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Glu Mobile, Inc. (NASDAQ:GLUU)

Q4 2009 Earnings Call

February 10, 2010; 4:30 pm ET

Executives

Niccolo De Masi - Chief Executive Officer

Eric Ludwig, - Chief Financial Officer

Seth Potter - ICR - Investor Relations

Analysts

Tavis Mccourt - Morgan Keegan

Steven Koffler - Cambria Capital

Justin Patterson - Morgan Keegan

Operator

Good afternoon. My name is [Andralia] and I will be your conference operator today. At this time, I would like to welcome everyone to Glu Mobile’s fourth quarter and financial year 2009 year end 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)

Mr. Potter, you may begin your conference.

Seth Potter

Thank you. Good afternoon, everyone and thank you for joining us on the Glu Mobile fourth quarter 2009 financial results conference call. This is Seth Potter from ICR. On the call today, we have the CEO, Niccolo De Masi, and the CFO, Eric Ludwig.

During this call, we will make forward-looking statements regarding future events and 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 result to differ materially from those in the forward-looking statements.

We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and in this conference call. These risk factors are described in our press release and are more fully detailed under the caption "Risk Factors’’ in the Form 10-K filed with the SEC on November 9, 2009.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude acquired in-process, research and development, amortization of intangibles, stock-based compensation charges, gain on impairment of option rate securities, restructuring charges, the non-equity component of the MIG earn out, our 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, or a substitute for, or superior to our GAAP results and we encourage investors to consider all measures before taking an investment decision. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures in a quantitative reconciliation of those figures, please refer to today’s press release regarding our fourth quarter results. The press release has also been furnished with the SEC as part of our Form 8-K.

In addition, please note that the date of this conference call is February 10, 2010 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 expressed information of Glu is strictly prohibited.

With that, I will turn the call to the company. Niccolo.

Niccolo De Masi

Thank you, Seth. We’ll thank everyone who joining us today. It has been just over a month since I joined Glu, and I spent much of my time performing the global review of our business. Although this review continues, I wanted to share my initial working view and where we are as an industry in business, and where’s the opportunities to drive sustainable long term value entering organization dispositioned us a digital gaming leader.

Consumers at large and particularly the most digital savvy users are upgrading their mobile handsets at accelerating rates to take advantage of bigger screens and touch capabilities. Faster processor has more storage and other enhanced functionality. The good news for our mobile gaming industry as a whole is that consumers are accessing significantly more data and content with these new devices. Further doing so through a wider variety of storefronts then solely the career vending Glu grew up on.

I expect over the next few years, the amount consumer spend on mobile device gaming, will go quite strong into totality. Over this growth, we’ll be capture through a mixer of career store fronts such as Verizon, V CAST Apps, OEM store fronts such as iPhone, Nokia’s Ovi and Palm and OS store front such as Android and Windows Mobile.

A believe fragmentation of foreign factor store front in operating systems, this year to stay as a future of smartphone landscape. For the simple reason, consumers demand differentiation in the devices, which are both objects of utility and fashion. Now our fragmentation here’s to stay with dominant operating systems a OEMs tomorrow will not be a same as they were a couple years ago.

We Glu are competing this in build around delivering high quality gaming experience since for the mass markets through the world gardens of carriers. This is result in a company developing games for sanction is market, which now either on profitable or becoming unprofitable as consumers transition, and operating systems that are declining rather than growing such as Java.

As this day, we are operating with the new lines of profitability in ROI for all of our operations. For platform since fortunes are declining all activities, which we do not believe generate positive operating cash flow or being ceased. In prior periods, we did not focus as aggressively as we could have on the winning platforms of tomorrow.

The corollary to our elimination of unprofitable business lines, that this year we are targeting a doubling the studio capacity dedicated towards smartphone platforms. We believe in the long term significance of carrier, OEM and OS store fronts and then we have the relationships in infrastructure to maximize the discovery in revenue opportunities they will provide.

On the product front, I’m believer in playing product where it’s going as opposed to where it was six months ago or even as today. To this end, I believe our future lies in fewer and larger persistence the gaming experiences, which were both, capture the imaginations of consumers as well as allows to bill growing and direct relationships with our audience.

Doing so with predominately our own IP will significantly enhance long term value margins as well as reduce shorter term cash outflows, guarantees, other constraints from licenses. We have a talent in studio, as well as a scale in infrastructure to complete this transition successfully.

