Glu Mobile CEO Discusses Q4 2010 Results - Earnings Conference Call

| About: Glu Mobile (GLUU)

Glu Mobile Inc (NASDAQ:GLUU)

Q4 2010 Earnings Call

February 7, 2011 4:30 pm ET


Greg Cannon - VP, Finance

Niccolo de Masi - President & CEO

Eric Ludwig - SVP, Assistant Secretary & CFO


Travis McCourt - Morgan Keegan

Adam Krejcik - Roth Capital Partners

Mark Argento - Craig Hallum


Welcome to the Glu Mobile fourth quarter 2010 earnings results conference call. I would now like to turn your call over to Mr. Greg Cannon, VP of Finance.

Greg Cannon

Good afternoon, everyone. Thank you for joining us on the Glu Mobile fourth quarter 2010 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 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 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 can 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 November 10, 2010.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude the change in deferred revenues and royalties, 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 the 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. 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 fourth quarter results. The press release also has been furnished to the SEC as part of the Form 8-K.

In addition, please note that the date of this conference call is February 7, 2011, and any forward-looking statements that we may take 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.

We've also made available on our corporate website at a slide presentation that provides additional information regarding our business industry and operational results. These slides supplement the information that Niccolo and Eric will be providing today during today's call. We encourage investors to review these materials.

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

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

Niccolo de Masi

Thanks, Greg. I had my one-year anniversary at Glu last month, and I'm pleased that the fruits of our labor over the past year have begun to surface in our results.

On my first earnings call, we set out a review on industry trends and how Glu would position itself to capitalize. We believed that games on mobile devices had a bright future on smart phones and tablets, that social games have moved from online to mobile devices with the potential to create the Zynga of mobile and that Glu had unique advantages from our experienced negotiating complexity in the mobile ecosystem with which to address this intersection.

We began investing aggressively in what we saw as the fastest-growing business model, freemium, and the fastest-growing segment of the games market, mobile devices. We are encouraged that the market indeed appears to be heading precisely where we have positioned Glu.

Our first batch of freemium social mobile titles have built upon our initial traction and our teams are learning daily how to improve monetization, retention and virality.

Non-GAAP smartphone revenues grew by 38% between Q3 and Q4 to reach $3.4 million. MAU also grew strongly from September's average of 5.1 million to December's average of 12.1 million.

Accumulative installs grew 165% from Q3 to reach 50.2 million at the end of December. Yet make no mistake that we still have much to accomplish and that our urgency for progress is unrelenting.

Our industry began a fundamental expansion with the introduction of the iPhone and, last year, reached a tipping point of accelerating smart phone and tablet penetration.

Recognizing this, we embarked at the start of 2010 on four significant transitions for Glu; firstly, shifting platform focus from feature phones to smartphones and tablets; secondly, shifting our business model from paid download to freemium; thirdly, upgrading the quality and social mechanics of our titles; and fourthly, creating compelling original IP.

We brought in a new team of leaders. Nearly every executive around the world is fresh, driven and excited about where we will take Glu in 2011. A [troxial] transformation is underway from B to B to B to C and from games as a digital packaged good to games as a live service.

Unlike in the past, we now consistently update our titles once live to keep the experience fresh and compelling for our audience. We have built a substantial amount of infrastructure to support analytics and all functions require the scale of social mobile games business.

We are proud of the fact that in Q4 we delivered with Gun Bros what has become arguably the most successful traditional gamer freemium social mobile title in the app store. We can indeed create successful original IP organically. Testament to this is Pocket Gamer's selection of Gun Bros as one of the top five most significant mobile games of 2010.

We have posted a presentation on our website today for investors, which illustrates much of what I would like to cover on today's call. I am confident you will find it a self-explanatory accompaniment for the next few minutes.

Glu is fundamentally about creating and delivering social mobile games for everyone, regardless of carrier, operating system, handset or geography. Our global cross-platform reach means we believe we are placed to benefit dramatically from the consumer upgrade cycle of users adopting smartphones and tablets.

