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Glu Mobile, Inc. (NASDAQ:GLUU)

Q3 2010 Earnings Call

November 02, 2010 04:30 pm ET

Executives

Greg Cannon - VP, Finance

Niccolo de Masi - President & CEO

Eric Ludwig - SVP, Assistant Secretary, & CFO

Analysts

Operator

Good afternoon. My name is Bonnie and I will be your conference operator today. At this time I would like to welcome everyone to the Glu Mobile third quarter 2010 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Mr. Cannon you may begin your conference.

Greg Cannon

Good afternoon everyone and thank you joining us on the Glu Mobile third quarter 2010 financial results conference call. This is [Greg Cannon], VP, Finance from Glu Mobile. On the call today we have CEO, Niccolo de Masi; 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 the actual results to differ materially from those in the forward-looking statements.

We caution you to consider the important risk factors that would 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 thoroughly detailed under the caption Risk Factors in the Form 10-Q filed with the Securities and Exchange Commission on August 9th, 2010.

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 or impairment of auction-rate securities, restructuring charges, the non-equity component of the MIG Earnout, transitional expenses and foreign currency gains and losses primarily related to revaluation of assets and liabilities.

These non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results and we encourage investors to consider all measures before taking 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 third quarter results.

The press release also has been furnished to the SEC as part of a Form 8-K. In addition, please note that the date of this conference call is November 2nd, 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 a property of Glu Mobile and any recording, reproduction or rebroadcast of this conference call without the expressed written permission of Glu is strictly prohibited.

With that, I will turn the call over to Niccolo. Niccolo?

Niccolo de Masi

Good afternoon and thank you everyone for joining us today. I'd like to begin by announcing that Ben T. Smith, IV a pioneer in the freemium mobile gaming space has joined our board effective today. Ben was one of the earliest investors in Tapulous and Mesmo and provided leadership to the Tapulous board through its sales to the Walt Disney Company earlier this year.

He is also an investor and Board member in a number of other social platforms including as co-founder of MerchantCircle.com and Spoke Software. We look forward to benefiting from his insights and support. On my first earnings call with Glu this past February we settled a strategic direction for Glu focusing on freemium, social, persistent games that can reach all smartphones and tablets.

We’ve been hard at work ever since bringing in and integrating the new DNA that we needed, retooling teams and processes. In Q2 and Q3 we launched updated versions of our earlier iPhone games with freemium retrofitting social features, micro transactions, offers and ads. Our confidence in operating games as a persistent service has grown. Monthly active users for the month of September were over 4.2 million.

Per our plan, we launched Gun Bros, last Thursday our first of five social freemium titles that we plan to launch in Q4. As many of you may have already seen, Gun Bros previewed strongly in Q3 and has thus far been downloaded more than 490,000 times. It is currently ranked at number four in top three apps in the U.S. Apple Apps store. Our first freemium product Toyshop Adventures went live on October 20th and has been downloaded over 680,000 times. It is currently ranked number 13 in top three apps. Four more freemium social titles will be launching for the holidays including Magic Life which we previewed in Q3.

Three new titles will be unveiled at a launch event in San Francisco on November 11th. All of our Q4 products will be available on the iPad and Android phones a few weeks after their initial iPhone launch. In Q1, we believe we will be able to achieve simultaneous launches on iPhone and iPad.

Glu game availability for all iOS and Android smartphones and tablets significantly expands the potential for virility and social functionality. The universe of friends Glu gamers can invite to play with or against [leachers] creatures across operating systems, carriers, devices and geographies. We will further expand coverage as other smartphone operating systems and devices gain comparable traction with end consumers.

Our Q4 games will also be supported by our server side technology which will enable users to log-in for multiple social networks beginning with game center on Facebook and iOS in Facebook and OpenFeint and Android. We anticipate adding support for additional social networks in the future.

