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Glu Mobile Inc. (NASDAQ:GLUU)

Q4 2013 Earnings Conference Call

February 5, 2014 16:30 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

Doug Creutz - Cowen

Mike Hickey - The Benchmark Company

Adam Krejcik - Eilers Research

George Kelly - Craig-Hallum

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Glu Mobile Fourth Quarter and Fiscal Year 2013 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to hand the conference over to Mr. Greg Cannon, Vice President of Finance. Sir, please go ahead.

Greg Cannon - Vice President, Finance

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

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Generally, these statements are identified by the use of the words such as expect, believe, anticipate, intend and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking 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 Securities and Exchange Commission on November 8, 2013.

During this call, we will present both GAAP and non-GAAP financial measures. The non-GAAP measures are not intended to being 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 fourth quarter results as well as the supplemental presentation accompanying today’s earnings call that can be accessed via our Investor website, www.glu.com/investors. The press release and supplementation presentation also have been furnished to the SEC as part of our Form 8-K.

Please also note that in addition to the presentation, you will also find on our Investor website demo videos of titles that we expect to launch in the coming months. Given the recent SEC guidance regarding the use of social media channels to announce material information to investors, we are notifying investors, the media, our players and others interested in the company that in the future, we might choose to communicate material information via social media channels or it is possible that information we disclose to the 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 in the list of social media channels we will use to announce material information will be posted on the Investor Relations page of our website at www.glu.com/investors.

In addition, please note that the date of this conference call is February 5, 2014 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 a 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 will turn the call over to Niccolo. Niccolo?

Niccolo de Masi - Chief Executive Officer

Good afternoon and welcome to everyone joining us today to what I am confident will be a very memorable call for all of Glu’s stakeholders both recent and long-standing. Throughout my tenure, our focus has always been biased towards strong long-term performance that maximizes stockholder value even the expense of some short-term volatility.

I am exceptionally pleased to report today that our investments over the past five quarters have begun to pay off handsomely. In Q4, 2013, we delivered the strongest financial performance in our company’s history. Non-GAAP revenue grew 90% quarter-on-quarter to set a new record at $42.8 million. Adjusted EBITDA scaled with non-GAAP revenue to reach a Glu all-time high of $6 million. This step change in our performance is a result of 15 months of hard work, retooling and operating key aspects of our operations. Numerous critical initiatives across our operating functions have come together along with the impact of better processes and better talent. We have made sizable strides over the past product cycle in our ability to monetize more fully, optimize games more predictably and market our titles more efficiently.

As discussed in our calls over the past five quarters, we always believed improving these fundamental capabilities would be the harbinger of sustained elevated momentum in our business. As you will hear in a few minutes when Eric walks through the guidance, we believe we have begun a new era for Glu, one with solid foundations for more predictable and sustainably profitable operational rhythm. Glu’s strategy over the past four years has been focused around leveraging our platform strengths and early mover advantage to create long-term gaming franchises. Franchises underpin the long-term sustainability of our company and we are proud to have build out four in our portfolio thus far Contract Killer, Frontline Commando, Eternity Warriors and Deer Hunter.

We target doubling the lifetime revenues of each new franchise release and are pleased to be on track to exceed this goal with both Deer Hunter 2014 and Eternity Warriors 3. We expected regular content updates to both DH14 and EW3 will enable them to be meaningful to overall company performance throughout H1 2014. With solid additional Q1 launches of RoboCop and Motocross Meltdown give us confidence in our ability to deliver strong Q1 fundamentals. We look forward to the next installments of the Contract Killer and Frontline Commando franchises, which are both released in H1 2014 and are confident they have the potential to be the strongest performers in the respective series yet.

This year our core operational focus will remain on action titles. As we continue our games-as-a-service evolution. Our central server infrastructure has scale to plan and been successfully deployed globally for both Eternity Warriors 3 and Motocross Meltdown. Our global distribution and localization capabilities plus deep android platform expertise remains second to none. As Matt detail in a moment, our portfolio strategy for 2014 has been designed to incorporate significant innovation whilst leveraging sunk investments and proven engines.

We believe Glu’s franchise diversification and ability to leverage central services for all its studios has created a superior and highly scalable risk profile. With Glu’s operating functions now rolling in unison. This year, shall be focused as have my prior for on delivering strong year-over-year growth. We have never and will never sacrifice full year growth for the sake of quarter-on-quarter optics. Since the emergence of the iPhone, the free-to-play games industry has grown exponentially worldwide. Over 1 million apps now exists on each of the Apple App Store and Google Play. With hundreds of thousands of professionals dedicated to developing apps in every corner of the earth.

We at Glu have always been believers in the importance of global scale as an enduring competitive advantage. Scale allows us to spread the fixed costs of deep central functional expertise across many products, geographies and platforms. Over the next few years we expect various entry and advantages of scale to increase with the emergence of ever larger and truly global free-to-play games companies. With the growing core significant success at our company we intend to be on a lookout for opportunities to drive and otherwise participate in the consolidation of our industry. We believe that Glu is the outright market leader in free-to-play mobile action gaming, a category that we believe has those significant barriers to entry and is destined for continued long-term growth.

