to get them out on this new schedule? Thanks.

Chris Akhavan

Sure, Michael. I will take the first half and I’m sure Niccolo or others may want to chime in here. In regards to the Q2 what went well in Q2 probably the biggest title and update that I would highlight the Frontline Commando or D-Day when we had the monster update and that title did extremely well and had some -- I believe it was our second best quarter of revenue of any title ever from Frontline Commando D-Day.

So I think that was probably the biggest underpinning and that really I think is a lighthouse for things that come in the third quarter of EW issue, we’ve got a big update and Heroes of Destiny we’ve got a big update. So I think those were kind of point number one.

And then I would say kind of talking about the Analyst Day and I’m sure Niccolo or Matt would want me to chime in here as well. But when I look at the fourth quarter so things that happen to us here is we thought we’d have some low hanging fruit coming into the air and titles that were in production that did not come to realization. I don’t think there’s any more of that that we envisioned coming other than some titles and big updates.

Secondly, we have titles that we’ve continued to push to get more refinement. And when you look at the titles coming out in the fourth quarter, we’ve got a history of always hitting our fourth quarter titles as given the holiday, the timeline to submit before the holiday as well as three of the five titles launching between now and the holidays are franchise extension.

So we’ve usually done a much better job of franchise extensions that we’ve usually done a great job of hitting those windows. Then the question would then be, are data writing ample to improvements in modernization retention, I’m probably not the best person to answer that.

But I think Niccolo or Matt chime in there. Then lastly will be third party publishing. I would say that third party publishing we just launched our first title in July and we were probably over optimistic in what we could accomplish early on. But Chris has mentioned we’ll have six titles that will be live. So I think of the $3.5 million of gross revenue for the back half of the year from third party publishing I think we feel pretty good that we will have enough revenue from the six various titles to hit those numbers.

So, I think that’s the -- maybe Matt, if you want to chime in a little bit about the amplitude of retention and modernization in those four quarter titles.

Matt Ricchetti

Yeah. What I would say there -- I mean, I think Eric answered the question very well. And historically the holiday season is a big time for mobile and we’ve always launched a pretty heavy slate around that time. So we’re confident that given our experience handling that time of the year and multiple titles in the past that we’ll do the same this year.

In terms of amplitude, you know I try to speak in my remarks about the introduction of Glu on which I think is the single biggest event definitely for me since I’ve been at Glu in terms of impacting both the retention I spoke in the last earning call about the relationship with retention monetization.

Those two things go hand in hand, having the soulful features that require that sort of attack coming on board and the games allows us to sort of keep people engaged in a much deeper way and keep them more kind of interacting with the game in a regular basis which again means pain at a more frequent click too. So, I’m super excited about the fourth quarter from an ample’s perspective.

Niccolo de Masi

So, fourth quarter titles have had a very full development period in cycle and nice tenure for the whole cycle, I think is important. But Michael I think just sort of most important thing to take away from this call as regard to Q4 and onwards is kind of shape of momentum for Glu. So, Q3 is a rough period but let’s remember its rough relative to approximate flatness with Q2. And Q2, we came in at the top end of guidance, a little over it in fact on the back of no new titles.

Q3, the guidance is effectively flattish with one title out, which has been performed as forecast on with my friends. Thereafter, you’ve got a wonderful ramp of four incredibly strong titles in Q4, which are launching by the way fully late in the quarter, because they tend to go live in the few weeks before Christmas, not early in the quarter. That ultimately means you’re going to have a strong Q1 2014. And we mentioned in my prepared remarks that we’re bullish on Q2 2014 titles as well.

So, there are sort of three strong quarters here. And we expect to see substantially elevated performance to what we’ve seen over the last couple quarters. And we hope that we will be seeing performance with an elevated level, which we have historically been unable to achieve in my tenure.

Michael Graham - Canaccord

Okay. Thanks a lot guys.

Niccolo de Masi

Thank, Mike.

Operator

Your next question comes from the line of Mike Olson with Piper Jaffray.

Mike Olson - Piper Jaffray

Hey, good afternoon. I just had a question related to the online gambling business and Zynga kind of stepping away there domestically. How are you guys dealing about that decision, does it impact at all how you plan and think about your initiatives there. And just in general how you’re feeling about general initiatives for the domestic business for online gambling? Thanks.

