Glu Mobile's (GLUU) CEO Niccolo de Masi on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Glu Mobile (GLUU)

Glu Mobile, Inc. (NASDAQ:GLUU)

Q2 2014 Earnings Conference Call

July 30, 2014 4:30 PM ET

Executives

Greg Cannon - VP, Finance and Corporate Controller

Niccolo de Masi - CEO

Eric Ludwig - EVP and CFO

Analysts

Doug Creutz - Cowen and Company

Mike Olson - Piper Jaffray

Sean McGowan - Needham & Company

Michael Graham - Canaccord Genuity

Mike Hickey - The Benchmark Company

Adam Krejcik - Eilers Research

Operator

Good day, ladies and gentlemen and thank you for standing-by. Welcome to the Glu Mobile Second Quarter 2014 Earnings 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) Please note, today’s conference is being recorded.

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

Greg Cannon

Good afternoon, everyone and thank you for joining us on the Glu Mobile second quarter 2014 financial results conference call. This is Greg Cannon, VP of Finance from Glu Mobile. On the call today we have CEO, Niccolo de Masi; and CFP. 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 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-Q filed with the Securities and Exchange Commission on May 12, 2014.

During this call, we will present both GAAP and non-GAAP financial measures. The non-GAAP measures are not intended to be considered in isolation from, a substitute for, or superior to our GAAP results and we encourage investors to consider all measures before making an investment decision. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and the quantitative reconciliation of those figures, please refer to today’s press release regarding our second quarter results as well as the supplemental presentation accompanying today’s earnings call that can be accessed via our Investor Web site at www.glu.com/investors. The press release and the supplementation presentation have also 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 Web site demo videos of titles that we expect to launch in the coming months. Given SEC guidance regarding the use of social media channels to announce material information to investors, we are notifying investors, the media, our players and others interested in the Company, that in the future we might choose to communicate material information via social media channels or it is possible that information we disclose through social media channels maybe deemed to be immaterial. Therefore, we encourage investors, the media players and others interested in Glu to review the information posted on the Company’s forum, the Company’s Facebook site and the Company’s Twitter account. Any updates to the list of social media channels we will use to announce material information will be posted on the Investor Relations page of our Web site at www.glu.com/investors.

In addition, please note that the date of this conference call is July 30, 2014 and any forward-looking statements that we may make today are based on assumptions that we believe to be accurate as of this date. We undertake no obligation to update these statements as a result of future events. Lastly this conference call is the property of Glu Mobile and any recording, reproduction or rebroadcast of this conference call without the expressed written permission of Glu is strictly prohibited.

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

Niccolo de Masi

Good afternoon and welcome to everyone joining us to what will undoubtedly be a memorable call for new and long time Glu shareholders alike. I am extremely pleased to report today that Glu has reached several important milestones. Front and center there is a tremendous performance of two recent launches, Kim Kardashian: Hollywood and Dino Hunter: Deadly Shores. These titles have so far peaked in the number three and number 16 U.S. iPhone top grossing positions respectively and are driving our guidance for Q3 to record highs. Both titles reached number one top three in the U.S. iPhone Store with branding and gameplay that resonates strongly with consumers worldwide.

We now expect Q3 2014 to be the single largest quarter in Glu’s history to-date, both on a non-GAAP revenue and adjusted EBITDA basis. In fact for Q3 we expect to report nearly double the adjusted EBITDA of our prior record quarter in Q1 2014. I am delighted that our share price is trading at the highest levels of my 18 quarter tenure and in fact the highest it has been since November 2007. Our $650 million plus market cap is in fact the largest in our history to-date. As Eric will detail later, today we are also substantially upgrading expectations for the full year 2014.

The appreciation in our equity value has allowed us to consummate an important strategic acquisition that brings Glu the current number one grossing racing game in both the U.S. Apple and Google store fronts. 30 minutes ago we announced our transaction to acquire Cie Games owner and operator of the Racing Rivals franchise. Cie Games brings to Glu approximately 50 new colleagues based in Southern California as well as a significantly profitable operating business. We anticipate the transaction being adjusted EBITDA accretive from its first quarter of consolidation.

Cie Games is our largest acquisition to-date with total consideration of approximately $100 million. Circa $30 million of this is being satisfied in cash with the balance in Glu common stock priced using the average closed during the 10 consecutive trading days prior to today. Total consideration equates to an approximately 8 times multiple of current 2014 run rate EBITDA from Cie Games. We are delighted with the quality of studio talent, the anticipated near immediate accretion and retention prospects of all key personnel. In addition to Racing Rivals, Cie is the creator of the popular Facebook game Car Town which will be launching as a fresh mobile game in 2015.