The Entertainment Software Association using NPD Group data for 2012 classifies nearly 45% of revenue on consoles as being derived from action and shooter titles. On smartphones and tablets recent app AnyDATA would indicate the equivalent figure is approximately 20 times lower. Over the coming years we anticipate these percentages will begin to converge and the Glu uniquely possesses the expertise to grow, define and lead the action category in the free-to-play world. We believe no other developer has successfully been able to translate the biggest and most enduring category of the living room to our mobile world. As significantly we believe Glu to be optimally positioned as our Apple, Google and Microsoft look to extend free-to-play gaming into the living room.

To-date we have supported numerous controllers across our ecosystem in addition to Apple TV over airplay gaming. As we have demonstrated by launching the world’s first native game for Google Glass, we intend to continue or support of any new platform initiatives, which we believe maybe impactful to our long-term growth trajectory.

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

Matt Ricchetti - President, Studios

Good afternoon everyone. In our last earnings call, I shared some of our initial success with Deer Hunter 2014. In this call, I’d like to follow-up on that title’s progress, report on the launch of Eternity Warriors 3, provide an update on our games-as-a-service technology and look forward to the rest of the year.

As I detailed in the previous call, Deer Hunter 2014 was on track to be the highest revenue generating game in Glu’s history. That trajectory has continued through the end of 2013. During Q4, Deer Hunter never fell below the number 15 top grossing in the U.S. on either iOS or Android. This is testament to our ability to both cost effectively acquire users for the title and to consistently release compelling new content that reengages our players. In late Q4, we launched Eternity Warriors 3, another top monetizing title for Glu. Eternity Warriors 3 has been a sustained top 100 grossing game in key markets worldwide, exhibiting even stronger performance in Asia. It’s deep economy, high production values, addictive game play and social competitive features are all major improvements over Eternity Warriors 2. As a result, Eternity Warriors 3 is currently on pace to bring in more than double the lifetime revenue of its predecessor.

I am also very pleased to report that Eternity Warriors 3 represented the first major launch of our GluOn, gas technology platform. Eternity Warriors 3 utilizes several services provided by GluOn including chat, guilds, account management and virtual goods management. We have been very pleased with performance of all GluOn services across both iOS and Android and around the globe. Our most recent title Motocross Meltdown also heavily leverages GluOn and has also seen excellent tech performance. Having a stable, scalable server platform that provides valuable gas services to all studios is a major accomplishment for Glu. It is a competitive advantage for our business and will serve us well as we further expand into gas in 2014.

In terms of our 2014 portfolio, we will focus first and foremost on where we have had historical success, the action and shooter genres. The majority of titles we released this year will also leverage our most successful franchises as Niccolo mentioned and game engines as we seek to de-risk development. We don’t need to reinvent the wheel with regard to core gameplay, instead we will focus more time per product on continuing to deepen monetization, add social competitive features, and ensure our titles all have robust post-launch content plans. At the same time, we are also conscious of the hit-driven nature of mobile gaming. In our industry, more than most thoughtful innovation can meet outsized results. To this end, we are also placing a smaller number of bets on new titles in genres adjacent to our core expertise. Because of Glu’s diversified portfolio and global development footprint, we can afford to do this both strategically and cost effectively.

In sum, I am very pleased with the progress our Studios have made across the board, talent, technology, product strategy and operations in 2013. We believe that combining these gains with an aggressive, but balanced 2014 portfolio puts us in a great position to reach new heights this year.

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

Chris Akhavan - President, Publishing

Thank you, Matt and hi everyone. As Niccolo noted earlier, our disciplined and aggressive investment in upgrading Glu’s talent and tech paid off significantly in Q4. Within the publishing organization, we made substantial progress towards the goals I outlined when I joined the company early last year. We believe our advanced user acquisition capabilities have become a competitive advantage for Glu allowing us to increase both the volume of downloads as well as the revenue tail for games like Deer Hunter 2014 and Eternity Warriors 3.

In addition to bringing in the right talent, we have developed and deployed unique technology that allows us to rapidly execute and optimize paid user acquisition campaigns. Our upgraded user acquisition capabilities combined with our strong platform partnership have enabled us to greatly amplify the distribution of every title we launch. Our investments in Asia have similarly paid off. We are seeing strong performance for EW3 in key markets like Korea and China, where we believe we have outperformed similar recent launches from certain competitors. We will continue improving the quality of our localization while investing further in platform partnerships and strategic relationships like the one we announced with COLOPL in Japan to drive growth in the region.

Our efforts to increase advertising base revenue have been highly successful The percent of revenue we generated from advertising has nearly doubled during my time at Glu increasing from 11% of gross non-GAAP smartphone revenue in Q2 ‘13 to 21% in Q4. We believe there is further room for growth as mobile advertising budgets will likely continue to increase over the coming years. We have seen impressive growth in our Android business. The gap between our iOS and revenue continues to close. Android revenues grew from 29% of non-GAAP smartphone revenue in Q1 ‘13 to 36% in Q4. We attribute this to our industry-leading Android team and our commitment to working closely with Google to continue driving growth on the platform. The performance we delivered in Q4 has greatly validated our strategy and focus. I look forward to building on this momentum in 2014 and believe gamers worldwide are going to love the titles we have in the pipeline.

With that I will turn you over to Eric for a review of our financials and guidance.

Eric Ludwig - Chief Financial Officer

Great, thank you, Chris. I was very pleased of our ability to achieve record results during the fourth quarter as we significantly exceeded expectations across all of our financial metrics. I will first detail our fourth quarter and full year 2013 results. I will then conclude by providing outlook for our first quarter and full year 2014. Summarizing our key financial highlights for the fourth quarter, total non-GAAP revenues were $42.8 million, an increase of 62% year-over-year and 90% quarter-over-quarter.