Niccolo de Masi

So we were obviously early to investigate this opportunity starting kind of mid-last year with a partnership in the U.K. We put our toe in the water. We also added a new board member and loan avenue had extensive gambling expertise in a couple of public companies, including CryptoLogic and FUN Technologies.

And our board has come to the view along with our management team that there is certainly likely to be more opportunity in the skill gaming -- than the game for chance real money space in the U.S. in the next 12 or 18 months.

We are not about to embark upon our process of getting our own, gambling licensee. So we came to the same conclusion as Zynga did, albeit it earlier. We have been early in the -later with regards to skill gaming. We have Deer Hunter re-loaded Amazon with an opportunity to play games, turning games effectively, eternally games effective for cash.

And we’ll keep a watchful eye on what the regulatory response is on a state-by-state basis to that particularly with regards to the attitudes of the store find orders Apple, Google, Amazon, Microsoft may each come to their own policies about that. Both nationally and by state and we were sort of planning to the pump to step into the breach on that revenue opportunity as we have seen inflection point.

But at the moment, we don’t -- we do not see one and we’re resources revenues and resources accordingly.

Mike Olson - Piper Jaffray

Okay. Thanks very much.

Operator

(Operator Instructions) Your next question comes from the line of Darren Aftahi with Northland Capital.

Unidentified Analyst

Hi. This is [Akash] for Darren. How much of the $5 million decrease in your projected cash balance for the end of the year is due to increased CapEx and how much due to operations?

Eric Ludwig

Yeah. So about $1 million was incrementally on CapEx due to the additional bill about of two facilities or two new leases here in San Francisco and Kirkland and the balance was from operating cash flow -- operating cash usage.

Unidentified Analyst

All right. Thank you.

Operator

Your next question comes from the line of John Taylor with Arcadia.

John Taylor - Arcadia

Hi. I’ve got a couple of questions, if I may. Matt, I want to go over Glu on a little bit, I guess. And I don’t know how to -- how you’re going to sort of look at this. But I assume you’re going to get a couple of benefits from this, one is a lower cost of customer acquisition and second is greater monetization and retention and so on.

So as you look at a sort of our pre-Glu on game and our post-Glu on game. Is there any way to allocate the additional operating potential or lifetime value or operating income per user. However, you want to do it. Allocate that between a lower cost to get them in the door? And second to maximizing what you can make of off that relationship. Is there any way to talk about that?

Niccolo de Masi

Yeah. I’ll let Chris speak to the User Acquisition component of that question. But on the monetization side, I guess, it depends what you mean by allocate. I think the key takeaway is that the, kind of, what I was saying before is that once you got playing the game, you have a much less finite game experience because you’re bringing people back for hang out with their friends, play against each other, compete in live tournaments, live events.

So you can get a -- essentially multiple on the user life time in terms of days, weeks, months and that can translate into any kind of corresponding level of monetization increase on top of that?

Chris Akhavan

And on the User Acquisition side, this is Chris. The primary benefit to what we want to build into our games is the social functionality which what will that -- will really do is drive virality in our titles and there is a viral coefficient we watch called the K factor which tells us for every user we bring into a game, how many users is that user going to bring in through their social network. Our current titles don’t have much of a social graph experience in them. So we do think they are going to be User Acquisition efficiencies driven through Gluon.

John Taylor - Arcadia

Yeah. I guess, the easy way of to sort of -- the easy answer I’m looking for is that, we think our cost of customer acquisition is going to go down on average by 23%. Yeah, I’m making this up obviously for our sales and marketing as a percent of revenue is going go you know, drop five points and our average revenue per user is going to go up by 25%. Is there anything you know with real numbers on it or ranges in numbers that might get at that way?

Eric Ludwig

Yeah. I mean, John this is Eric. Let me kind of abstract it back for a moment here. Historically as we’ve talked about our [Nazism] for the last three years. Virtually all of our games have been either single player games or single player with light, very light social activity of posting to Facebook or the Twitter or having maybe a Leaderboard.

And with that came a certain life time value and our totalness and value that was almost always under $1 of lifetime value for an average customer and invariably as well, the whales that we had were not whales, they were small fish because we just did not have big LTVs et cetera. A lot of our competitors that came from online Facebook gaming in the mobile, they have the entire backend technology to allow for real time gaming, et cetera and that is what we are building with GluOn.

We bought GameSpy a year ago. That was one of the components to GluOn. We’ve had other four raise internally and GluOn really is that package of assets that we’ve built in and pull together that we are now exposing to our internal studio teams that Matt runs. So they can plug into this network.