In order to enhance our trajectory, we’re working to augment our product, team and function by adding strong personnel with expertise in Persistent State Gaming, Social Gaming and Analytics. The core confidence in focus on customer relationship management will be integral part of our organization by the middle of the year.

We are clear and how we must continue to evolve aggressively in order to leading online smartphone gaming services. We’ve begun preproduction of the past months a number of titles the intersection of social and massively multiplayer online style gaming for smartphones. This intersection more hard core than trundle, get more casual than world at war craft plays to our strength of the high quality casual gaming company. I’m confident, these titles will be very will received from at least in second half of this year.

What we’d now our expectation significant revenues in the first half of the year from our introductory for rays into gaming on Facebook. We are integrating social gaming techniques and Facebook connect into all of our upcoming innovative smartphone offerings.

Our focus on Facebook during the first half of 2010 will be on strengthening our team and beginning to gain confidence and our ability to grow audience. Actually, substantial opportunities with premium business models on smartphones and also intend to exposure an ultimate refine of variety of advertising monetization techniques. Increasingly significant proportion of our smartphone revenues are coming from micro transactions.

A combination of quality original license content along with the better understanding of how do more effectively market gains in smartphone App stores, as well as to grow smartphone revenues by 98% between Q3 and Q4 of 2009, that’s also worth noting that we’ve had over 20 million total downwards in the iPhone store to-date. The foundations are clearly in place for us to build on this momentum.

Now some level setting, we certainly approach all of our challenges with urgency and clarity. Here I must make it clear that our transition towards products and platforms of tomorrow will take time. During this transition, we are committed as a business to remaining cash flow neutral from operations. As well as aggressively growing our revenues from smartphones each quarter.

We’re also extremely focused to ensure, there were no further cash concerns for our company. We’ve plenty of options on this front, all of which are being aggressively work through and considered in depth. As part of our efforts to optimized cash flows, yesterday we enacted a global restructuring, we’ve today announcing the initial charge related to our intention to significantly reduce global run rate OpEx by Q4 of this year.

Today, we also begin greatest signals closures to all our shareholders to better understand the progress we have made and look to accelerate going forwards and capturing rapid smartphone revenue growth. Fourth quarter 2009 revenues of $19.1 million, were slowly below our expectations, primarily due to a faster than expected deceleration of our Java and feature phone business, as our market accelerate to transition towards smartphones.

Although, smartphone market is growing, the replacement cycle is not fully active as many carriers have yet to enable one quick carrier billing for OEM store funds. While as we continues to be increasingly better than amounts carrier throughout 2010, personally the decline of feature phone business is not being fully offset by the growth of smartphone revenues.

Revenue related smartphones increased to $1.74 million in the fourth quarter of 2009 from $0.88 million in the third quarter of 2009; and from $0.39 million of the same period in 2008. We expect this trend to continue, especially as carriers implement their smartphone strategies in the coming quarter.

In addition, we achieved a non-GAAP operating profit excluding royalty impairments of $1.5 million and generated approximately $200,000 of positive cash flow from operations to end the year with $10.5 million in cash and equivalents.

Our ability to exceed our non-GAAP profitability guidance with primarily due to Glu focus on cost controls, as core operating expenses during this fourth quarter 2009 declined by over $1 million to $12.6 million compared to the third quarter of 2009. We should be continuing our efficiency drive over the coming quarters.

My experience on mobile content industry has permitted me to hit the ground running, which I believe will allow me to continue to move quickly in driving our transition. That being said, I anticipate continuing my initial review of the business for another 60 days. We’re now entering a very significant transitional period for our business. Until we have a greater clarity on the metrics and traction of our new platforms and products, we believe a most constructive to provide quarterly guidance, which we shall detail today for Q1, 2010.

Throughout this period of transition, we’re committed to remain operating cash flow neutral and rapidly accelerating our early success on smartphone platforms. With operations around the world, Glu’s organization is currently still a complex. We’ll be simplifying as we simultaneously continue to drive, further focusing clarity in our product strategy and overarching objectives.

Delivering titles that will capture consumers’ imaginations and building the growing direct relationship with our users. I’m excited about our future encouraged by what I’ve seen and we’ve achieved so far this past month.