Moving now on to our Q3 results highlights. Progress continued in the third quarter with smartphone revenues going 12% quarter-over-quarter to 2.3 million even with limited new launches. Micro transactions and advertising revenues grew 98% quarter-over-quarter to account for 25% of total smartphone revenues. At the end of September Glu had cumulatively over 31.9 million installs on smartphone platforms.

Q3 total revenue came in at 15.5 million allowing Glu to be positive with an operating cash flow level for the sixth quarter in a row. In order to keep our shareholders informed of our progress, from time-to-time we will be disclosing monthly active users, installs minutes and daily active users on both the glu.com website and various industry media such as Inside Social Games, local news, Tech's Crunch, Pocket Gamer and Mobile Entertainment.

As mentioned previously, we anticipate launching approximately five to six titles per quarter. Glu’s internal focus continues to be cross platform mobile social gaming. However, we recently had interest from and are accurately exploring external parties licensing or co-developing original IP for other platforms such as Facebook and PlayStation Portable. By way of example, we recently entertainment a joint agreement with Hi Point Studios at Boston to bring Gun Bros to Facebook with a live date expected in January.

In closing, I would like to highlight the substantial interest in value increasingly attached to social gaming. We now are seeing a number of exits in this space including Playdom's acquisition by Disney, PlayStation's acquisition by EA, Slide's acquisition by Google and (inaudible) recent acquisition by DNA. We viewed this M&A activity as validation of our decision to transform Glu's operations to focus on social games for Smartphones and tablets.

I think those take over for internal, external for the supports and dedication of the new Glu. I will now hand over to Eric to discuss our third quarter financial results in detail.

Eric Ludwig

Great, thank you Niccolo. Let me first review our third quarter results and then I will go through outlook. Starting with the income statement for the third quarter, total revenue for the quarter was $15.5 million which was above our guidance range of 13.6 to $14 million but down towards a $16 million during the second quarter of 2010 and 19.6 million during the year ago quarter.

Similar to the second quarter of 2010, the feature film business performed better than expected despite declining approximately 5% sequentially and 29% on a year-over-year basis. Breaking out on revenues, our Smartphone revenues were $2.346 million which was 15% of our total revenues and which was up 12% compared to $2.88 million in the second quarter of 2010 and up approximately 90% compared to 1.232 million in the third quarter of 2009.

As Niccolo mentioned micro transactions and in-game advertising increased 98% on a quarter-over-quarter basis and accounted for 25% of all Smartphone revenues and we achieved this growth despite our limited launch in new titles during the third quarter.

In the third quarter across all titles we generated 491,000 micro transaction billable events compared to 294,000 during the second quarter of 2010. We remain extremely incurred by the strength given our new free to play persistent titles launching in the fourth quarter.

As a reminder we defined some upper revenues at the revenue from title sold on Android Windows Mobile and Windows 7, Blackberry, iPhone, iPad, palm and OV as well as revenues from in-game advertising. Should we noted that we started including this quarter revenues in the Symbian operating systems in our definition of Smartphones for the figures that I just reported which is why Smartphone revenues for the second quarter of 2010 has increased some of the amount that we reported during the last quarter's call.

As Niccolo mentioned, the fourth quarter of 2010 marks a significant change for our business as we begun launching our first batch of premium titles. The following of the measures in the metrics that we will be reporting on a quarterly if not monthly basis. New and total installs of our titles as of September 30, 2010 we have 32 million total installs on the Apple platform and this increased by $7.2 million during the third quarter.

Monthly active users are now related to the number of unique customers who played our games during a given calendar month. This measures important as a point to the number of consumers globally playing our games.

For the month of September 2010 we had 4.2 million monthly active users which is up from 3.7 million from the June 2010 period and daily active users or DAU relate to be unique number of consumers who played our games during a given day. For calculating this measure we look at the unique number of consumers that play our games each day and then we take the average of the DAUs by day for the month to arrive at a rolling 30-days DAU average. In the month of September we averaged 413,000 daily active users which is up from 332,000 in June 2010.

Turning to specific revenue metrics, our top 10 titles accounted for 37% of revenue and the average revenue for top 10 title was $565,000 in the third quarter of 2010. Our largest title was 7% of revenue.