Leadership requires a marriage of quality content with global community and distribution, all things we believe Glu is uniquely positioned to achieve.

We've continued over the past quarter to strengthen our presence on iOS devices. We intend to be ever more proactive this year in supporting cutting-edge mobile technology and hardware with our franchises.

We are delighted that last week we were selected by Google to be showcased at the launch events for the new Honeycomb Android tablet OS as well as the new Android NF purchase functionality. We've enjoyed a close relationship with Google and look forward to success with our freemium model on their devices worldwide.

We are focused on supporting not only Google's Android initiative as a whole, but also the upcoming and potentially game changing devices based on the Android OS. We were one of the first publishers to support NVIDIA's new Tegra 2 dual-core processor and the new range of Android tablets they power. We anticipate supporting future upgrades to the Tegra GPU in due course.

Over the past few months, we have been hard at work architecting the building blocks of a strategy, which will allow us to pull together Glu's global assets, presence and talent. Today we are pleased to announce the launch of the Glu games network, which will link audiences together not only between games, but across devices, platforms, carriers and countries.

The Glu games network marries Glu's global smartphone distribution assets with its compelling social mobile content. It will benefit not only Glu's proprietary content but also allow titles co-develop with third parties to tap into Glu's global smartphone distribution of OEM stores, carrier stores and increasingly vibrant and significant off-deck ecosystem.

There are three additional components of the Glu games network I would like to now highlight on slides 18 to 20. First is our proprietary server technology, which allows users to sign on using a range of social networks without a separate additional Glu login. We have already integrated facebook and Game Center and will soon include Twitter and Myspace.

Second is our proprietary loyalty program. This will allow us to rapidly build out the Glu games network and incent engagement across titles using status on iOS and a universal Glu virtual currency on Android.

Third is the Glu games network becoming our global games community hub. It has been built in HTML5. Upgrades are get more games functionality and provides a one-stop shop for all Glu content and gamers.

The global Glu games community is already accessible standalone in the Apple App Store and Android marketplace. Localized versions will roll out into major Glu territories by the middle of 2011.

With our new Glu games networking strategy, each title we develop now serves dual purposes: firstly, creating its own audience in revenue streams; and secondly, contributing towards the long-term global Glu games community.

We believe the Glu games community, along with our focus on creating popular original IP, will underwrite sustained momentum in our business over the long term.

We will soon be opening up Glu's global distribution network to third party independent developers. We see them as an integral part of the Glu games network over time and as such have formed a new unit at our headquarters, which have named the Glu Partners team.

Glu Partners will source integrate independent content from each of our major regions: North America, EMEA and China. Glu Partners is already in advanced discussions for the development of eight titles and discussions are underway around the world on additional projects.

Another important component of Glu Partners is taking original Glu content to non-mobile platforms. Our fourth protocol will usually be facebook. However, beyond that, a number of other digital distribution channels will be contemplated and analyzed through the lens of ROI.

Gun Bros has now launched on facebook and hi5 and is being supported in distribution by Wild Tangent. We believe that the Gun Bros franchise indeed has cross-platform appeal.

Just a few weeks ago, we completed a financing raising $15.9 million in net proceeds in order to enable us to invest in our global social games community and Glu Partners. This additional capital is earmarked to allow Glu to execute on an enhanced growth trajectory and fully capture exciting opportunities which have come into the marketplace in the past quarter.

We have full teams dedicated to supporting the successful launches from Q4, such as Gun Bros and Deer Hunter Challenge. Over time, as we create and prove out more franchises, an ever larger portion of our resources will be devoted to maintaining and building each franchise's audience, retention, virality and monetization.

In addition to supporting and growing our Gun Bros, Deer Hunter Challenge and poker franchise, launching the first half of this year will be approximately 10 new titles, the first four of which we are pleased to announce today as [Bugging Around, Treasure Raiders], BIG TIME GANGSTA and CONTRACT KILLER. We also launched Zombie Isle, our zombie and pirate theme resource management game, last Thursday.