Our Cie games acquisition is a continuation of the consolidation strategy commenced with our transaction last quarter to bring the Diner Dash franchise to Glu. Glu has built scaled central services in our headquarters. With a rigorous transaction selection process we believe Glu is uniquely able to plug in quality studio operating businesses which we can rapidly and meaningfully add value to. We anticipate that our global publishing monetization, live operations and distribution capabilities will drive greater cumulative lifetime revenues from games such as Diner Dash 10 and Racing Rivals and could be generated standalone.

The greater scale we expect to maintain growth momentum through our combined organic and inorganic strategies. I am committed to the proposition that each of our studios needs to specialize. We have such aim to engender in each studio what I call team talent product alignment, a total focus on the genre it is passion about becoming the best in the world app. With more scale and more studios comes a welcome ability to more rapidly make high level growth decisions about each of them. Such decisions were based on our assessments of how they are performing against world leaders in their genre.

Q2 results came in ahead of expectations. Non-GAAP revenue of $35 million was 7% ahead of the high-end of guidance. The adjusted EBITDA loss of $0.9 million was also significantly above expectations. The rapid initial attraction of Kim Kardashian: Hollywood drove this outperformance, despite the title only contributing 5 days of revenue to the quarter. Our consistent strong execution on the advertising side of our operations supported the beats in the quarter where we had limited new title launches.

Moving now to our product roadmap. Our Q3 slate still has Tap Sports Baseball yet to launch in mid-August. Q4 in turn will see a considerable number of new launches including Diner Dash 10 brought into the Glu fold by the PlayFirst acquisition last quarter. But we are optimistic regarding improvements from current beta levels Diner Dash 10 lifetime value and organic coefficient metrics already looks solid.

On the action side of our portfolio, we will deliver Contract Killer, Global Assault and Frontline Commando, World War II by year end. Q3’s strength means that 2014 is shaping up to deliver impressive top and bottom-line growth over the full year 2013. Excluding the impact of Cie Games revenue is expected to grow by 90% and EBITDA from a loss making to substantially positive $18 million plus position. 2014 will indeed be the biggest and most profitable years in Glu’s history with over $20 million in expected free cash flow generation even excluding the impact of Cie Games.

To put our growth in perspective, we now expect to generate significantly more revenue in the second half of 2014 than we did for the entire year of 2013. With the next installment of the Deer Hunter franchise the launch of our 007 James Bond game, our Terminator Genesis Shooter plus other Glu franchise titles we are optimistic that 2015 will be even stronger.

I’ll now hand you over to Eric Ludwig for details on our financial performance and guidance.

Eric Ludwig

Great. Thank you, Niccolo. I am very pleased with our ongoing strong execution during the second quarter, as we once again exceeded expectations across all of our financial metrics. I’ll first detail the Q2 results and discuss the pending Cie Games acquisition. I will then conclude by providing our outlook for the third quarter and full year.

Summarizing our key financial highlights for the second quarter, total non-GAAP revenues were $35 million, a 51% year-over-year increase and above the high-end of our guidance range. Non-GAAP gross margin was 69%. Adjusted EBITDA was a loss of $900,000 and our non-GAAP net loss was 1.6 million or EPS of a loss of $0.02 per basic share. We increased our cash balance by $34.5 million to 71.5 million due to the combination of the proceeds received from our recent fundraise as well as solid free cash flow generation. We had 60.2 million downloads of our titles during the second quarter. Our daily active users in June were 5.3 million while our monthly active users for June were 51.9.

Summarizing the full results for the second quarter, total non-GAAP revenue was 35 million which was above our guidance range of 30.6 million to 32.7 million. Our three largest titles during the second quarter represented approximately 60% of total non-GAAP revenues. Kim Kardashian: Hollywood launched late in June and only contributed five days of revenue was not a top three title for the quarter.

Subsequent to the end of the quarter we released Dino Hunter: Deadly Shores and as we have previously reported we have set company records for single day revenue, download and DAU with both this game and Kim Kardashian: Hollywood. We expect significant contributions from both games during the second half of the year given the strong continued momentum.

During the second quarter our non-GAAP gross margins of 68.9% was above our guidance of approximately 67% primarily due to the better than expected advertising revenue which does not have any platform fees associated with them. And as a reminder the quarter-to-quarter variability in our gross margin is driven by branded IP royalty costs as well as potential increases in hosting costs to support our games and the service titles.