I shall now turn it to Eric, who’ll provide you with more details on our Q4 results and first quarter 2010 guidance.

Eric Ludwig

Great, thank you Niccolo. Let me first review our fourth quarter and year end results and I’ll go through our outlook. Starting with our fourth quarter income statement, total revenue for the quarter was $19.1 million, which was slightly below our guidance range of $19.5 million to $20 million and down compared to $19.6 million during the third quarter 2009 and $21.6 million in the year ago quarter.

The lower than expected revenues as compared to the guidance was attributable to a faster than expected deceleration in the feature phone business, particularly, in the Americas and EMEA as a market conditions transition to smartphones. Despite our strong title whereas during the fourth quarter the slowdown of feature phone related revenue more than offset the growth of smartphone revenue.

Niccolo spoke off the transition of consumers from feature phone games to smartphone games and this transition was certainly evident to us in quarter-to-quarter revenue decline of $592,000 despite an $860,000 increase in smartphone revenues. In 2010, we will shift our focus of our investment dollars away from the lower tiered handsets and increase of our studio reporting capacity on the growing smartphone markets.

We anticipate that every dollar of loss feature phone revenue will not be fully recouped in the short term on the growth in the smartphone platforms however we are focused on profitable growth and in certain cost in the declining markets and customers. To increase the transparency into this mix shift, starting this quarter we will be providing revenue breakdown between smartphones and feature phones. In Q4 2009, our smartphone revenues were $1,740,000 million and grew 98% over the third quarter of 2009 and 350% over the fourth quarter of 2008.

The growth was primarily due to the continued strength of the iPhone and successful titles such as Deer Hunter. For purpose of this calculation, we defined smartphone revenue as the revenue from title sold on Android, Windows Mobile, BlackBerry, iPhone and Palm. So these are the specific revenue metrics, our top ten titles represented 32% of revenue down from 39% in the prior quarter and up from 31% during the same quarter last year.

The average revenue for top ten titles was $610,000 in the fourth quarter of 2009 down from $766,000 in the third quarter of 2009 and $664,000 during the same period last year. Our largest title was 5% of revenue, which is down from 6% last quarter are in flat to the same period last year.

Revenue from new titles represented 40% of revenue in the fourth quarter of 2009, down from 64% of revenue in the third quarter and down compared to 44% in the same period last year. The mix of revenue between license, titles and original IP, it was down to 22% in the fourth quarter of 2009 from 23% last quarter and up from 21% during the fourth quarter of last year. This was inline with expectation.

Our top four carriers represented approximately 41% of revenue in the fourth quarter of 2009, compared to 42% in the third quarter and 43% in the fourth quarter of last year. We had one carrier in the fourth quarter of 2009 that represented 10% of more revenue, Verizon at 20%. By geography, our revenue mix from the fourth quarter was 51% in North America, 25% in EMEA, and 24% in rest of world.

Royalties in the current quarter were $10.5 million, which represented a 55% of revenue increased, compared to 30% from the third quarter of 2009 and 47% during the same period last year. Royalties during the fourth quarter included an impairment of $5.5 million. The non-cash royalty impairment we realize in the fourth quarter related to a numerous properties that we’re primarily focused on the EMEA region as well as several global properties.

The primary genres impaired were titles based on movie properties as well as certain casual titles. It should be noted the underlying licenses has being impaired generally the contract signed two to three years ago and with a continue decrease in the feature phone revenues in our specific focus on making regions at EMEA profitable. We were expecting the revenues from these properties underperformed versus our prior forecast.

One final point to note, although our royalty impairment signals at a specific licenses original forecast were underperformed. It is not necessarily mean that we do not generate positive cash flows in our property. Excluding the impairment, royalties would have been 26.5% of revenue during the quarter.

Turning to profitability, we’ll be providing non-GAAP measures for each fourth quarter expenses category and full reconciliation GAAP to non-GAAP financial measures will include in the press release we issued today. Non-GAAP gross margin was 44.7% in the fourth quarter of 2009, which is down from 70.4% during the third quarter of 2009.

The sequential decrease in gross margin was primarily due to an increase in royalty impairments from $513,000 in Q3, 2009 to $5.5 million in Q4 2009 and excluding the $5.5 million non-cash royalty impairment, non-GAAP gross margin would have been 73.5% during the fourth quarter, compared to a Q3, 2009 figure of 73%, excluding the royalty impairment in that quarter.