So I think kind of at the highest level, we’ve been at sub $1 LTVs. The markets got a lot higher LTV than that for games that are very -- that have revenge mechanics and breaking rights and leader boards, et cetera. So that’s kind of what we are playing for but it’s hard to put a specific number on a future title but that’s kind of the highest level apps store.

John Taylor - Arcadia

Okay. Great. That’s helpful. And then let me ask another one if I can. With the new emphasis in the marketing focus on Asia, what do you think you can get Asia as a percent of total revenue up to or do you think its going to, sort of, keep pace with what’s going on here in western market as you do migrate to GluOn and so on?

Eric Ludwig.

So I think we’re currently seeing about 33%, is that right, about business coming from Asia. I think we can safely assume that in 2014 growing that somewhere around 40% given the growth in key markets like China.

In Japan, we’ve fairly touched that market. Our games have not done well historically. Now that we actually have someone dedicated there executing as an effective marketing strategies, Niccolo mentioned. So let me take my friend actually made it to top three in Japan. We expect good growth opportunity there and likewise in Korea as well.

Niccolo de Masi

So to be clear, on all your questions there, the two I would sort of emphasize, we are playing for big numbers, not 10% improvements in life time value but closer to factors of five, right. Similarly in Japan, the one I sort of mince words here, we’ve made virtually no money in Japan in the last 10 years at Glu. And obviously some of the biggest companies in our space like Gung Ho Games et cetera D&A generate hundreds of million of dollars individually just from Japan.

So the potential of both in lifetime value factor and on things like Japan and Korea could add doubling factors of two to Glu overall revenue in the coming years. That’s certainly we see the sort of cap is. The floor obviously will come down to execution but we see these as both potential game changers in the next 18 months.

John Taylor - Arcadia

Okay. Cool. And last question, what’s your current headcount?

Niccolo de Masi

515 John.

John Taylor - Arcadia

Okay. Great. Thank you.

Niccolo de Masi

Next.

Operator

(Operator instructions) Your next question comes from the line of Mike Hickey, The Benchmark Company.

Mike Hickey - The Benchmark Company

Hey guys. Thanks for taking my questions. It looks like Facebook here is kind of positioning themselves as a mobile games publisher and the kind of shortlist of games we are experimenting with, I’m just curious as to how you feel that will impact your business positive or negative?

Matt Ricchetti

So we’ve actually significantly expanded our use of the Facebook platform for paid User Acquisition. That’s been definitely a positive movement for our business and we expect to continue to work closely with Facebook. We’ve seen great results and quality from that channel. So I think overall net effect of Facebook is definitely positive for us.

Niccolo de Masi

So it’s not so much a publisher of the channel, Mike, is the way to sort of think about it. So just like in the early days of online Facebook gaming, there are tremendous User Acquisition and reality mechanisms that can be tapped into. And that really has yet to be exploited fully on mobile.

So as with all new things, we’re early. And where we see opportunity, we will double down and continue to invest. So far, so good, though, on Facebook Mobile.

Mike Hickey - The Benchmark Company

Okay. Thanks, Niccolo. And last question. You know there is some sort of kind of near-term compelling, this is my view. Technology trends are looking to create kind of a seamless link between mobile and TV. Google has come out with Chromecast and it looks like there is considerable demand for the product. And Apple has had AirPlay now for a while. But can you talk about the market for your games on mobile played through TV? How you think that market will take shape over the next couple of years?

Niccolo de Masi

Probably, slowly but the reality is what we’re excited about here is the opportunity to obviously take gamers who aren’t traditionally console guys but have played on mobile devices and migrate them and stay with them ultimately to potentially bigger revenue opportunities and bigger lifetime value numbers long-term.

So as you’ve probably heard me say in previous call, we believe the winning game platform companies long-term are going to be the biggest technology companies in the world. So it’s going to be the Apples and Googles and Microsofts that likely dominate living room experiences , laptop, tablet, phone experiences.

So we have been early to mobile and a mobile game for 12 years. Mobile is probably going to become the most important place to be successful long-term for video gaming because of the tremendous reach and the relatively low hardware cost. So devices are becoming faster and more powerful there and cheaper at a rate that trumps everything else, that is going to stuck in, in audience and gamers that could never afford console or even a PC.

And that’s one of the reasons why we focus so heavily on Asia emerging markets et cetera, because we see a lot of leverage there from what we’ve done well in developed nations been able to be that first effectively PC in your pocket or first living room device in your pocket, that’s going to be a phone and that’s going to be a tablet only for some people.