Total non-GAAP operating expenses were 25.6 million in the second quarter approximately $400,000 better than our guidance. The combination of our revenue and gross margin over performance as well as lower total operating expenses resulted in an adjusted EBITDA loss of $900,000, significantly better than our guided range of negative EBITDA between 3.4 million and 4.5 million.

As a result, we reported a non-GAAP net loss of 1.6 million which also significantly exceeded our guidance of a loss of 4.1 million to 5.2 million resulting in non-GAAP EPS of negative $0.02 per basic share. As always a full reconciliation of GAAP to non-GAAP financial measures was included in the press release and in the supplemental presentation we issued today.

Now turning to the balance sheet. As of June 30th, our cash and equivalents totaled 71.5 million which was up $34.5 million from the end of the first quarter. During Q2, we generated $5 million of cash from operating activities and received approximately 32.4 million in proceeds from our recent follow-on offering which is net of underwriting discounts. Additionally, we received $300,000 from stock option and warrant exercises. This was partially offset by $2.3 million from repaying the acquired debt of PlayFirst and using approximately $480,000 in cash for in other investing activities.

Before I discuss our financial outlook, I wanted to provide a quick comment on the integration of PlayFirst and Cie Games. We acquired PlayFirst in the middle of May and have fully integrated them into Glu. We brought on zero G&A and sales and marketing personnel and does not need to add any additional Glu hedge to support them. Similar to PlayFirst, we expect the integration of Cie Games to be very smooth and we’re confident in our ability to realize a significant return on our investment given our past M&A successes including Griptonite which developed Deer Hunter and Dino Hunter, Blammo Games, our Stardom and Kim Kardashian Development Studio, GameSpy and the Deer Hunter IP.

Now turning to guidance. Included in our supplemental presentation you will find a detailed breakdown of our guidance for Glu standalone, Cie Games standalone and the combined entities. You should note that the guidance for Cie Games assumes that we will close this acquisition on August 15th. If the acquisition takes longer to close, it will obviously reduce the revenue EBITDA contributions to Cie Games during Q3 and 2014 accordingly.

For purposes of this call I will just discuss the combined guidance. For the third quarter 2014 given the ongoing momentum with Kim Kardashian: Hollywood and Dino Hunter along with the expected edition of Cie Games, we’re increasing our total non-GAAP revenue guidance range to 80 million to 85 million compared to our prior guidance of 37.5 million to 39.8 million. This is an increase of over 200% on a year-over-year basis.

Kim Kardashian: Hollywood continued to be ranked number five top grossing in the U.S. app store for the iPhone. Our second and third largest titles during the quarter are expected to be Dino Hunter and Racing Rivals. In addition we continue to expect a solid contribution from Deer Hunter 2014 and Eternity Warriors 3.

During the third quarter we expect non-GAAP gross margin to be approximately 58% which is lower than Q2 primarily due to the higher royalty costs for license IP and higher hosting cost. As I mentioned earlier the company’s blended gross margin will reflect the revenue mix between original IP and branded IP titles.

Our non-GAAP OpEx for the third quarter is expected to be in the range of 37 million to 38 million. As a result we except third quarter adjusted EBITDA to be in the range of 10 million to 12 million or 14% of total non-GAAP revenues at the high-end of guidance.

Finally we expect our cash balance at the end of third quarter to be approximately $47 million. This reflects paying approximately $30 million for Cie Games during the quarter. Glu standalone is expected to be cash flow positive during the quarter.

Regarding the full year 2014 we’re increasing our total non-GAAP revenue to be in the range of $222 million to $232 million compared to our previous guidance of 155 million to 161.5 million. The increase reflects adding the Q2 beat to the strong Q3 outlook and the addition of the expected post closing revenues generated by Cie Games.

Included in the supplement presentation you will find the details of our guidance for both the third and fourth quarters. I would highlight that we expect revenues to decline in the third -- from the third quarter levels to the fourth quarter due to an expected decline of revenue from Kim Kardashian: Hollywood, but we are still guiding to positive EBITDA for the fourth quarter of $3.5 million to $5.5 million.

We currently expect non-GAAP gross margin to be approximately 62% for 2014 down from our prior guidance of 66.8%. The year-over-year decline in gross margin is primarily due to the mix of title based on original IP versus licensed and third-party content. Non-GAAP operating expense for 2014 are expected to range from 121.7 million to 123.4 million, the increase from last quarter’s full year guidance is due to the expected $5.9 million addition of OpEx from Cie Games and the incremental variable marketing spend related to Kim Kardashian: Hollywood and Dino Hunter to support their growth.