During the third quarter of revenue from new titles, represent 39% of revenue. In terms of the mix of revenue between licensed titles Original IP, Original IP was 22% in the third quarter of 2010.

Since the majority of titles being launched in the fourth quarter of 2010 and beyond are Original IP we anticipate this percentage to turn high in the future.

Turning to the breakdown by carrier, our top four carriers accounted for approximately 39% of revenue in the third quarter of 2010. We had two carriers in the third quarter of 2010 that represented 10% of more of revenue Horizon at 14% and China Mobile at 11%. Should we know that Apple was our third largest customer during the quarter and was just under 10%, we anticipate in the fourth quarter that Apple would be 10% of greater customer. By geography our revenue mix for the third quarter of 2010 was 49% in North America, 24% in EMEA, and 27% the rest of the world.

Royalties in the current quarter were $3.9 million which represented 25% of revenue compared to 31% for the second quarter of 2010 and 30% during the same period of last year. Excluding royalty impairment charges of $662,000 in the second quarter of 2010 and 513,000 in the third quarter of 2009, royalties in a percentage of revenue would have been 27% in Q2, 2010 and 27% in the third quarter 2009.

Turning to profitability, we will be providing non-GAAP measures for each third quarter 2010 expense category. A full reconciliation of GAAP to non-GAAP measures will include in the press release we issued today.

Non-GAAP gross margin was 75% in the third quarter 2010 which is up from 69% during the second quarter 2010 and up from 70% reported in the same period last year.

Excluding royalty impairments in the second quarter of 2010 and third quarter of 2009, non-GAAP gross margin would have been 73% in the second quarter of 2010, 72% in the third quarter of 2009. Total non-GAAP operating expenses in the third quarter of 2010 were 11.3 million down 1% from 11.4 million during the same quarter of 2010 and down 16% from 13.5 million during the same period of last year.

The sequential and year-over-year decline was a result of our ability credit cost more quickly and realized savings from recently announced restructurings. The combination of the better than expected revenue from our feature film business growth in the Smartphones and aggressive cost reductions resulted in us reporting a non-GAAP income from operations for the third quarter of $232,000 which is well above our guidance of the loss between 1.6 million and 1.9 million.

Income tax from the quarter was comprised from the tax expense of $442,000 and a $362,000 for formal holding taxes for a net income tax expense of 504,000. Our non-GAAP net loss of $362,000 or a loss of $0.01 per basic share exceeded our guidance range of a loss of $0.07 per basis share.

Let me unlock your results for the third quarter of 2010 on a GAAP basis which include $1.1 million related to the amortization of intangibles, $355,000 related to the allocation of stock-based compensation and $177,000 foreign exchange gain, the following expense levels determine in accordance of GAAP.

Cost of revenue 4.9 million, R&D 5.9 million, sales and marketing 2.7 million and G&A 3.1 million. For the third quarter GAAP loss from operations was 1.2 million and GAAP net loss is 1.6 million based on 36 million basic shares outstanding GAAP net loss is $0.04 per basic share exceeded our guidance range of a loss of $0.07 per basic share. Now on to our results for the third quarter of 2010 on a GAAP basis which include $1.1 million related to the amortization of intangibles, $355,000 allocation of stock-based compensation and $177,000 foreign exchange gain, the following expense levels determined according to the GAAP.

Cost of revenue 4.9 million, R&D 5.9 million, sales and marketing 2.7 million and G&A 3.1 million. For the third quarter GAAP loss from operations was 1.2 million and GAAP net loss is 1.6 million based on 36 million basic shares outstanding, GAAP net loss was $0.04 per basic share.

So as I mentioned earlier, a reconciliation of GAAP to non-GAAP gross profit expenses, incoming loss from operations and net loss can be found in our press release and current report of the Form 8-K filed with the SEC today.