Non-GAAP gross margin was 73%, we achieved a record adjusted EBITDA of $6 million, significantly above our guidance. And our non-GAAP net income was $5.4 million or EPS of $0.07 per diluted share. We have 79.6 million downloads of our titles during the fourth quarter and our daily activities in the month of December increased to $6.4 million, while our monthly active users for December were also up to 56.3 million. Summarizing the key results for the fourth quarter, total non-GAAP revenue of $42.8 million was significantly above our guidance of $31.5 million to $32.5 million.

Our three largest titles during the fourth quarter represented 75% of total non-GAAP revenues with Deer Hunter 2014 generating $27.4 million, Deer Hunter 2014 was our first new title launch that was green lit at its inception by the new team. This title leveraged our refined focus on monetization as well as continuous content updates both of which we identify as potential revenue catalysts over the last year. And I am pleased to see that becoming reality.

During the fourth quarter our non-GAAP gross margin was 72%, slightly higher than our guidance and up from 66% during the third quarter. This increase was primarily due to the strength of Deer Hunter which is a higher margin first party owned IP title and also due to the increased revenue from advertising that Chris mentioned. As you may recall we do not grow sub revenues from ad networks. Total non-GAAP OpEx was $25.9 million in the fourth quarter and approximately $3 million higher than guidance. This was due to increased variable marketing spend during the quarter, which helped to drive incremental revenue realized. Despite the higher than expected OpEx during the fourth quarter, we reported record adjusted EBITDA of $6 million or 14% of total non-GAAP revenues. This was substantially better than our guidance of pos $750,000 to $1.25 million and it highlights the significant leverage we have in the business beyond breakeven. And as a result we reported non-GAAP net income of $5.4 million or $0.07 per diluted share also substantially above our guidance.

Let me take a moment to walk through this final full year 2013 results. During 2013, we launched 12 new first party titles and 4 third party titles. Additionally we generated 222 million downloads of our games and ended the year with approximately 606 million cumulative lifetime download. Total non-GAAP revenue for 2013 was $113.4 million, up from $108.9 million in 2012. Non-GAAP adjusted EBITDA for 2013 was a loss of $2.5 million as compared to a loss of $2.3 million in 2012. And another full reconciliation of GAAP to non-GAAP measures was included in both the press release and the supplemental presentation we issued today.

Now turning to balance sheet, as of December 31, 2013 our cash and equivalents totaled $28.5 million, which was up from $27.7 million at the end of the third quarter. During Q4 we generated $1.9 million of cash in operating activities, received approximately $700,000 in proceeds and stock option exercises. This was partially offset by the $1.6 million in cash used in investing activities mainly related to our San Francisco headquarters office moved.

Now I am going to talk through our full year 2014 guidance and then drill into the Q1 specifics. As Niccolo mentioned we are very pleased with Glu’s performance during 2013 as we are making tangible progress on our strategy to improve monetization and lifetime values within our games. This is evidenced by the breakout success of Deer Hunter 2014 as well as the solid initial traction from recently launched titles EW3, RoboCop and Motocross Meltdown.

Entering the New Year, I have never been more excited about Glu’s position in the industry. We believe we will maintain the momentum given the investments we have made in both our senior management team as well as the infrastructure to support more social games. While we realized the mobile gaming industry is a hits-driven business, we believe that the progress we have made in the past year has led to a more predictable and sustainably profitable operation.

During the fourth quarter, feature phone revenues were less than 2% of total revenues. As such, we are no longer going to break it out given the immateriality on the overall business. Now turning to guidance, during the full year 2014, we expect total non-GAAP revenue to be in the range of $142 million to $150 million or growth of 25% to 32% year-over-year. We view this as a strong outlook given as an increase from our previously announced guidance of 15% to 20% revenue growth and additionally it is on top of the $10 million beat in the fourth quarter.

Our full year top line guidance does not assume any Deer Hunter 2014 five titles. Also the two largest titles in our guidance are already live, Deer Hunter 2014 and Eternity Warriors 3. And lastly no new titles launching in 2014 are forecasted to be more than 8% of total non-GAAP revenues. We expect our 2014 quarter results to be impacted by the timing of new title launches. And as a result, we do expect to see quarterly variability of revenue during the year. Our first quarter 2014 non-GAAP revenues are expected to be down slightly compared to our records set in Q4. We have included the slide in our supplemental presentation outlining the preliminary breakdown by quarter, but suffice to say we are guiding to substantial growth on a year-over-year basis during the first three quarters of 2014. We don’t typically derive this level of granularity this early on in the year, and we may not do so in the future. And we probably felt it was important this quarter given the step function increase in our revenues we experienced starting in Q4 coupled with an expected quarter-to-quarter decline in revenues in Q2 2014.

This guidance assumes the title point as of today and it may change as the year progresses. We expect non-GAAP gross margin to be approximately 68% for 2014, down from 70% in 2013. And this is due – primarily due to the mix of titles based on original IP versus license and third party content as well as incremental hosting cost to support our games to the service titles.

Non-GAAP operating expenses for 2014 are expected to range from $96 million to $99 million, an increase compared to $84.5 million in 2013. Approximately 60% of the increase is due to additional variable marketing on the higher revenue with the balance being used for headcount-related cost for new hires and incremental accrued bonuses. Adjusted EBITDA for 2014 is expected to be in the range of $4 million to $6 million. We are confident in our ability to achieve profitability for the full year. However, the quarter-to-quarter variability I mentioned earlier has this currently expecting to report a loss in the second quarter of 2014 due to the timing of title launches. Finally, we expect to end the year with $35 million of cash and no debt.