Total non-GAAP operating expenses in the fourth quarter of 2009 were $12.6 million down from $13.5 million during the third quarter of 2009 and down 15% from $14.9 million due to the same period last year.

On a quarter-over-quarter and year-over-year basis, the majority of the decrease in operating expenses was primarily due to our continuing efforts to find additional operational efficiencies in our business. It should be noted, that included in the fourth quarter operating expenses is a 330,000 contra expenses related to the final resolution of facilities restoration cost for an acquired U.K. lease.

During the fourth quarter, our expenses level determined on a non-GAAP basis were as follows. R&D $6.1 million or 32% of revenue down from 33% last quarter, sales and marketing expense was $3.1 million or 16% of revenue, down from 17% last quarter and G&A was $3.4 million or 18% of revenue for the quarter down from 19% last quarter.

Our non-GAAP loss from operations for the fourth quarter was $4.1 million, compared to our guidance from a profit of $600,000 to $1 million. It should be noted that the operating income was negatively impacted by the $5.5 million non-cash royalty impairment and excluding the impairment, non-operating income would have been $1.4 million and represented a non-GAAP operating margin of 7.2%, which would have exceeded expectations.

Income tax during the quarter was comprised of tax benefit of $747,000 and $200,000 expenses for withholding taxes, for a net income benefit of 346,000. During the fourth quarter, our non-GAAP net loss was $4 million or loss of $0.13 per basis share, which includes $0.18 per basic share relating to the $5.5 million non-cash royalty impairment. Excluding the non-cash royalty impairment, non-GAAP net income would have been $1.5 million or $0.05 per diluted share, which would have above our guidance.

Turning to our results on a GAAP basis, which include $1.5 million related to the amortization of tangibles, $724,000 related to the allocation of stock based compensation, a $441,000 restructuring charge and $216,000 foreign exchange loss, the following expense levels determined in accordance of GAAP, cost of revenue $11.9 million, R&D $6.3 million, sales and marketing $3.2 million, and G&A $3.9 million.

The restructuring charge, we recorded this quarter of $444,000 related to severance and separation cost of $90,000 and facilities charges for leases, which we have impaired, but subleasing can just not fully offset the future lease obligations. For the fourth quarter GAAP loss from operations was $6.7 million and net loss applicable to common share was $6.9 million.

Based on 30.3 million basic shares outstanding, net loss applicable to common was just $0.23 per basic share. As I mentioned earlier, reconciliation of GAAP to non-GAAP expenses, income from operations in net loss can be found in our press release and current report on Form 8-K filed with the SEC today.

For the full year, revenues of $79.3 million were slightly below our guidance range of $78.9 million to $80.3 million, primarily due to a fastness currently deceleration in feature phone business in the fourth quarter of 2009.

Non-GAAP operating loss of $1.9 million and a non-GAAP net loss of $5.2 million or $0.18 per basis share was above our guidance excluding the non-cash royalty impairment of $6.6 million for the full year. GAAP net loss was $18.2 million or $0.61 per basic share, excluding the $5.5 million fourth quarter non-cash royalty impairment GAAP net loss would have favorable to our guidance.

Let me now turn to the balance, cash and equivalents were $10.5 million as of December 31, 2009, compared to $9.9 million at the end of the third quarter for a total increase in cash of $649,000. During the fourth quarter of 2009, the company generated approximately $195,000 from operations, which includes $2.4 million in royalty prepayments that we made in the fourth quarter, additional of these $269,000 related to CapEx.

During the fourth quarter, we drew down $573,000 on our line of credit and had a net increase in cash of $123,000 in stock options exercises and we experience a $27,000 gain due to foreign exchange translations on foreign cash accounts. It should also note that for the full year, we generated $1.1 million of positive cash flows from operations despite paying over $12.6 million for license prepayments during 2009.

We also used $838,000 for CapEx purchases, pay down $14 million for former MIG shareholders to around $4.7 million in our line of credit, received proceeds on stock options in ESPP contributions trailing $402,000 and experience FX changes on foreign cash of $23,000. I’m pleased, that we were able to meet our commitment to shareholders backing Q1, 2009, that we would adjust our cost structure regardless of the revenue performance to ensure that we generated positive cash from operations for the full year.