Whilst individual title performance will always vary significantly, over time, we anticipate that the new Glu games community portal and Glu games network will bring greater predictability and success.

With billions of mobile devices potentially addressable by Glu in the coming years, we believe our social mobile games strategy will ultimately create a virtual circle of confident distribution to rival what the largest online social games companies have achieved on the web.

I shall conclude on 2011 and our four primary goals, which are: one, growing our overall Glu games network audience, both on the Glu games community portal and on each individual game title; two, monetizing our audience and growing smartphone revenues quarter on quarter; three, run-rate growth and smartphone revenues overtaking declines in feature phone revenues by the end of 2011; fourth, improving the efficiency of our studios and product functions.

The Glu team worldwide has worked hard through an important transitional year for our business and looks forward to achieving these 2011 objectives. I thank them for their efforts and our shareholders for their support as we together prosecute our vision to become the world's leading social mobile games company.

I now hand you over to Eric Ludwig for more analysis on our financial results and operating metrics.

Eric Ludwig

Great. Thank you, Niccolo. As Greg mentioned, we provided a supplemental presentation, which is on our website at, which provides details on the new initiatives that Niccolo walked through as well as an overview of our operating results and operating metrics.

I'll first provide some details on the company's fourth quarter 2010 financial results, including certain operational metrics and will conclude by providing our outlook for the first quarter ending March 31, 2011.

We are pleased with our fourth quarter results, especially our ability to accelerate growth in total smartphone revenues from the third quarter of 2010 in addition to the continuing traction we're seeing with our recently launched freemium social mobile games.

Starting this quarter, we are presenting revenue for both feature phone and smartphone products on a GAAP basis as well as on a non-GAAP basis. Non-GAAP revenue generally refers to revenues collected from our customers in that month. But in some cases, there may be a one or two-month lag in reporting.

The primary reason for the new disclosure is that for the growing portion of our business, revenue on smartphones, a significant portion of that smart phone revenue needs to be deferred over the useful life of a customer. For example, for micro transactions, offers and most premium revenue on Android and the Apple iOS platforms we need to defer revenue over at least three months.

In our press release that we issued today, we have provided a detailed breakdown between feature phones and smartphone revenues on both a GAAP and a non-GAAP basis for the last five quarters. Additionally, in the supplemental presentation, we have broken down the same five quarters of non-GAAP smartphone revenues between premium smartphone revenue and freemium smart phone revenue.

As a reminder, premium smartphone revenues relate to revenues from one-time downloads. Freemium smartphone revenues relate to micro transactions, ads and, for the first time, offers, which started generating revenue in the fourth quarter of 2010.

In regards to the fourth quarter 2010, we are very encouraged by the growth trends in our non-GAAP smartphone revenue as such revenue, as a percentage of total non-GAAP revenues, increased to 22% of revenue in the fourth quarter 2010, sequentially up from 16% in the third quarter of 2010 and up from 10% in the year-ago quarter. Our freemium smartphone revenues increased 128% on a quarter-over-quarter basis and 3922% on a year-over-year basis.

During the fourth quarter of 2010, we had 715,000 micro transaction billable events, which was an increase from 504,000 in the third quarter 2010. Consequently, our revenue per micro transaction billable event increased from $1.12 to $1.80.

The freemium smartphone revenue growth was primarily driven by the strong demand we had with games such as Gun Bros, which had two months of revenue contribution in the quarter and was our top revenue-producing freemium titles during the quarter and our number four title overall during the quarter.

Additionally, our fourth-quarter freemium titles had a higher price points for the micro transaction products than our titles in the third quarter.

To help provide some color on what a successful freemium title looks like, we have provided some metrics on Gun Bros in our supplemental slide deck. Gun Bros launched on October 28 and had 3.8 million downloads within two months, which resulted in 161,000 daily active uses over the entire fourth quarter.

For the two months that the title was live, we generated $610,000 of non-GAAP revenue. We are very pleased with this title's performance and have since taken that title to facebook, hi5 and Wild Tangent and just recently have brought the title to Android where we are one of the launch partners with Google on their new in-app purchasing.