Matt Ricchetti

But it was very much acquired screen play here in the long term. It’s just that we think that the right way to approach that is actually from mobile devices to living room as appose to from console device to living room.

Mike Hickey - The Benchmark Company

Thanks guys.

Niccolo de Masi

Thanks, Michael.

Operator

Your next question comes from the line of Eric Wold, B. Riley.

Eric Wold - B. Riley

Good afternoon. I have a question on your thoughts around kind of development teams and kind of development cycles. I know last year we do kind of last three fresh. You kind of length and development cycle of gains to have them more ready before a launch kind of fast forward to now with kind of given the tweaks, more the tweaks needed after games out and maybe, where hands on some of these third party games you get them ready for western launches.

Is that development cycle lengthening further and with that in mind if it is, do you have right number of teams in place now or if you want to do it in terms of teams, just number of people in place now to kind of think about where you need to be for next year?

Matt Ricchetti

Yeah. Thanks. That’s a good question. This is Matt. So I think the challenge there right is that we got a maturing market that’s expecting kind of ever increasing level of fidelity in game play, more features, all that stuff which tend to add up to longer development times, right.

And then, on -- I think the opportunity as we see it is that, we have a very diversified portfolio of gains and also diversified number of development teams in different locations around the world. So we actually have the ability to basically not have, kind of, a single strategy across the company about how we approach that question. We can have some gains at our -- kind of, on a shorter cycle, some of it on a longer.

And then, I think, kind of, the other angle on that question is, as you look into games that become services, right. We’re already seeing with Frontline Commando: D-Day game, it was a big hit for us in Q1 -- towards the end of Q1. That game is still getting a lot of attention on updates because it’s well worth it for us from a revenue perspective and a dev cost perspective to do that.

So the other, kind of, tuning factor, I would call it, on that question is, looking at how games are actually performing. So the answer isn’t, sort of, any one thing, it’s about being very fluid and being able to respond to, hey, a game is super successful. We’re going to continue to develop it and add to it and grow it, versus a game that is less successful. We want to do something else. But I think the bottom line for me and one of the reasons I came to Glu is that we have the, kind of, portfolio and the spread of development offices that allow us to have that fluidity.

Eric Ludwig

Yeah. And Eric, this is Eric. Just to help kind of, bridge the internal studio side conversation that Matt just had with the analyst modeling, I look at things in three buckets. First is, we’ve got internal studio teams and we’ve got third-party publishing teams.

Within internal studio, under Matt’s realm, you’ve got titles that are big ticket titles and then you’ve got titles that will leverage other -- a game engine. So we have shorter whole titles that can be a reuse of the game engine and then you’ve got the bigger titles that Matt talked a lot about.

And then thirdly, is that third-party publishing and there we have a very small less than two handful as a people internally. And this is a group that just started in January, launched their first title in July, launching the second title just this past week as well. We’ll launched six titles by year-end. So really answer to that question, we’re getting more shots on goal with the small team and third-party publishing with less margin, obviously but with less OpEx.

And then really the first party publishing is -- first party studio teams are either the big, big ticket titles or the engine. So then lastly, from my cost perspective, we do not anticipate hiring more heads in 2014. I think we’ve got all the heads we need. Once we get through a bit of hiring at the end of Q3. And we’ve got the OpEx and the headcount that we need to execute that strategy.

Eric Wold - B. Riley

Okay. So as you make it understand that you said you expect the higher more through year end this year but not more next year?

Eric Ludwig

No. I’ve said in my prepared remarks that we’re going to add a little bit of OpEx in Q3 for some headcount on monetization. And then pretty much slowing down the hiring rate in R&D from that level.

Eric Wold - B. Riley

Okay. Perfect. Thanks, Eric. Thanks guys.

Operator

Your next question comes from the line of Adam Krejcik with Eilers Research.

Adam Krejcik - Eilers Research

Yeah. Hi, there guys. Thanks for taking my question. Just one on kind of bigger picture strategy, if we look at the mobile market right now, one of the top publishers are dependent or really have released only a handful of game. Have you guys given much thought or strategy to kind of adjusting your release later over the next few years to really just focus all of your resources on a very few number of first party titles and kind of making sure that those are of the highest quality and really put in a lot of marketing and dollar behind that versus I guess the current strategy of quite a few more titles. Thanks?