Turning to the first quarter of 2014, we currently expect our total non-GAAP revenues to be in the range of $38 million to $40 million, an increase of 54% to 62% compared to the first quarter of last year and slightly down compared to Q4. This guidance assumes Deer Hunter 2014 to contribute approximately one-third of total non-GAAP revenues during the quarter.

We are also seeing solid initial traction from EW3, RoboCop and Motocross Meltdown, which will lead to broader revenue diversity in Q1 as compared to Q4. During the first quarter, we expect non-GAAP gross margin to be approximately 68.6%, which is below Q4. This decline is primarily due to the increased royalty costs related to RoboCop and an increase in hosting costs from our fully GAAP titles EW3 and Motocross Meltdown. Our non-GAAP OpEx for the first quarter is expected to be approximately $25.6 million at the midpoint. This is essentially flat quarter-to-quarter but as a result of lower variable marketing and the lower revenue offset by increased variable compensation and incremental headcount. As a result, we expect to achieve positive adjusted EBITDA in the range of $1.5 million to $2.5 million. Finally we expect our cash balance at the end of the first quarter to be approximately $30 million, up $1.5 million quarter-over-quarter.

Before closing I like to mention that we are really pleased with the market, the recent market receptivity of the NaturalMotion acquisition. We believe the valuation paid for this asset is a find that companies with deep franchise expertise and global scale remain incredibly valuable as our sector continues to consolidate.

In summary, I am extremely pleased with our record Q4 results and the performance of Deer Hunter 2014, the largest title Glu has launched thus far in history. We are confident with the strategy we laid out five quarters ago has taken a hold and that we expect to gain momentum throughout the year. I look forward to updating you on our progress in our next quarter.

And with that, we will open the call for questions. Operator?

Question-and Answer Session

Operator

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

Sean McGowan - Needham & Company

Thanks a lot. I haven’t got a chance to run some of the numbers here on the international, but Niccolo, could you just talk generally about what you are seeing emerging in non-domestic markets and why you think that bodes for the future?

Niccolo de Masi

Well, we have always said that emerging market growth, Asian growth is something that Glu is, I would say, more exposed to than the vast majority of our competitors, right. We have always have been early in the international markets. We have been early not only in terms of localization, but boots on the ground. And I think we have talked on previous calls quite granularly about the fact that China is our number two market after the U.S. Korea is our number three market. These countries all have local idiosyncrasies for distribution as well as call it genre affinity. Glu is focused on action titles, shooters has done well for us to-date. We think it will continue doing so. But I am particularly bullish about room for other countries to come online in the next year or two. We are still – we still have yet to see Latin America, for example, start to sort of engage in the, let’s say, smartphone upgrade cycle and smartphone content upgrade cycle.

If you looked in some of our supplemental presentation slides, you will see that our total percentage of revenue coming from that region, for example, and Europe has been muted compared with what we have been doing in North America and Asia since we transition from feature phones. So we remain above on every market, but obviously, in percentage terms, I think there are some sort of call it Tier 2 emerging markets that are going to get going. And we remain a very fervent believer that we are just scratching the surface of what we can even do in places like China, Korea, Japan, but we will continue to invest.

Sean McGowan - Needham & Company

Okay, thank you. And the second question would be, I think you said it in the fourth quarter that the success you are experiencing with Deer Hunter kind of gave you little bit of not only luxury, but also the impetus to hold off on releasing some titles until you could fully featurize them with the gas model. Do you see any effect like that in the first quarter like other titles that you are putting off is a) you can because you got good success with what you have out there already or will have or are you delaying anything to put additional features in or are you kind of running at a normal pace now?

Niccolo de Masi

Well, I think the business has reached the scale with the Q4 performance whereby our ability to focus on optimizing revenue in totality rather than worrying about sort of timing of title launches is kind of at on all-time, I will put it that way. So resources are going to go where we get the biggest return on kind of let’s say time-weighted discounted probability weighted basis. So at the moment, as I referenced in my script, we are expecting DH14 and EW3 to be significant contributor to the whole first half of the year. We have had some other solid launches already in the first quarter. The things to look out for in H1 are going to be Frontline Commando 2 and Contract Killer 3. So let me hand this over to Matt maybe for some more details on that for the first half of the year if that will be useful for you.

Sean McGowan - Needham & Company

Great, thank you.

Matt Ricchetti

Sure. I mean, I don’t have a whole lot to add. I think Niccolo covered it. We, because of the scale of Deer Hunter and EW3, we have the ability to focus more on long-term revenue than on specific launch windows for games, but that said, there aren’t any significant delays or changes to the lineup that we put in place in Q4 for this quarter. And I would reiterate that Frontline Commando 2 and CK3, Contract Killer 3 are kind of the big titles for look for in the first half.

Sean McGowan - Needham & Company

Okay.

Matt Ricchetti

We are pleased, Sean, obviously with the fact that we have been able to improve the probabilities of additional efforts going into the titles driving a meaningful return, right. So I think our ability to turn the C titles into Bs and Bs into B pluses or A minuses is obviously something that we have just demonstrated we can do. On that list the overall probabilities here as the business being predictable year in, year out.