This is a great example of our strategy for developing our freemium titles and taking the successful titles cross-platform to other mobile operating systems and to social networks.

We believe that we remain well positioned to benefit from the growth across platform social games, given our strength in capital structure in addition to our expectation of launching 20 to 25 new freemium titles in 2011.

Now turning to our results and starting with the P&L; total GAAP revenue for the fourth quarter was $15.6 million, which was above our guidance range of $14 million to $14.5 million, slightly up compared to the third quarter of 2010 and down compared to $19.1 million in the year-ago quarter.

Total non-GAAP revenue for the fourth quarter was $15.5 million, which was up slightly from $15.3 million in the third quarter of 2010 and down compared to $19.4 million in the year-ago quarter.

Similar to the third quarter of 2010, the feature phone business performed better than we expected despite declining approximately 6% sequentially and 30% on a year-over-year basis, both on a non-GAAP basis.

Breaking out our revenues, our non-GAAP smartphone revenues were $3.4 million, up 38% compared to $2.5 million in the third quarter of 2010 and up 70% compared to $2 million in the fourth quarter of 2009.

Freemium revenue accounted for 38% of our non-GAAP smartphone revenues. We remain encouraged by this trend since the majority of our titles were live for only one to two months during the quarter.

As a reminder, we define smartphone revenues as a revenue from titles sold on Android, Windows Mobile and Windows Phone 7, BlackBerry, iPhone, iPad, Palm, Symbian and OB.

Given the continued traction and focus on our freemium titles, we are going to continue providing the following metrics on a quarterly basis and after we have a reasonable understanding of the useful life of such titles in monthly basis, which will help investors measure the health of our business, specifically new and total installs of our titles.

As of December 31, 2010, we had $50.2 million total installs in the Apple and Android platforms. This sequentially increased by approximately $18 million new installs during the fourth quarter, or a growth rate of 165% on a quarter-over-quarter basis.

Monthly active users, or MAU, related to the number of unique consumers who played our games during a given calendar quarter -- given calendar month. This measure is important as it points to the number of consumers globally playing our games.

During the month of December 2010, we had 12.1 million monthly active users, which was up 137% from 5.1 million during September 2010. The increase was due primarily to our freemium titles that launched in the fourth quarter, including Gun Bros, Deer Hunter Challenge and Toyshop Adventures.

Daily active users, or DAU, grew to a number of unique 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 take the average of the DAUs by day for the given month to arrive at a rolling 30-days DAU.

In the month of December 2010 we averaged 903,000 daily active users, which was up 85% from 487,000 DAU during the month of September 2010. I would point out that at any given month the MAU or DAU will be impacted by whether new titles are launched in that month and then in December we had several new titles go live including Deer Hunter Challenge and [Hero] projects.

One item to note is that during December 2010 we had some reporting issues which suppressed the installs MAU and DAU figures for that month. The figures that were reported for December 2010 excludes any of the loss in unrecoverable data and we've taken remedial measures and don't anticipate encountering any similar issues in the future.

As expected, original IP accounted for 26% of non-GAAP revenues, up from 23% in the third quarter of 2010. The increase was due to the number of new, original IP titles launched in the fourth quarter. By geography, our non-GAAP revenue mix for the fourth quarter of 2010 was 46% North America, 28% EMEA and 26% in the rest of the world.

Turning to profitability, non-GAAP gross margin was 77% in the fourth quarter 2010, which is up from 73% last quarter after backing up the royalty impairment of $5.5 million and up from 75% non-GAAP gross margin in the third quarter of 2010.

Total non-GAAP operating expenses in the fourth quarter of 2010 were $13.3 million, up 17%, $11.3 million during the third quarter of 2010 and in line with our guidance. The sequential increase in cost was a result of higher R&D and analytics as well as increased spending on variable marketing to support our premium title launches.

The combination of the better-than-expected revenues and OpEx coming in line with guidance resulted in us reporting a non-GAAP loss from operations for the fourth quarter of $1.3 million, which is well above our guidance and a loss of $3 million to a loss of $3.3 million.