Accounts receivable at the end of the fourth quarter were $16 million, which was flat compared with the third quarter. Let me now discuss additional details relating to our capital structure including our view of obligations in the form of MIG shareholders. During fiscal 2009, we successfully paid our entire fiscal 2009 obligation of $14 million to the former MIG shareholders.

The remaining $11 million of principal and $975,000 of accrued interest is due as well as $2,438,000 of principal and $665,000 of interest due on March 31, 2010, $2.438 million of principal and $150,000 of interests due on June 30, 2010 followed by payments of $3.62 million of principal and $106,000 of interests due on September 30, 2010 and a final payment of $3.62 million of principal and $54,000 of interests due on December 31, 2010.

In addition, at the end of fourth quarter of 2009, we had $4.7 million outstanding on the line of credit with Silicon Valley Bank and we were in compliance with all the financial covenants related to this facility. Today we announced that we successfully amended the bank’s financial covenants, to factor in the restructuring charges incurred in the fourth quarter and currently expect to incur during the fourth quarter 2010.

In the addition the effects in the fashion and expected to deceleration in our feature phone business. The revised amendment changes in covenants goes from a rolling two quarter covenant to a one quarter covenant. Please refer to the Form 8-K filed with SEC today show even, which as the last covenants.

During the fourth quarter of 2010, we achieved EBITDA defined by our lender of $1.5 million and when combined with our third quarter 2009 EBITDA $489,000, we reported $2 million of positive EBITDA for the six months starting July 1, 2009 and ending December 31, 2009. This is comfortable above our covenant of EBITDA of $1 million for the same six months period ending December 31, 2009.

To help you reconcile our fourth quarter GAAP loss of $6.9 million to a fourth quarter EBITDA defined by our lender of $1.5 million. You need to add back $268,000 of interest expense, $564,000 of depreciation expense, $1.5 million of amortization and intangibles, $724,000 of stock based compensation, $5.5 million of royalty impairments, the $216,000 foreign exchange loss and subtract the $346,000 income tax benefit.

I’m pleased our ability generates positive cash flow during the quarter, and plan to continue focusing on cost controls to drive positive cash from operations in company transitions, as business to focus on growing segments in the market.

Turning now to guidance, for the first quarter of 2010, we currently expect revenue to be in the range of $15 million to $15.5 million. This is down sequentially and we flex deceleration of the decline in the feature phone business as the industry transition to smartphones. We expect smartphone segment of the business to grow 6.4% as compared to the fourth quarter, which driven by growth from the iPhone and other platforms.

We announced today that we performed restructuring the business. Our OpEx for the first quarter of 2010 is forecasted to be $13.1 million, which is up slightly from the fourth quarter due to timing of year end audit charges and a minimal impact of savings to the first quarter of restructuring cost. By the end of 2010, we anticipate our quarterly OpEx to decrease 15% from the first quarter 2010 levels.

Non-GAAP operating loss for the first quarter is forecasted to be in a range of a loss up $2 million to a loss of $2.4 million. Our income tax expense for the first quarter is expected to be $787,000 and reflects full with holding taxes of $500,000 and income tax expense of $287,000.

Non-GAAP net loss for the third quarter expected to be between a loss of $3.1 million and a loss of $3.4 million or a loss between $0.10 to $0.11 per basic share, the non-GAAP loss excludes $1.3 million for amortization of intangibles, approximately $600,000 anticipated stock based competition and restructuring charge of $475,000 related to our personal restructuring we enacted yesterday.

Weighted average common shares outstanding for the first quarter 2010 are expected to be approximately $30.6 million basic and $30.9 million diluted. GAAP net loss for the first quarter is expected to be between a loss of $5.4 million and a loss of $5.8 million or a loss between $0.18 and $0.19 per basic share.

As Niccolo mentioned in his prepared remarks, we are now providing guidance for the full calendar year 2010, but we are committed to be in cash flow neutral from operation during 2010. It should be noted that our contractual obligation for license prepayments in 2010 is $5.4 million, which is significantly lower than the $12.6 million we paid in 2009 and this help to support the ability to be cash flow neutral from operations on the lower revenue base including the lower OpEx base.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tavis Mccourt - Morgan Keegan.