As a result, adjusted EBITDA for 2014 is now expecting to be in the range of 19.1 million to 23.1 million. Finally, we expect to end 2014 with approximately $64 million in cash and short-term investments and no debt. In summary, I am extremely excited about the momentum for our business and that we add in the Racing Rivals franchise team to Glu. A significant traction we’ve had with Kim Kardashian: Hollywood and Dino Hunter highlights that our monetization strategy is working. I look forward to updating you on our progress next quarter.

And with that we’ll open the call for questions, operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Doug Creutz from Cowen and Company.

Doug Creutz - Cowen and Company

Thanks. I wonder if you could talk about on Kim Kardashian, this is a game that you had in that kind of prior duration that was a modest success for you guys. Obviously having the branding, I am sure helped with the downloads, but I am not sure that it necessarily would have helped with the monetization, so can you talk a little bit about what you may have done differently on the monetization side this time around that helped it be so successful? Thank you.

Niccolo de Masi

Yes, Doug it is Niccolo. I am obviously not going to reel off a list of things that are competitively sensitive on sort of secrets sauce and tools of trade that may have generated higher ARPDAU on this title than prior ones. But I will say that her audience base, Kim’s audience base has been a tremendously tight fit with the way this casual RPG game works. And you can see that as evidenced in the reviews. I think we have 60,000 or 70,000 5 Star reviews of that game, it is the best reviewed game in the top 10 grossing let alone the top 10 free and probably even in the top 100 grossing and free. So you have a lot of happy gamers.

And happy gamers retain better than partially happy gamers. So a lot of the impact of the monetization is coming from better retention. And we think we got a lot of first time gamers actually from her social audience into the title. So we are seeing better fundamental metrics on this game than we have in almost any other Glu title to-date. It helps that her audience has a significant contribution from, first world countries which tend to have higher GDP per cap and a higher ARPDAU. But overall we’re seeing kind of the best of all worlds. Whereby, yes, the game download exceptionally well it has a high organic coefficient a low CPI, but it isn’t just that that’s driving success it’s actually great on every metric, it’s great on how many people are virally downloading the game and telling their friend about it it’s great, it’s best in class for retention, it’s best of call for ARPDAU.

And I think a lot of it is driven by the fact that we are working so well with Kim, on not only the original game launch but the updates there are events running many weekends there are new updates going out frequently some of whom, some of the updates of which are obviously somewhat in parallel with thing that were going on in Kim’s real world schedule and calendar. So we have the first real tie in, I think that’s ever been done with a brand or lifestyle that also can be reflected in the game going on. We have the first voiceovers that are done by the brand. As a package we’re obviously doing something very unique and so we are the first game that sort of cuts it way into the top five grossing, I think in a better part of a year actually in the U.S. and that’s speaks to frankly the originality of what the overall experience is and the satisfaction that we’re delivering for really tens of millions of players.

Doug Creutz - Cowen and Company

Does the overall success of the game you talked a little bit about hosting cost, did you had to invest in sort of additional servers to support the game? And or how you had to staff up at all, given the success of the game I would imagine you want to get as much incremental content out as you can, can you talk a little bit about how that’s going?

Niccolo de Masi

Sure, [indiscernible] right about that, I mean we feed the winners and starve the losers, Glu overall and you can imagine there is more people working on the game at this point to keep the content updates going than there were certainly at some points in development. It is obviously a big focus for us and we have the better part of an entire studio location supporting the title. Because we think it can be nearly evergreen. The beauty of this partnership with Kim and the title game we have built it’s a narrative RPG and it can be extended almost instantly. So intend to do just that and roll on an annual basis with as many updates the same cadence we’ve achieved to-date. So, I mean we’re very pleased the hosting cost yes they’ve gone up but they’re not, they are certainly not anything out of line with what the Glu average has been in the past. And this game whilst it has all the [indiscernible] elements to is designed to be pretty robust. And it’s not certainly kind of title that you can play when you’re on a plane but the same time it’s not a 100% download only gameplay.

Operator

Thank you. Our next question comes from the line of Mike Olson from Piper Jaffray.

Mike Olson - Piper Jaffray

Thanks. Good afternoon. So on the Kim Kardashian: Hollywood game, we can all try to do some calculations on this. But would you be willing to just share any details or provide any qualitative comments on; first, what the game is doing kind of in daily revenue; and then second, what the revenue or profit share that you’re paying out as it relates to that game? And then second thing be that I think your guidance strategy is it fair to say has always kind of had a history of trying to be relatively conservative around how highly ranked some of these strong titles will continue to be? Can you just talk about kind of again qualitatively like where you are assuming the game will continue to be ranked when you think about what you’ve incorporated into the full year guidance?