Our non-GAAP net loss of $1.1 million or a loss of $0.02 per basic share exceeded our guidance range of a loss of $0.08 per basic share. A full reconciliation of GAAP to non-GAAP financial measures was included in the press release we issued today.

Now, turning to the balance sheet, cash and cash equivalents were $12.9 million as of December 31, 2010 for the quarter ended December 31, 2010 and we used $321,000 of cash from operations.

In January 2011 we raised $15.9 million in net proceeds for the issuance of 8.4 million shares of common stock and ProForma, after the offering to reflect [to] receive the $15.9 million in net proceeds and repayment of our line of credit of $2.3 million, we have $26.5 million in cash and equivalents.

So, in summary, I'm very pleased with the traction we continue to have in our smartphone revenues and we are excited about the success of our recent freemium game launches. The combination of our strength in balance sheet and initial successful title launches position us to benefit from the growth of social [persistent] cross platform games worldwide.

Now, let's review our guidance. For the first quarter of 2011, we currently expect non-GAAP revenue to be in the range of $14 million to $14.5 million which includes $4 million to $4.4 million in non-GAAP smartphone revenues. I would point out that this smartphone revenue guidance reflects the fact that four of our five launches this quarter will go live in March.

We expect our overall revenues to continue to decline on a quarter-over-quarter basis until our smartphone revenues overtake feature phone revenues on a non-GAAP basis, which we expect will occur by the fourth quarter of 2011. GAAP revenue should lag non-GAAP revenues by one quarter in regards to this transition.

We expect our non-GAAP OpEx for Q1 2011 to be $14.2 million, which is up sequentially by $900,000 as we are increasing our spend to focus on new initiatives that Niccolo outlined today. Non-GAAP net loss is expected to be a loss of between $3.4 million to $3.8 million or $0.07 per basic share. GAAP net loss for the first quarter is expected to be a loss of between $5.5 million and $5.8 million or a loss of $0.11 per basic share. The non-GAAP loss includes the $300,000 of incremental revenue as compared to GAAP and excludes $810,000 for amortization of intangibles, approximately $375,000 [of being] stock-based compensation and a restructuring charge of $600,000.

We anticipate ending 2011 with at least $15 million in net cash, which implies that we will be forward investing until our overall revenues stop declining, which should occur by the fourth quarter of 2011 on a non-GAAP basis as smartphone revenues overtake feature phone revenues.

The majority of this investment will take place in the first three quarters of 2011. The majority of the incremental cash burn will be used to accelerate the development of our global social gaming community, as Niccolo has discussed and as we've outlined in the supplemental presentation.

Weighted average common shares outstanding for the first quarter of 2011 are expected to be approximately 51.8 million basic and 56.5 million diluted.

With that, I'll turn the call over to the operator for questions. Operator?

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Travis McCourt - Morgan Keegan.

Travis McCourt - Morgan Keegan

First, I guess for Niccolo, you pointed out Gun Brothers specifically as being the hit of Q4 obviously. I was wondering if you had an expectation for what you expect your hit rate to be in this business. Is this going to be a business where one or two titles may make up a majority of your revenues or should it be broader than that?

Then, second, Eric, I'm trying to figure out which of the metrics that you are now disclosing are relevant to project revenues. In other words, is it the daily average users and the non-GAAP smartphone revenues or is it just the freemium part of the revenues that are relevant to that DAU? Help us to understand that.

Niccolo de Masi

We have launched the Glu Games community and Glu Games network specifically to start to address the longer term of how we can underwrite performance of all titles. There is always going to be tiers of performance.

There's not doubt that not every title will always perform in the top tier simply because paces change, mechanics go in and out of favor. However, fundamentally, the two things that are rising tides lifting all boats: the first one is, of course, that smartphone and tablet penetration is going from 3 million-ish in the world to probably 3 billion-ish over the next four or five years.

That means that every title does better, slowly but surely, or rather quickly but surely at the rate of that growth.