Sean McGowan - Needham & Company

Okay, thanks a lot.

Operator

Thank you. And our next question comes from the line of Michael Graham from Canaccord.

Michael Graham - Canaccord

Hi thanks. Hi guys, congratulations, really great job in the quarter. I just wanted to ask a couple of questions, the first is about Deer Hunter and I don’t want to get overly granular, but when you guide us for Q4, I think it was a rate of roughly 175,000 a day or so is what it worked out to I am calculating that you actually did around 300,000 a day during the quarter and that your guidance if I heard you right what you said you expected to be about one-third of Q1 is about $145,000 a day give or take. And I am just wondering like do that sound about right to you and can you comment on how it looked during the quarter like did it peak a lot higher than that 300K and how did we sort of exit the quarter, just any color you can provide there, I’m going to have another question? Thank you.

Eric Ludwig

Sure, yes, Mike, this is Eric. Thanks for the question and obviously I will try to answer as much, but not give you all the details. But I think the September numbers you were correct, it’s about 175,000 to 180,000 a day and that was predominantly in September just on iOS, the Android version launched late at the tail end of September. So yes we certainly saw higher revenue than that in the earlier parts of the fourth quarter. And then there was bit have step peak as well around the Christmas time horizon, but we certainly if you look at the charts as Matt mentioned that title did not get below top 15 grossing for all of the fourth quarter. It is now in the 20s, so we have definitely seen a step function change lower in the first quarter than we get in all of these – the fourth quarter and as you well know I think it was almost talked about here, these terms are pretty exponential. So a number of 15 slot versus number 20 slot is a sizable lower rating of revenue. So I think our guidance for the first quarter reflects an expectation one that we are at a lower base level starting the quarter. And secondly that – those numbers we’ll continue to see some degradation in February and March, we expect based on the title becoming older that long run. Two, that it was back in Q4.

Niccolo de Masi

I would sort of add to that but obviously sort of precision that we can deliver on single title forecasting guidance is a lot greater asset titles and out for a quarter and a bit for a quarter and half because you are on kind of a downward slope albeit a gradual one or is when we gave guidance on that title on the quarter last time, we were still trending up with one platform launch and so we had a take on view on the timing as well as amplitude of the curve.

Michael Graham - Canaccord

Okay, that makes sense, certainly better to come in at a lot higher than you could for the lower?

Niccolo de Masi

Yes

Michael Graham - Canaccord

The follow-up was just – I was just wondering on RoboCop when the movie comes out like are you going to – like how are you thinking about promoting the game again when you movie comes out and just any color on how that will work? Thanks.

Niccolo de Masi

We have been encouraged by let’s say the international appeal for that brand is doing very well in Asian markets for the films actually I could believe launching before it does in the U.S. So the U.S. launch I believe on the 12th of February less than in Europe I believe late this week and Asia I think a week or so ago. So we expect the brand to resonate. We expected to be obviously a lot of brand halo effect assuming that the film can be an ironman performer in North America as it has been already in Asia. So our strategy with the couple of movie properties that we are doing this year with MGM has been one obviously of let’s say effectively trading powered UA costs for some kind of partnership royalty stream and that’s very much we expect to play out with this title as well.

Michael Graham - Canaccord

Okay, thank you, Niccolo.

Eric Ludwig

I can add quickly to that we are coordinating an update to the game to launch with the movie in the West and U.S. particularly and Chris’ team is working to get the visibility of the game backup along with the launch of the movie and the launch of the movie and the launch of the content updates.

Operator

Thank you. And our next question comes from the line of Doug Creutz from Cowen.

Doug Creutz - Cowen

Hey, thanks. You talked about how your advertising revenue was a bigger contributor in Q4. And I just wondered to what extent was that driven specifically by Deer Hunter, in other words, is that a title that’s driven proportionately more through advertising or is that something you saw kind of across your entire book of business? Thanks.

Chris Akhavan

Hi, Doug this is Chris. So Deer Hunter definitely was a big contributor to the ad revenues as we saw, but we also saw lift across the portfolio. For us specifically we saw lifts coming from implementing video advertising into our games and now increasingly seeing big brand advertisers shipped into the space, whereas earlier in the year, you mostly had other game developers, advertising ads. Now we are seeing a much larger interest from major brands advertising and specifically through mobile video advertising.

Niccolo de Masi

I would add to that, that the lift in absolute terms is definitely driven by Deer Hunter, but in relative terms, we have seen that hold up across our portfolio and is that a relative percentage that is what almost double where we were just entering 2013.

Eric Ludwig

Yes. Just to add to that just this quarter we saw in absolute dollars $9 million from advertising and as a percentage of revenue that’s 21%. And there was only one quarter ever where we have had over 21% from advertising and that was back in Q2, 2012 when incentive advertising was allowed on the iOS platform. And that was the same quarter we got shutdown. So we are on an all-time peak absent that one average quarter both in absolute dollars as well as the percentage of revenue.

Doug Creutz - Cowen

Alright, perfect. Thanks.

Operator

Thank you. And our next question comes from the line of Mike Hickey from The Benchmark Company.

Mike Hickey - The Benchmark Company

Hey guys. Great job on the quarter. Congratulations.

Niccolo de Masi

Thank you.