Eric Ludwig

Mike, this is Eric. I’ll answer probably half of what you [indiscernible] the answer there so in terms of what have we said publicly Kim’s title was live for five days in Q2 and it generated $1.6 million of revenue in Q2. So that simple math is $320,000 a day just right there and that’s just pure math that you can do. We have said in the press release from about a week ago, week and half ago, that this title has had I think 18 consecutive days being bigger than Deer Hunter for that is peak day as well. So it’s obviously had great strong momentum. It’s been sitting in the top ranking charts at number five between three and five since launch of right around the 4th of July weekend. So that’s kind of where we are at from a title perspective and this probably all we will go into -- we’re not breaking down the guidance as to how much of this coming from this title.

In terms of royalty we’re not going to talk about the royalty per se you can do some math by looking at the gross margin. But we have had both Kim Kardashian royalties, Hercules royalties, other title royalty the RoboCop as well this quarter plus the hosting cost that I talked about and Niccolo talked about. And then in terms of guidance obviously we are guiding very, very strong quarter, $80 million to $85 million in Q3 on the back of both Dino Hunter and Kim Kardashian and Cie Games combined there. And we are guiding down sequentially from Q3 to Q4.

So yes there is an assumption that revenue will come down. We don’t equate that into this being a top five to top X we just really look at this more from a revenue curve as opposed to what does that translate into in terms of revenue as opposed to ranking. And so I couldn’t give you a corollary as to what the revenue I am guiding would look like from a ranking. But it certainly is not being held assumed to be top five for the rest of the year.

Mike Olson - Piper Jaffray

That’s helpful. And then one last one, what kind of stickiness do you kind of expect to see with the Kardashian game compared to other games and genres that I mean your portfolio now or have had in the past that I guess really this question is some have suggested that a title like this maybe should not have the longevity that some other genres could have. Could you just talk about why that may or may not be the case?

Niccolo de Masi

Okay, so there is two ways to looking at stickiness there is the retention metrics of the users in the game and then there is sort of I think what you are asking which is what is the half life of the sort S curve of the product look like. As I said with Doug’s question the fundamental retention per user basis is exceptionally good it is sort of Deer Hunter levels or better and all of our top games have seen great retention, day one, day seven, day 14 day 30. So that’s in really good shape. And lifetime value of the game is in really good shape because of that retention and because the ARPDAU also very high at least for Glu Games.

In terms of the game S curve half life it’s obviously uncharted territory here there has never been a game like this in the top 100 grossing let alone top five grossing or 10 grossing. We do believe that Kim’s in our 9th season on E and I am sure it’s going to end up going in other 90 seasons of the rate that her audience is going because it’s actually growing. On a worldwide basis it’s actually growing. So I think that you will see this title as you have with all the top 10 grossing titles likely persist for much longer than games that don’t make into the top 10 three year grossing. There is an extra call it organic audience boost that happens for titles that hangout in the top 10, free top 10 grossing for a long period of time because of virility and word of mouth as well as just the chart ranking effect of users going to the store and clicking on what they came to discover.

The likely PR coverage from this title I think will carry on and the tremendous pick that we’ve seen from all sources is also likely to carry on. In addition there is international growth. So this game is not localized at the moment it’s only in English and obviously we’re doing tremendously well given that is only in English. But we should never rule out the opportunity for us to start expanding that into markets where Kim’s brand overall has traction. So I think total revenues will have a lot of life to it and I think it’s years not months. And ultimately the composition may change somewhat as the years roll on but I think the prospects of seeing this game maintain as long as other top 10 grossing games of the over last year have is strong.

Operator

Thank you. Our next question comes from the line of Sean McGowan from Needham & Company.

Sean McGowan - Needham & Company

Your revenue increments from Kim Kardashian which [indiscernible] low compared to what Deer Hunter contributed, with much, much lower rankings. [Indiscernible] 300,000 a day given that rankings seems kind of low compared to what Deer Hunter was able to contribute at a much lower ranking level.

Eric Ludwig

Sean, this is Eric, the iOS version of Deer Hunter launched about seven to 10 days before the Android version versus Kim it was both iOS and Android combined. So I think you’ve got that factor in there as well, as well as the Kim title launch on the 25th and started building momentum over that weekend. So it’s a bit of launch cadence and timing around the launch weekend and comparing apples and oranges in terms of how many platforms are live.

Niccolo de Masi

The other thing Sean is remember Deer Hunter went out in 12 languages, also did well in Android as it gates, this title is not doing as well on Android as it is iOS and it’s not localized. So when you save the charts usually people are using the U.S. chart as a proxy for the globe. In this case the U.S. revenue is obviously, a bigger contributor of the total because of the lack of localization.