Now, turning to the balance sheet. Cash and cash equivalents were $15.9 million as of September 30, 2010 compared to $6.2 million at the end of the second quarter and above our expectation of $14 million. As we recall, we closed the pipe fund raising in August for a total of $13.495 million. The better than expected ending cash balance at the end of the quarter was due to generation of $389,000 in cash from operations as we achieved strong cash collections during the quarter. This is the sixth consecutive quarter for Glu reporting positive cash flows from operations and it should be noted that we have cumulatively generated $3.7 million in positive cash flows from operations over the last seven quarters.

The strong positive cash flow from operations was offset by the $2, 914,000 payment during the quarter. Additionally in October 2010, we paid $722,000 of taxes that had been withheld in the September 30 special bonus payment made to the former MIG shareholders in China. In regards to remaining obligation to the former MIG shareholders we owe a final payment of $3,062,000 of principal and $54,000 of interest due on December 31, 2010.

At the end of the third quarter of 2010, we had 1.6 million outstanding on a line of credit with Silicon Valley Bank down from 2.8 million during the second quarter of 2010 and we are in compliance with all the financial covenants related to the facility. It should be noted that we could have drawn down an additional $580,000 on the line of credit, but we chose not to.

During the third quarter 2010, we achieved EBITDA as defined by our lender of a positive $689,000 which is well above the covenant of a loss of $500,000. To help you reconcile our third quarter GAAP loss of 1,603,000 to the third quarter EBITDA as defined by our lender, we need to add back 98,000 of interest expense $504,000 of income tax expense, $450,000 of depreciation expense, $1.6 million amortization of intangibles, $3.5 million of stock based compensation and then $177,000 foreign exchange gain.

So in summary I am very pleased with our ability to generate positive cash flows from operations and generally a small operating profit as you can hear for and reposition the business. The combination of better than expected feature phone revenues, [qwerty] smartphone revenues, accelerated reduction in operating expense more recently restructuring initiatives and strong receivable plus has led to a solid quarter.

Now lets review our guidance, for the fourth quarter of 2010 we currently expect revenue to be in the range of $14 million to $14.5 million.

This represents a sequential incline of revenues as we are launching fewer titles of feature phones globally and you don’t expect to decelerate feature phone declining to be offset by the expected increasing revenues from smartphone is launching during the quarter from our premium titles in the fourth quarter which are back and awaited during the quarter and which revenues differed over three months.

We expect core OpEx for the fourth quarter of 2010 to be 13.4 million. This is up 19% on a sequential basis approximately half of this OpEx increased related to the increased headcount in R&D and sales and marketing and the other half relates to a significant increase in variable marketing spend to market our premium titles.

We believe that growth in the social mobile market is accelerating and the consequent and the time to invest in our products is now. Our non-GAAP operating loss for the fourth quarter is forecasted to be in the range for the loss of $3 million to a loss of $3.3 million. Our income taxes most of the quarter is expected to be $388,000 and reflects form of taxes of greater than $30,000 and an income tax expense of $38,000.

Non-GAAP net loss for the fourth quarter is expected to be between a loss of $3.4 million and a loss of $3.7 million or a loss of $0.08 per basic share. A non-GAAP loss excludes $1 million for amortization of intangibles approximately at $370,000 to anticipated stock-based compensation at a restructuring charge of $2.3 million. Weighted average common shares outstanding for the fourth quarter 2010 are expected to be approximately $44.6 million basic and $45.3 million diluted which includes the four facts of our recently completed financing.

GAAP net loss for the fourth quarter is expected to be into the loss of $7 million and a loss of $7.4 million or a loss between $0.16 to $0.17 per basic share. We are forecasting cash from operations to be slightly negative in the fourth quarter with our line of credit draw down increasing to $2.5 million and an earning cash balance of approximately $13.1 million after the repayment of the December 31, payments in the form of MIG shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions). At this time there are no questions.

Niccolo de Masi

All right. We appreciate you dialing this afternoon, you see we have made substantial progress in the past quarter. We look forward to chatting again soon and the Christmas Results. Have a good afternoon.

Operator

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

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