The second one is that we're building this Glu Games community specifically so that we have a marketing asset from which to cross sell two new titles that are launching. That builds a virtual circle between audience on an individual title and audience across all of Glu titles and retains more of that audience for the future.

So I think you're going to see all these classes of success the same way that you do with films in the console space or on facebook online but we believe that the steps we're taking are going to fundamentally drive a higher overall average, which is obviously what's important to underwrite Glu's future.

Eric Ludwig

Yes, Travis, to answer the question about the relevant metrics, obviously we are just getting our arms around the freemium business as to what are the most relevant metrics. The three things that we've talked about, the total installs, the cumulative installs, obviously drive the filling up the number of users that are playing our games and then MAU and DAU are both important metrics.

When you look at revenue per MAU and revenue per DAU you probably should be looking at that on the overall smartphone revenue as opposed to just a freemium given that we don't get reporting for all of our smartphone revenue.

So a lot of the premium that are off-deck, so to speak, with RIM and OV, et cetera, we don't have that data even included in the DAU and MAU calculations. So you really should look to the interplay of both MAU and DAU divided into the total smartphone revenue and looking at that and modeling that as an estimated growth for those metrics.

Travis McCourt - Morgan Keegan

Just a follow-up there, Eric, I was a little confused. So the MAU and DAU is really just at this point included iPhone and Android titles but it includes both the premium titles and the premium titles on those platforms.

Eric Ludwig

That is correct. So the MAU and DAU includes Apple and Android where we get good, relevant data from those platforms but the Blackberry, Windows Phone 7, et cetera, we've not reported those MAU and DAU and installs given that we're not getting accurate reporting to those metrics.


Your next question comes from the line of Adam Krejcik - Roth Capital Partners.

Adam Krejcik - Roth Capital Partners

I guess first for your Q-end guidance, can you talk a little bit about how much of that growth, the smartphone revenue growth, is coming from new game launches and how much is from a continuation of the success of Gun Brothers?

Greg Ballard

As I mentioned in my prepared script, we've got five titles launching in the first quarter, four of which will be launching in the month of March, so not a ton of the revenue on the smartphone basis that is being guided will be coming from the new title launches. It would mostly be coming from the catalog, including Gun Bros.

Adam Krejcik - Roth Capital Partners

I know it's still early, but talking a little bit maybe about the life cycle for a successful game like Gun Brothers maybe, Niccolo, you can provide your insight about how you see that tracking in terms of expecting the user base to stay relatively stable or increase around new content upgrades?

Then in terms of increasing the monetization efforts there are you trying to build up the install base and then further try to drive that revenue per DAU or just trying to get a bigger picture thinking.

Niccolo de Masi

Yes, so I think you hit a lot of the things we're trying to do there, Adam. So step one, make sure you stabilize the user base. Step two, try and make sure that you monetize it as effectively as possible. Then step three, how do you make the user base more viral so that it grows by itself, all the while trying to consistently update the content so that it stays as fresh and compelling as possible?

So we are building, as I said, on our last quarter's call, every title we launch is built from the ground up to potentially be a multi-quarter and maybe even multiyear franchise. When we say franchise we mean not only the initial launch on IOS and Android smartphones and tablets but also seeing potentially extensions of these franchise into the future and, of course, onto other digital platforms.

So we expect the life cycle of substantial success like Gun Bros to more likely be multiyear than multi-quarter. However, we own the [inaudible], so we have a full team of people dedicated to ensuring that that is the case. That team has been working as furiously since launch as it has been up until launch and you'll see us follow exactly that same philosophy with every new title we put out.

So we will actually ramp up investment in success and we will also take investment away from titles which are not showing the same level of traction largely because perhaps the theme is not having the same amount of traction with the demographic it targets.

So I think, in summary, it's pretty much everything you hit out in your question. We expect it to be stable. We expect it to grow from there and we're going to invest accordingly to ensure that that happens.