Sean McGowan - Needham & Company

Okay. Thanks. Great, that's helpful clarification. And another Kim question. Now, it seemed like this game, as a style of game, would lend itself pretty easily to maybe other celebrities. Is that something that you've, A, is it something you can do in terms of your contract with Kim? Would you do it? Would you do it within the confines of this game, or if you were going to do it, would you launch separate games with other celebrities?

Niccolo de Masi

I’d like to be able to say Sean that we never thought of that and it was a brilliant idea but obviously we have been churning on that as anyone who is associated with the company would expect us to be. I am not going to define what our contract says as that’s all confidential. But I will say that we’re not prohibited from potentially other games it really comes down to capacity and the quality of Glu. So we want to be able to do anyone we work with a lot of justice, if we do a game with them and we’re not going to compete in the reality segments certainly. But I wouldn’t rule out music or sports, potentially as other areas where similar type games could work.

So I mean look Glu overall is pursuing a pretty clear strategy which is take the six to eight proven game engines we have, make the most of them evolve them cautiously every year but make sure there is a clear business case behind every new title that we embark upon and make sure that we have that team talent studio product alignments and passion behind each product because as you know as well as I do it’s exponential revenue and profits for linear placements in the app store. So fewer, bigger better is still the overarching ambition here and that’s the same with what we do with the future of our Kardashian title. Having one great is a lot better than 10, because it concentrates her audience and concentrates monetization and focus from us as well.

Sean McGowan - Needham & Company

Okay. And then switching gears to the question about Cie, what can you share with us at this time about how the cadence of some of their product releases in 2015? I mean, it's looking like a pretty good year. But can you give us some sense of what the timing might be?

Niccolo de Masi

I think it’s a bit early to tell you what, we said we’re going to launch a game in 2015 with them. I think it’s probably overly comparatively sensitive as well as a bit early to be telling you when and whether there is more. But let’s just leave at that the focus on Cie is continuing to grow revenues from their breakout hit which is Racing Rivals. That game is basically a car based competitive massively multiplayer online game MMO. And that game continues to grow. So we have purchase the studio that’s still growing its product has not peaked in terms of overall monetization, it still has room to be optimized and expended and that is very much the focusing core of that studio and that operation. The second focus we’ll be getting a Car Town type mobile game out next year.

Eric Ludwig

And Sean I think just to add is that I think that we’re very pleased that we’re able to get that asset the leading number one racing genre on mobile for an 8x EBITDA multiple. So very, very competitive pricing for us and as it is part of our strategy of our M&A focus of trying to get good value to assets and bring them into the fold and get the leverage of additional devices, additional languages, additional regions that we can pull against that.

Operator

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

Michael Graham - Canaccord Genuity

Congrats on such a great series of events here. Just wanted to ask about acquisition strategy going forward, you made a much bigger acquisition here than you have in the past. Should investors consider this to be a high-water mark or how big you're willing to go? And just any qualitative thoughts on how the rest of this year and next looks for you in terms of M&A activity, given where your stock is. Thanks a lot.

Niccolo de Masi

Well, as I have said on prior calls we’re focused on ensuring deals that are accretive quickly or good value and are sensibly sized and proportionate to Glu. So I said in the last call that it was unlikely we’d be doing deals that go over the NASDAQ 20% shareholder approval line I think that’s a good place to think about kind of maximizes byte size, minimum byte size is going to be something that moves the needle. So we’re not going to be probably acquiring things that have or certainly we’ll not have less than $10 million of revenue potential in them if they don’t game out. But we’re looking primarily for businesses that are operating, that are profitable having a run rate we can dig into and frankly then we can turbo-charge that’s what we’ve done with studios like Blammo, PlayFirst, and what we believe we can do with Cie.

So we want good pricing that’s important to us. We haven’t written down a single acquisition anyway under my tenure and we’ve no intention or risking things up. We do not have any defying cadence in terms of how many targets we need to be consummating annually we’re always on a lookout but we have a very high bar and a tight filter around what gets through to close. And so we’re going to remain opportunistic and not relax those criteria frankly.

So look it’s a consolidating market I am delighted for the first year in my tenure to see that private market valuations at least can be in line with public market ones. You can always over pay that’s always possible. But the reality is I think valuation expectations for good assets are in a position whereby accretion can occur as early as the first quarter path close as we’ve said will occur on an adjusted EBITDA basis we’ll Cie. And professional management is also something that I and we are a big fan of. I mean Glu is the only business in our space that is run entirely by professional managers. We believe professional management is worth dramatically more than founders in the long-term because you can retain every one retain the expertise.