Tavis Mccourt - Morgan Keegan

The first question is, in regards for the cash flow neutral for the full year, I presume it would be negative for the first quarter and if someone could give us some kind of sense of how negative is negative? Then the second one, in terms of growing the smartphone business, can you give us some sense of what it’s going to take in terms new titles, I mean historically internal IP generated games has not been in Glu’s strong point. How long it take to change that culture?

Eric Ludwig

Sure, let me answer the first question and probably Niccolo for second component. So, yes, Tavis, you’re correct. We will be burning cash in the first quarter, we’re anticipating ending the first quarter with $6.8 million of cash and that includes after repaying the $3.7 million of the big shareholders in that quarter, so virtually all of the decline is due to the repayment of the MIG shareholders.

Niccolo De Masi

Second question there, in terms of changing culture around original IP, we’ve seen an interesting dynamic starting to sort of raise with regards to the way that better mobile device, gaming platforms as well as more open vending environments are allowing consumers to ultimately enjoy original IP provided is of course engaging and willing to or able to capture peoples imaginations.

There have been relatively few original IP titles that I think would sort of touch the bar in online space of capturing to consumers’ imaginations and your right to ask, how we got denied to do that? How long will it take us to the past threshold, and we of course are aiming to do this in effectively one product cycle.

You’re probably similar that historically a carrier games may take us circa nine months to go from concept out the door. Smartphones are little shorter than that closer to the six month mark, but we are at the same time looking to ultimately address a genre of ease on a statistic state online smartphone games, and so I’d like to give ourselves certainly six to nine months before we have something that we feel is going to be passing that bar.

Operator

Your next question comes from Steven Koffler - Cambria Capital.

Steven Koffler - Cambria Capital

I’d like to explore these royalty impairment charges, I’m not familiar with this and how they relate to smartphones. Can you explain how this works?

Niccolo De Masi

So we’ve impaired $5.5 million of prepaid licenses and these relate typically some EMEA distribution deals regarding moving properties and some global casual titles as well. So these are deals that we signed two to three years ago and prepaid moneys two to three years ago; and with our forecast coming down, the forward forecast not only support the remaining prepaid balances, and so we’re taking impairment charge based on that.

So it’s really less a function of smartphones versus feature phones and just more of these the forward forecast, don’t support the prepayments on the balance sheet and these were non-cash charges, these are all non-cash P&L charges.

Steven Koffler - Cambria Capital

I meant to say, feature phones when I feature posed the question, and I think I understand you to say that, because of the rapid decline of feature phones, these licenses are or the value of these licenses are impaired, is that correct?

Niccolo De Masi

That’s correct and they were predominantly impaired for the EMEA market. So we have done some pretty significant distribution deals two, three years ago focused on the EMEA market. The EMEA markets we’ve seen are pretty rapid declines over the last two years, and then we’re forecasting additional declines in the EMEA market. So this is just to true-up our future forecast for the EMEA market, as well as the restructuring we done effected yesterday also did impact some of our EMEA sales folks and so we have also taking down the forecast from those regions.

Steven Koffler - Cambria Capital

Are you coupling a time are to declines in feature phones in EMEA or is it just more general than that?

Eric Ludwig

I would say it’s more general and I think there is an overarching trend that we’re seeing feature phone revenue going down and a replacement cycle from smartphones is not dollar-for-dollar replacing. So that’s the overarching being for this quarter.

With the impairments in particular it more relates just to the EMEA market in particular and the EMEA market has been slow to rollout smartphone devices due to billing issues and just consumer purchases. So it is certainly seeing with than that, but actually impairments are much more just targeting the titles that we actually had in the EMEA.

Steven Koffler - Cambria Capital

I mean that’s really kind of where I’m going with this, because I believe you said in the release your, because granted they are non-cash, you’re basically saying, back those out of the non-GAAP EBITDA calculations, correct?

Eric Ludwig

Yes, for the lender I guess backed out as well as for non-GAAP operating. We’re not specifically pointing out non-GAAP, but we’re trying to give an apples-to-apples comparisons, what our non-GAAP numbers would if you did not back those out.

Steven Koffler - Cambria Capital

I understand, the only thing from a business perspective, I mean if feature list happened into other companies, I mean Motorola was very open about the fact that, they had such a rapid decline in feature phones that the smartphones can’t make up for it and so thinking about in terms of the industry in your business, there’s a chance we’re going to see more of this.