Mike Hickey - The Benchmark Company

Just curious on Deer Hunter, Matt, what’s you and your team are doing to kind of drive service piece now and it’s amazing how that’s staying as it stayed at the top of the charts and clearly, you are putting an effort into it. So if you could just kind of walk us through what you are doing to keep that engagement through the year, movie on the end of that or I guess it reflect on what Deer Hunter means to ‘14 and what you did on Q1? That would be helpful.

Matt Ricchetti

Thanks Mike. I mean, I would say to kind of echo what Niccolo was just talking about last year guidance on Deer Hunter was that, it certainly has exceeded our expectations in terms of amplitude and kind of the length of the tail, but we have done everything we can to take advantage of that and kind of ride the tiger as long as we can. And I think the team has done a fantastic job in terms of servicing the title. So they put out something like eight major content updates in the first four months that the game has been alive, so roughly every two weeks. There has been either events or new regions or new features going into the game. We continue to kind of keep running in that clip for as long as it makes sense internally for us. So you will see we are just an event that launched this week and we have got a very robust roadmap running out at least through the first half of the year. So I think there is still as Eric said, there is the game kind of in its slow degradation. And I think it’s our job to kind of maintain that at as small as possible run off as we can and we have got the technological and operational capacity to do that.

Eric Ludwig

Yes, then Mike your other question about Deer Hunter and we obviously said that Deer Hunter did $30 million, $30.8 million in 2013. I guided that will be $13 million, roughly $13 million in Q1. And this title will be less than 20% of overall revenues. So I will kind of leave it at that is kind of less than 20%, but for the full year.

Mike Hickey - The Benchmark Company

Thank guys. It’s really helpful. I don’t know if I heard you guys right, but, Matt, are you planning on iterating Deer Hunter again in Q4?

Matt Ricchetti

Q4 of 2014?

Mike Hickey - The Benchmark Company

Yes.

Matt Ricchetti

I think that our roadmap for the existing title runs out at least through the first half of the year and we will continue to update the game as long as that makes sense to. So, I definitely wouldn’t have any concerns that if the title’s future in no way depends on our ability or our ability and willingness to continue to put out updates for. We have kind of gotten that down to science, but there is – the next question is it’s the franchise for us and of course we will continue to do develop against in the future so at some point there will be another Deer Hunter out in that again a factor of what the tail ends Deer Hunter 14 looks like and a timing of everything else in the portfolio.

Mike Hickey - The Benchmark Company

Okay. And the – on the pipeline for ’14 do you guys have a rough idea of the number of gains you’re thinking about and I didn’t hear much Niccolo about the publishing side and I was curious if few plan there are still kind of consistent with the vision you showed us before for few chance?

Niccolo de Masi

Alright, on the number of titles, I mean, it’s broadly flat with sort of what we did last year by number, but I think as everyone in this call are seeing our willingness and ability to generate revenue by virtue was doubling down on major titles sometimes giving titles more times, sometimes releasing titles and they reach kind of a point of diminishing returns for work, we’re very much be what we are doing for the year so, I wouldn’t want you when you sort of fixed rate on number of timing of titles because it’s very difficult sort of predict quarterly performance or the post annual performance in the business like ours. The publishing business is one that we remained invested and we think we are running a unique model, which is we are affectively mining second and third-party opportunities and a lot of markets where our competitors of publishing market are not nearly as long. It has certainly taken longer to get a hit in that business and I think that piece of our business will certainly remain as if not primarily more volatile as the first-party business, but it’s something that we’re active in a very, very efficient way, I actually hand this over to Chris Akhavan for a second to give you the more color on that as you run that directly.

Chris Akhavan

Sure. With third-party publishing the approach will continue to take as a very low investment approach, we’re licensing gains in unique markets where our competitors like Niccolo mentioned are not reactive. That means with licensing gains with minimal or no upfront commitments, again we’re leveraging existing team to operate this program and I really compare this to being something similar to the venture capital approach, we’re going to launch a lot of third-party title this year, most of them are not going to do well, few will do okay and I’m confident in that mix will have a couple of do exceptionally well and we’ll make this program profitable for us.

Niccolo de Masi

I think always like in that the second and third-party business may well be something which helps to identify future acquisition opportunities as well and this is a basis going to keep consolidating we have a very clear kind of success, I think as a supplemental presentation this quarter, we’re the only company that dominates the action of interest space on the entire sort of journal math amongst the top 10 or 15 players, but we also recognized it to be even bigger company, we may need strengths in other journals so, step one of the Glu continue to dominate action of interest step. Two is and trying to enhance the lead we have with competitors and step three is keep an eye open for whether it might be interesting value opportunities for us.

Mike Hickey - The Benchmark Company

Awesome, thanks guys, thanks a lot.

Niccolo de Masi

Thanks.

Operator

Thank you. And our next question comes from the line of Adam Krejcik from Eilers Research.

Adam Krejcik - Eilers Research

Hi, guys. Thanks for taking my question and congrats on the quarter. My first question was on EBITDA margins kind of how to think of it’s going forward so, keep forward you guys on my calculation had a 17% EBITDA margin and then for Q1, you’re guiding for roughly 5% and then for the full year kind of down at 3% to 4% so, understanding you’ve got ramp-up headcount in investments, but just trying to get an understanding of know why you might not be able to drive a little bit more profitability given the revenue rate this quarter and then kind of a continuation of that question sometime ago, you talked about kind of longer term targets for EBITDA margins, 20% plus range just curious as you guys look at this business, what kind of revenue run rate do you think, you might need to generate on the top-line to start approaching that 20% level especially conceded 17% this quarter. Thanks, that’s my first question.