And so we will not be picking up businesses where 80% of the D&A walks out the door because they are cashed out. Those are the kind of things to keep an eye on. As you can see we’re now in three big categories. We’re doing well in casual we’re doing well in action. We’re doing well post Cie close in the racing segment. So I wouldn’t rule out other categories I also wouldn’t rule out bolstering the categories we’re in. Although for my comments this quarter and last quarter studio specialization is everything to us. And GM specialization of studios is really the driver of that. So looking out for good professional management that retains, and business that fit in with those teams at the right price is how we’re going to roll. But at the end of the day we’re always comfortable that what we own is enough to grow the company at an interesting rate organically year in and year out.

So even if we don’t find anything else we’re feeling pretty good about the way the company has constructed today the talent that we have in and around the world, in and around the leadership of the studios and where that talent can take us.

Michael Graham - Canaccord Genuity

Okay, thanks that’s helpful Niccolo. Thanks a lot.

Operator

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

Mike Hickey - The Benchmark Company

Great quarter, awesome. Congratulations. The, I guess guidance more than anything, with Kim here and the success of that game, just to clarify, the sequential decline in Q4 from Kim, it sounds like, Eric, that's more of a qualitative view versus a kind of data-driven assessment. Is that accurate how you're looking at that came into Q4, in terms of the --?

Eric Ludwig

We’re certainly building our models and kind of looking at what we think week-over-week declines may or may not be around events and updates, et cetera. And just with what we know today we don’t believe it will be sitting top five grossing through December 31st so with those assumptions that that declines from the current revenue levels.

Niccolo de Masi

I mean to extend with every other title we have right. So whether it’s Dino Hunter, Deer Hunter I mean yes you guys have seen us for 18 quarters meet and beat the year quarter guidance, annual guidance, et cetera. So, given the choice between assuming that something is rather growing to assuming a decline obviously we’re going with historic decline curves. But as I said one of the earlier questions from Doug we’re in uncharted territory and I mean that in a good way right. This title and all of our titles we are getting better and sustained. We have a UA department that is world class and incredibly adept at maximizing the tail of title through paid marketing and so on. But I do also think that the fact that we’re doing something with the Kim title it is globally unique and globally really unsaturated it’s going to lead to a lot of extension opportunity which we’re going to obviously turn to now that the title is doing incredibly well in English speaking countries.

Mike Hickey - The Benchmark Company

Yes. No, that'll make sense. Just curious on the Google side, it looks like on a ranking basis that Kim is kind of under indexing what we're seeing on iOS. It appears if that's accurate and if you have any idea why that is.

Niccolo de Masi

I’ll take that Mike I think it’s a function of Kim’s TV audience is probably a wealthier more affluent younger crowd that is probably more buying and playing games on their iPhones than being Android devices. So that probably the biggest reason I could add there.

Mike Hickey - The Benchmark Company

Okay. And the last question from me, on the Cie Games acquisition, obviously a big deal for you guys, $100 million. Just kind of wondering why you guys looked at the racing category. I mean, certainly, it has a game that's working here. But overall, it seems like it's a fairly saturated category with a lot of competition. And so, curious why you think that you can sort of supercharge that particular category versus others that are maybe underdeveloped.

Niccolo de Masi

Well I’d day that every major category has leadership in it, we consider ourselves a leader in obviously the shooter end one of the leaders and portion of the casual segment. If you have key metrics and you have a studio dedicated to being the best in world in their genre and you have IP that resonates, and you have a game that monetizes retains and works. You have a very, very good chance in this business of maintaining one of the top one, two, three positions in our genre in the genre in question.

So most of it not all the profits in our sort of business goes towards the companies and games that are in the top three grossing spots in that genre. We have the number one racing game and we think we have the number one team at this point. There is room for, there is margin for error in there right, the racing category is going to grow globally. I think that our chances of holding the top one, two or three position in the long-term are very high. Given that there is a lot of network affects around the kind of synchronous PvP game the Racing Rivals is. The other reason that we’re excited about this acquisition is we get professional management that is committed to be here for long-term and we also get a business which ultimately is not optimized again for all of the platforms that Glu does well and all of the languages and distribution points we do well.

So we think the title still is going to grow in English let alone in Chinese, Japanese, et cetera. And same with where that game can go as Apple and Google ultimately expand into the living room and do a better job of linking our eco-system on to laptops, desktop devices et cetera, that still is a long-term future for Glu and the free to play strategy which just take our brands and games wherever Apple, Google, Amazon, Microsoft extend those platforms.