I mean, if it’s going down, if feature phones are falling so rapidly in the year you’re attaching to smartphones or whatever it’s happening and smartphone doesn’t compensate, we could see further impairment of these assets on that or these licenses in that does have some impact and how we look at cash flow, right?

Eric Ludwig

Well, two things, first you already, I think it’s been prepaid. Secondly, we only have $6.7 million remaining on the balance sheet as of December 31, 2009. So the announcement remaining a balance sheet, over a half of that relates to our drive titles that have launched in the fourth quarter from some pretty big license others.

So unless the EMEA market fell a part and issuing 12 months, it would be hard for us to see additional impairments and less the EMEA business went rapidly down from where we are today.

Operator

Your final question comes from Justin Patterson - Morgan Keegan

Justin Patterson - Morgan Keegan

Just my additional questions from Tavis since he was kind of cutting out over there, during some back of envelope math, it look likes you guys are baking in about a 20 percentage sequential decline in feature phones, is that correct?

Eric Ludwig

That would be about correct, yes

Justin Patterson - Morgan Keegan

Then moving along just taking about that persistent gaming environments, I think Niccolo you had mentioned during the prepared remarks that were define as something between Farmville and world of war craft that’s obviously two completely different extreme. So I was wondering if you can possibly give us a little more granularity sense of what exactly you guys are envisioning here?

Niccolo De Masi

Sure, ultimately we obviously are anticipating, probably running to not quite those extremes, but across quite a wide range of the middle ground and so, it will run from taking more hard core gaming experiences, which ultimately has been our bread and butter to be honest in the past five, six and seven years making those more social, making those more casual, making those about a premium community of users who are able interact with the game that perpetually relevant, perpetually updated.

We were certainly be experimenting other in the range as well, we’ve got plenty of internal IP that has been relatively successful things like Glider you’re publishing on the iPhone and so as more casual end, I think we’ve already got great IP in a great foundation for turning some of our existing brands into more casual persistent state experiences, but building a customer base modeling within our games, but across all our games is one of the sort of main driving forces for why we’re taking this approach.

Justin Patterson - Morgan Keegan

So we think of anything like say, micro transactions within the game as part of that persistent environment?

Niccolo De Masi

Absolutely, I mean premium, business model by definition will be monetized and increasingly through a mixture of paid for micro transaction advertising possibly offers may come into with, I mean, this is been relatively small percentage of revenues in 2009.

We’ve obviously discussed the fact, that we’ve seen an increase just in the past quarter or two, and we think it were the beginning of quite a nice longer term trend of premium business models being quite successful on smartphones in coming years. So, we certainly like to focus on domain, where we think the market will be in a year, in two years, and three year.

Justin Patterson - Morgan Keegan

Now with that, are you guys going to meet the higher additional R&D personal or do you feel confident with what’s your currently have that you’ll be able to capitalize on that success?

Niccolo De Masi

We have a lot of great people. I think I mentioned that we’ve started a number of projects already in last month since I’ve been here, which are very much addressing, what I’ve just discussed. That having been said of course, we’re always on the lookout for the very best.

We think that there’s going to be increasingly interesting opportunities to take, core mobile fragmentation cost platform, expertise and layer on top of that more and more sort of online dynamics and social expertise to produce gaming experiences, which can grow sustainable with an audience based that will ultimately be able to own on IP that we own. So, certainly always going to be on a lookout for the best talent we can attract.

Justin Patterson - Morgan Keegan

Finally with respect to iPhone, I think you had mentioned 20 million downloads. Congratulations on that. Is that just a total download number of paid and free, and if so can you please provide the breakout between paid and free?

Eric Ludwig

We talked about obviously $20 million is paid and free. This past year, we did a little under $2 million of revenues from our iPhone titles and the portion of paid titles well over 1 million units of unpaid downloads.

Niccolo De Masi

It’s inline with the industry, which tends to probably be 94% to 95% free downloads.

Operator

There are no further questions at this time.

Niccolo De Masi

Thanks everyone for listening in. Hopefully we’ve given everyone a flavor of what we’ve doing for the past month, what we’ll be up to in the coming quarter and we’re delighted to speak with anyone offline that hasn’t already scheduled with Mr. Potter. So, thank you again and we’ll chat next quarter. Thanks a lot.

Operator

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

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