Then on the strategy to start bringing some of these games, like Gun Brothers, to facebook, Wild Tangent, hi5, maybe just talk about the revenue opportunity there and I know it's just maybe been less than a week or so but what's that experience been like so far?

Niccolo de Masi

Well, we think that, as with the launch of Gun Bros on mobile devices, Glu has innovated.
We set out on our first earnings call a year ago to play the game where we thought 2011 was going to be. So the titles we launched in Q4 2010 has been and are indeed focused on higher production values and taking social gaming to very much the next level.

We achieved that with Gun Bros and we achieved that with Deer Hunter Challenge and hopefully some of the titles in Q1 will do that as well, which is to cut through the clutter of copycat mechanics on resource management, framing, et cetera, and at the same time try and increase production values so there's more longevity around the initial launch.

So Gun Bros is seemingly on target to do something similar on facebook because there are, to the best of my knowledge, no titles in that genre that are having the same level of success relatively Gun Bros has on mobile. Of course, what's really attractive about facebook and online generally is just the sheer size of potential reach.

So that -- other than modifying the game to be able to work on multiple browsers, a social network like facebook is hitting up potentially 500 million, 600 million people, which is obviously a larger platform than the 160 million-ish on IOS and whatever it is on Android as of last quarter.

That's pretty exciting. The other thing that's exciting is that facebook credits has come onto the facebook platform and been a 30%-ish tax, so to speak, in facebook's favor and that's obviously eaten into some people's revenues who have been enjoying higher revenue shares on facebook already.

But from Glu's perspective, facebook credits is a great billing solution. It's as good as the IOS solution Apple has, which is largely credit card based but it's a seamless one-click billing solution and these are one of the reasons why you've seen on facebook historically some titles delivering dramatically higher revenues than you've seen on mobile platforms.

I'm not at all predicating Glu's success on seeing that level of traction with facebook but I think that it's certainly well noted that there are some big titles on facebook that can deliver multiples on what you can achieve on IOS or Android.


Just in terms of getting presence on there I know is a challenge for everyone. But how is your -- what's your strategy there in terms of ensuring mind share and getting customer attention?

Niccolo de Masi

So facebook had largely been heads down for 2009 and probably even from Q4 2008. They shot down notifications and requests and all sorts of viral techniques that companies like Zynga and [Playahead] and Playfish used very successfully in 2008 to build a big audience quickly.

This is one of the reasons why we very much focused Glu on smartphone platform for social gaming because we had the advantages there and we also believed the ecosystem was stabler. What's happening right now on facebook is that they've rolled out facebook credits. They have made a couple new hires there and they've got a more curated ecosystem, which is starting to slowly, but surely, open up some functionality they previously shut.

So we think it's not only an ideal time to start taking successful titles from mobile back to facebook but we've partnered with companies like Wild Tangent specifically because we know they have more expertise than we do for distribution.

So you'll see us do the same thing for any franchise that can go to other non-mobile platforms. We will look for a partner that can share revenues with us and help ensure the success of that ecosystem because it's difficult to be an expert, obviously, on every single ecosystem on digital platforms globally.


Your next question comes from the line of Mark Argento - Craig Hallum.

Mark Argento - Craig Hallum

Just some -- I know Android's been lagging a little bit, of course, with the store and their gaming platform. Can you talk a little bit about -- it sounds like Amazon is going to be putting up a store. Talk about the opportunity that you see on Android because from our vantage point it looks like Android, from a pure sheer numbers perspective, could very quickly dwarf the Apple platform in terms of its opportunity.

Greg Cannon

Yes, so I think what we predicted a year ago is largely happening, which is that Android is largely replacing Java and Brew as a multi-OEM OS. It is making a compromise that everyone on the call is probably well aware of, which is that by being a multi-OEM and multi-store front solution, a multi-carrier solution you're seeing some compromises have to be made around fragmentation of OS, updates and versions and also, I'd say, slightly less sophisticated and tight experience between [technical difficulty] dicing, monetization and store front.