Eric Ludwig

Great, thanks and this is Eric, I’ll take all those questions. So, on the EBITDA first, the percentage is 14% this quarter, up 17%, but I think kind of - let me kind of frame up what happened in Q4 and then I will talk about what’s happening in Q1 and beyond. So Q4, we had a monster shift with Deer Hunter which was a predominantly single player game that was owned IP with no royalties. And all of those are important. One we had leveraged the scale of all that revenue coming from one big title.

Secondly, the hosting cost for that title was very, very minimal and it was no royalties, no hosting cost as well as even the great ultimate performance we had in the fourth quarter that didn’t make it up for our weaker Q1, Q2 and Q3. And so there are a bunch of bonus plans internally, inside the company that do not payout at all including the exact plan. So I think overall compensation costs were also suppressed. So I think the outside Q4 EBITDA margin was very impressive but was somewhat over numbers in those regards.

In the first half of the year you have got title like RoboCop that have royalties attached to them. And then we have now really launched the games to the service. So Motocross Meltdown is fully gas Eternity Warriors 3 is fully gas. And so we are going to see as step function up in terms of our cost of sales around some of the hosting costs. I think long – so that’s kind of the framing as to why our guidance is a bit more tempered as well as we had great quarter we don’t want to get too far ahead of ourselves. And then in terms of the full year numbers to get that 20%, I am probably not running to call a number out, but obviously the run rate of Q4 was about 170 million annualized run rate. And we got to 14% with the items I have talked about. So it’s certainly going to be something over the $200 million run rate but exactly with that numbers not yet (indiscernible) pocket.

Adam Krejcik - Eilers Research

Okay. And I do appreciate the color there. Second question is on the strategic relationship with the COLOPL in Japan. Just wondering if there is any kind more details about that Japan as guys know is I think the biggest app market in the world and Western publisher had trouble penetrating that, so can you kind of talk to this partnership. And then what the margins structure might look like for any revenues generated with that relationship? Thanks.

Eric Ludwig

Sure. So as noted we definitely recognized the Japan as the largest market in the world from global game revenue and also recognized that it’s very difficult for Western publishers to develop content for that market. So this relationship is COLOPL is really designed to solve those two problems. And we obviously have a lot of strong existing engine tier. We are going to work closely with them to identify how to take potentially one of those engines create content specifically for the Japanese market. And then leverage their publishing expertise to distribute and continue to promote the title in that market. That’s really what we are aiming to do with this partnership. As far as the economics I don’t think that we can comment on that at this point.

Niccolo de Masi

But you’re absolutely right Adam that you make a disproportionally tiny amount of revenue at the moment from Japan. And step one for us in Asia is continuing to do well in China and Korea. Continue investing there but obviously there is a big price if we can figure out in Japan. The same thing we figured out in China and Korea. And by that I mean we have a disproportionate market share for a foreigner I think China and Korea. And that’s been sort of the bi-product a lot of years of investment on the ground investment I am trying to figure out how to take what we build globally and very much localize it. Japan we are very early in this process, but we believe a few years from today that this could be something that is a meaningful percentage of the overall business.

Eric Ludwig

Last thing I would had to that too is that one reason that a company like COLOPL is interested and that’s just because of the leadership that we have shown in terms of 3D high-fidelity action games built in unity. I think they are looking at the future of the market in Japan and they will look at us and the kind of games we are developing as something that can play a role there. So they are coming to us saying that they want to partner with us, they want to use our technology and our deemed development expertise to help them succeed in that tough market just becoming tough internally as well.

Adam Krejcik - Eilers Research

That’s helpful. Thanks guys. Congrats on the quarter.

Eric Ludwig

Thanks.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Darren Aftahi from Northland Capital.

Unidentified Analyst

Hi, guys, this is (indiscernible) for Darren. Congrats in great quarter. I have two quick questions. Firstly, can you talk more about your focus on improved target marketing through gas in FY ‘14?

Niccolo de Masi

Sure. So I think you want to talk about marketing, you want to talk about game-as-a-service as a product strategy?

Unidentified Analyst

Both?

Niccolo de Masi

Okay. So you are sort of asking how we can improve, make our marketing more targeted via some of the connected services that were running?

Unidentified Analyst

Correct, through gas.

Niccolo de Masi

Okay. I think it’s a Chris question.

Chris Akhavan

Sure. I guess I would answer that by saying some of the technology that we have been working on and that we have deployed allows us to look at a lot of characteristics of the users that we are acquiring and optimize against those characteristics. So these are things like demographics, age and gender of course, but also interest that the user may have expressed as well as device characteristics and the OS version they are on, tablet versus phone etcetera and where they are located as well as a number of other different variables that we can look at and then optimizing real-time against those different characteristics across multiple channels that we are acquiring customers from. So, ultimately it generates the highest return on our ongoing paid marketing spend. The technology piece of that just allows us to rapidly identify where we should be spending and how we should be spending to maximize our returns.

Niccolo de Masi

Now obviously in the longer term when we talk a little about those on prior calls, the game is a service, infrastructure allow us know more about our users and keep track of them, so there will be also a lot more in Glu in-game merchandising that we can take advantage of. So that’s kind of less marketing per se and acquiring users and more how do you maximize life term value of the users you have.

Unidentified Analyst

And then my second question, I apologize if I missed this, but how many purchases that you have in 4Q and what was the average selling price?