So at the end of the day we think there is nodes around every genre and that node is really IP plus engine plus per game plus per team, where we see that we have a erected that mode we will feel comfortable purchasing provided that we’re not buying something post peak and throughout the pricing is good. At the same time you are right, and we’re always going to be cautious. And if we didn’t have full alignment on all of those things from price to talent to various modes, we wouldn’t have done the deal.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Adam Krejcik from Eilers Research.

Adam Krejcik - Eilers Research

Thanks for taking my questions. The first one, and, Niccolo, you've already touched upon this about international opportunity for the Kardashian game. Just wondering specifically, is there any kind of plans in place and have you guys considered going on to some of the third-party instant message platforms, for example, in Asia? And then beyond that, is it just a matter of localizing it or is it also just the brand and reach of Kardashian just doesn't really resonate in a lot of these non-English speaking markets like it does in the U.S. and UK?

Niccolo de Masi

Well hard to be sure on resident till you try, but the show is syndicated in something I think the 110 countries or something. We can debate whether or not the voiceovers in our game should be dubbed while the TV series is or whether or not we should just do text localizations. It will need to be done well and done by native speakers. And obviously there is a lot of text in the game because it narrowed our base.

But I have no doubt in my mind that we’re nowhere near peak revenues in English let alone and other countries. And I think that there is going to be a lot of opportunities to work with Kim to expand awareness of our brand in these markets. She does very well in places like United Arab Emirates, the Middle East obviously other bits of Asia are picking up the show in greater and greater numbers.

And I think that ultimately she’s probably just getting started herself with regards to wear her brand show can get you in market that we’re not necessarily there for season one of our series but been picking it up season 3,4,5,6 and so on so I am enthused about the fact that that audience of the TV show is still growing and it’s growing pretty rapidly overseas and the game should be able to do the same. Ultimately her brand is aspirational and iOS users have gravitated more to within the Android ones but that just means there’s a lot of room for growth on the other side of the equation frankly.

Adam Krejcik - Eilers Research

Got it. And then my second question is, Eric, on the guidance, I'm looking at the slide deck for Glu standalone guidance, in Q4. You've touched upon the expected revenue decline, given the curve for Kardashian, I think. But if I look at the implied adjusted EBITDA margin, it's just around 5% on the high end. Any reason for that pretty big drop-off from sequentially, given that I would assume you'd have more owned IP in Q4 from those revenues. So maybe, is there anything else going in there in terms of incremental OpEx? Thanks.

Eric Ludwig

Yes. Good question Adam. So, obviously this is still talking about gross revenue not net revenue so 50 million to 54 million of gross revenue. Kardashian will still be a decent size revenue chunk within that quarter, so I think that’s probably the interplay you’ve get there is there are royalties for Kim in that. The revenues are lower than Q3 but there are still meaningful revenue figure in there and that’s kind of differential there.

Operator

Thank you. And our next question comes from the line of Darren Aftahi from Northland Securities.

Unidentified Analyst

Hi, guys. This is Ankush in for Darren. Can you give us some color on how to think about variable marketing expense as you scale revenue? Thank you.

Eric Ludwig

Yes, sure. I mean we think it’s different to last two years on variable marketing. We spend between 20% and 21% of net revenue about 15% of gross revenue on user acquisition cost, so all of our variable marketing is been on UA on device UA and both Glu and Cie Games which is one of the reason why we love the Cie Games grow is a very identical in terms of how they do UA stand how much they stand on UA as a percentage of revenue and but, yes, we’ve been very consistent at those numbers for the last two years.

Unidentified Analyst

Alright and then in terms of the Cie Games acquisition do you expect any adverse impact in terms of gross margin, either from hosting fees or other areas?

Eric Ludwig

Nothing more than we’ve already got, we’ve got a pretty beefed up games sort of platform, Amazon are hosting, Cie Games also uses Amazon hosting as well. So but it’s also a very key game so they do leverage that hosting substantially within the game itself. However, it’s their margins look similar to ours in terms of the hosting cost and the Apple and Google platform fees well.

Operator

Thank you. And that concludes our question and answer session for today. I like to turn the conference back to management for any closing comments.

Niccolo de Masi

Well, I am going to close by thanking my collogues for their efforts and our stockholders for their continued support. We are pleased with their outperformance in Q2 and look forward to Q3 and Q4 with confidence. Thank you again for joining the call.

Operator

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

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Glu Mobile (NASDAQ:GLUU): Q2 EPS of -$0.02 beats by $0.02. Revenue of $35M (+50.9% Y/Y) beats by $0.97M. Shares +6.5%.