So that is playing out exactly as we predicted and as you described and so you're seeing phenomenal numbers of handsets and OEMs adopt the operating system. What is happening with the stores is that while Android marketplace continues to become more sophisticated -- so in the last week at the even we were launch partnered with for Google, it was launching not only a new tablet-specific OS, Honeycomb, but also launching an update to their store in that purchase functionality across all Android versions both for phones and tablets.

So consumers are getting a little bit -- seeing a little bit of friction with regards to keeping their OS up to date but there's no doubt that it has tremendous promise and is likely to go from strength to strength from its current run-rate.

So we are absolutely long-term bulls now. We've been long-term bulls for Android as long ago as a year or two ago. Glu was actually one of the first publishers in Android probably two years ago and we are keeping up to date not only with the operating systems and Android's own marketplace but also in being proactive about other stores that can have global traction.

So things like Amazon are interesting. There's a number of other Android stores which are likely getting announced this month at Mobile World Congress and Glu has always and continues to participate with the launches of both successful devices and successful store fronts from the start.

Mark Argento - Craig Hallum

When you guys talk to the 20 to 25 new games this year, is it a multiple platform launch or across Android and iTunes, Apple and some of the social networks?

Greg Cannon

No, so we will launch on IOS and then go to Android. Then after we've hit mobile platforms we'll think about probably facebook as the first, true non-mobile platform that we go to. We've been ratcheting up investment in IOS and Android as they become very much the top tier OS competitors. People like Windows Phone 7 are dragging behind. RIM has a new tablet out and it has a new operating system, QNX.

We're waiting to see what happens with Windows Phone 7. MeeGo and Symbian for Nokia also need to make some decisions possibly sooner than later with their new CEO and at the same time there's other contenders in the smartphone space such as Palm but they haven't delivered the kind of penetration that we are looking for to see 100 million plus users we can address efficiently with our titles.

Eric Ludwig

In the supplemental slides we also put a little pictorial showing we start with the IOS and then we pour it to Android for successful titles and then beyond that we bring it to facebook and other platforms. So it's very much a resource decision [to] really based on success on Apple and then to a lesser extent on Android.

Greg Cannon

So that 20, 25 will be things that go live on IOS, not necessarily make it all the way to facebook.

Mark Argento - Craig Hallum

Then, Eric, in terms of -- I believe you said ProForma by the end of the year you expect to have roughly $15 million in cash. Did I hear that right?

Eric Ludwig

Yes, that's correct.

Mark Argento - Craig Hallum

So you figure between now you get the 20 to 25 new IOS games up and running, probably, I think ProForma you said you had roughly -- what -- $24 million, $25 million in cash or actually a little less than that, $23 million. So you've got a net burn about $8 million to $10 million on the 20 to 25 games. Does that make sense?

Eric Ludwig

Well, the burn will be on the overall -- what we said is we had $26.5 million ProForma cash. I probably wouldn't look at it so much from a title-by-title burn but more really looking at it from our two product lines of feature phones, smartphones. We've really been shifting resources away from feature phones using that as our cash cow to then fund the smartphone business.

We anticipate the smartphone business to overtake the feature phone business by the fourth quarter, so it really is in the aggregate of our smartphone investment that will be burning the cash mainly on the new initiatives that Niccolo talked about today that's in the supplemental slide deck as well.

Mark Argento - Craig Hallum

So then it essentially gets you through the conversion process to being able to demonstrate bigger premium/smartphone revenues than feature phone revenues by the end of the year.

Eric Ludwig



(Operator Instructions). There are no further audio questions at this time.

Niccolo de Masi

Well, thank you, everyone, for joining us. It's been a big year for Glu. I think we've got another big year ahead of us, absolutely, but we've made the progress that we've set out to in the past 12 months. We very much believe we are on course to make the progress we need to in 2011 and look forward to seeing many of you in coming weeks if not talking to you sooner.

Greg Cannon

Thank you and for anybody of the investors that will be at the Mobile World Congress, I'll be there myself for three days. So if you want to set up meetings, feel free to email me, Eric Ludwig. Thanks a lot. Take care. Bye.


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

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