Niccolo de Masi

Sure, yes. That’s in our back page of our supplemental presentation from those numbers. So give me a moment here.

Eric Ludwig

It will be in 40s.

Niccolo de Masi

Yes, I’d say, it’s $3.1 million transactions at $10.48 on average.

Eric Ludwig

On Slide 40.

Unidentified Analyst

Alright, thank you so much and again congrats on the great quarter.

Niccolo de Masi

Thank you.

Operator

Thank you. And we also have a question from the line of Mitch Bartlett from Craig-Hallum.

George Kelly - Craig-Hallum

Hi guys. This is George Kelly on for Mitch. First question, advertising in the quarter I think you said it was 21% increased a lot sequentially and year-over-year. And just wondering if there is something seasonally there that drove that or if that’s a percentage that we could expect for 2014?

Eric Ludwig

Yes, I think we see – you certainly saw a bit of seasonality, this is Eric, in the fourth quarter due to big advertising budgets around the holiday time horizon. So, it was a bit seasonable. In addition to that though we are up from the prior quarters and prior quarters given Chris’ focus when he got here was early drive improved advertising and seeing the new team has done an amazing job making that happen. So, a bit execution, a bit seasonality in Q4. I probably would just recommend not trying to get overly aggressive, trying to model a business on advertising versus on purchases. We make product decisions at every quarter that may change that and the overall bottom line not really impacted either way.

Chris Akhavan

Yes. George, this is Chris. I also add to that that in the lift that we did see lot of that was driven by new channels that we had not integrated previously. So it wasn’t just simply a matter of existing ad relationships growing, there is also a lot of new advertising we added into the mix that drove that growth.

George Kelly - Craig-Hallum

Okay. Well, was there – is there anything specific to Deer Hunter that makes – is Deer Hunter a lot more weighted towards advertising than the overall average?

Chris Akhavan

One thing that sets up well with Deer Hunter is that we obviously have a large percentage of the interest coming from North American market. So that is helpful for advertising purposes. I think that those are the markets are in the highest demand from an advertiser perspective.

George Kelly - Craig-Hallum

Okay. And then a question for Niccolo, you mentioned at the beginning of the call that you think you see barriers continuing to increase and it’s getting – I took that as it’s getting more and more expensive to create new games? How was that played out in the last few quarters, what is sort of the trajectory of that and how do you expected to kind of to move through 2014?

Niccolo de Masi

So, we are not expecting much of the change between 2013 and 2014 and sort of average title cost and so on. My comment was much more about the expertise than the cost. So I think if you look at what’s happened to Glu’s business and we have shift the bigger shooter game every year in a row since there have been a Glu right for 2010, ‘11, ‘12, ‘13, we don’t have a four years in a row and if you look at the sophistication of here under 2014 compared with something we shift in 2010 or early 2011, we come along way, we’re still pushing the bar on visuals, but now we’re also getting a lot more, it’s a deep with regards to how much money you can spend in the game were the sort of socially competitive elements are in the titles and then even beyond that thinking about how quickly people can get in and out of the game, how much the (indiscernible) etcetera, etcetera. So it sort of highlights really the sort of – I would say overarching complimenting that our skills that we build up and the journals were strongest on. And I think that it’s getting difficult to compete in any journal without being in the top three, top four, top five businesses that have all the interlocking still such we need to be world-class.

And I think that’s obviously going to continue. There is no doubt in my mind that we can continue shipping franchise – extension franchise sequels every product cycle and every time we do we expect this in my script to approximately doubled of what we did in the lifetime revenue of the prior release and some of that market growth, but a significant portion of that growth comes from us of doing more with the gain to get a higher percentage of people to pay and the percent of pay of course sustain against longer spend more of the lifetime. So, we’re pleased with our positioning we’ve always had a view that action adventure gaming was going to be a bigger, not smaller piece of the market, and I think the last two or three years there has been balance of skepticism around how big an action title could be.

Obviously Deer Hunter shown that you can put out a $50 plus in a growth revenue title, lifetime revenue title and if you can do that given that we came from a world of $5 million titles probably for things like Gun Bros 1, there is room for that to run so, very comfortable ultimately with the trajectory we’re on with that and our ability to actually grow revenues substantially faster than development cost and maintenance cost of each of these releases.

George Kelly - Craig-Hallum

That’s helpful. That’s very helpful. Just one last question, I believe you said you expect Eternity Warriors like you were just talking about double in this – the second version, what was the total for Eternity Warriors 1?

Niccolo de Masi

It is Eternity Warriors 3 actually we re on so, I was referring to a doubling from the second one, we’ll look that up.

Eric Ludwig

Yes, I mean, we definitely announced the numbers throughout the course of time, I think EW.

George Kelly - Craig-Hallum

Was it ’12 or ’13 or so, is that about right.

Eric Ludwig

It’s probably about right.

Niccolo de Masi

’10, ’11, ’12, somewhere, yes.

George Kelly - Craig-Hallum

Thank you.

Eric Ludwig

Sure.

Operator

Thank you. And that concludes our question-and-answer session for today. I’d like to turn the conference back to management for any including remarks.

Niccolo de Masi - Chief Executive Officer

Alright. Allow me to close by thanking my colleagues for their efforts and our stockholders for their continued support. We were lot to be proud of both in our performance in the most recent quarter as well as our guidance for 2014. We are confident in the strength of the foundations we have laid and our ability to drive long-term robust sustainable growth. Thank you again for joining the call.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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