Niccolo de Masi

So I’ve already made a couple of comments in the past was on the math. I think it’s an important to be careful when we sort of picking shoes successes and sort of the 20-20 hindsight we’re been here, right. So that’s the most successful gaming company over the place right now is Gung-Ho who happens to be a business that’s public on the stocker exchange, looked exactly like Glu 12 months ago has 500 people, has lots of teens. They even make games for consoles or mobile.

The people that build puzzle and Dragon were a small group of probably 12 to 15 individuals that produce a game that is now making allegedly $100 million plus a month. That company itself was surprised by that achievement as is the entire market because they apparently have something like close to a 50% market share right now on things like the Google play store in Japan.

So you have that enormous success in the world which is coming from a company where the portfolio approach is very similar to Glu’s. Your other company is like Supercell or Rovio who are really focused on one or two teams and have gotten early successes and then built an entire company around it. There are other firms that are probably -- that are still private looking to come public, that similarly have built an entire company around one early success.

Now Glu has always been a business because of our legacy or history that never approached this with a public market cost base of being a sort of one hit wonder. We wanted to be a diversified portfolio that we can increase batting average and increase lifetime value of each title and increase effectively lifetime value of the company.

Now, as I have said on almost every call, success for us long term looks like never having to launch a new title because every team has such a big success they are constantly feeling it. You have 12 Frontline Commando: D-Day, the company’s revenues will be much larger than today’s and we will be very profitable and a very different of the business which is maintaining and protecting as opposed to effectively hunting.

Right now, we’ve had 2013 as a sort of transitional products year, whereby has green-lit new titles that we believe will all have on average higher lifetime values for Q4 2013 onwards. The rate at which we find should sustained game as a service hit, obviously we are making assumptions around that rate for our guidance. But we have every hope that we will be able to exceed the rate at which we get sustained successes.

So long term, we believe is absolutely undoubted that the games industry and the large companies in game space will have a mixture of big hits or sustained and a portion of the company hunting. Ultimately, we want that proportion to be as high as possible. But I don’t think that our approach to producing games could move any faster along the quantity to quality curve without fundamentally endangering the variety and the number of shops we are taking right now.

Adam Krejcik - Eilers Research

Great. I appreciate the details there.

Matt Ricchetti

The only thing I would add to that is kind of going back what Eric said it’s very much a layer cake approach so that we can do everything we can to create the kind of stability across the portfolio on development teams that we need to go out and hunt for those big hits but then still have third party games coming out that are kind of lower margin but more reliable.

We have franchises that Eric also mentioned, which we have a lot of coming on in Q4. So games that are kind of more known quantities, we have an easier time kind of forecasting what they are going to do. And then we have kind of the big hits and the new engines and new IP.

So -- and the last thing I was going to add to all that is Glu on by building essential tech platform for the gas features, we’re also saving a lot of development cost that we might otherwise kind of apportion out to each of our studios to do on their own. So all those things together make me very confident and excited about kind of having the room we need to hunt to get those hits.

Niccolo de Masi

So Adam, we have a constant of course decision point at every milestone of the title as to whether or not we keep going and we kill it. And I think there are companies that certainly take a very aggressive approach to building themselves around one hit and killing everything else in development that doesn’t look as good as that one hit. Partially it might be pride, partially because it’s sort of a return threshold but you end up not with better returns in the current approach we have which is often to let teams that get three quarters through finish and put it out.

If I told you we are going to ship four games this year instead of 14, we might not have revenue that’s dramatically less than what we have now, by virtue of what you are seeing around hits, sustained hits and continued refinement time. But I would of course, make it appear that we only produce games that are ace, are very successful and we just don’t look the rest of them see the light of day.

We are getting better at that but we think that having a volume of teams rather than just one or three still every year obviously increases your odds as well as increases efficiencies in the development process. And to Matt’s point, GaaS and Glu on knew for Glu this year, we want all of our studio teams to learn to use Glu on and build fully online game this year, because we believe that the chances of increasing life time value across all teams are very, very high.

One of the highest probability product strategies you can have is to move from where we were a year ago to where we’re going to be from October this year, which is everything is basically online or nearly fully online. Everything has a better chance of social monetization mechanism that will improve how long people are in the game and how much they pay. The exact amount will do that, will vary per title but systematically we’re very confident of our strategy.

Adam Krejcik - Eilers Research

Thanks.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for closing remarks.

Niccolo de Masi

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

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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