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Glu Mobile Inc. (NASDAQ:GLUU)

Q2 2011 Earnings Call

August 2, 2011 4:30 PM ET

Executives

Greg Cannon – VP, Finance

Niccolo de Masi – President and CEO

Eric Ludwig – SVP, CFO and Chief Administrative Officer

Analysts

Darren Aftahi – Northland Securities

Atul Bagga – Think Equity

Adam Krejcik – Roth Capital Partners

Mark Argento – Craig Hallum Capital

Operator

Good afternoon. My name is Hope and I will be your conference operator today. At this time, I would like to welcome everyone to the Glu Mobile Second Quarter 2011 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Greg Cannon, Vice President of Finance, you may begin your conference.

Greg Cannon

Good afternoon, everyone, and thank you for joining us on the Glu Mobile, second quarter 2011 financial results conference call. This is Greg Cannon, VP Finance in 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 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 of Risk Factors in the Form 10-Q filed with the Securities and Exchange Commission on May 5, 2011.

During this call, we’ll present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude the change in deferred revenues and royalties, amortization of intangibles, stock-based compensation charges, restructuring charges and foreign currency gains and losses primarily related to reevaluations 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 making an investment decision.

For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to today’s press release regarding our second quarter results. The press release is also been furnished to the SEC as part of the Form 8-K.

In addition, please note that the day of this conference call is August 2, 2011, 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.

We have also made available on our corporate website at www.glu.com/investors a slide presentation that provides additional information regarding our business, industry and operational results.

These slides supplement the information that Nicco and Eric will be providing during the call today, and we encourage investors to review these materials. Lastly, this conference call is the property of Glu Mobile and any recording, reproduction or rebroadcast of this information without expressed written consent of Glu is strictly prohibited.

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

Niccolo de Masi

Good afternoon, and thank you everyone for joining us today. Before we begin, allow me to direct you to the supplemental presentation we prepared to accompany today’s earnings. It can be accessed via our Internet website glu.com/investors.

Glu celebrated a number of important milestones this past quarter. Total installs of our games on smartphone devices grew by 31.7 million to reach over 101 million. Daily active users grew over 70% to average 1.6 million in the month of June. Monthly active users expanded inline to average 16.5 million in June. We are however most pleased to report the smartphone revenues for the quarter outstrips feature phone revenues for the first time in our history.

We began 2011 with the goal of achieving this crossover of new over legacy revenue streams by the end of the year. Due to the persistent success of Gun Bros, Contract Killer, Big Time Gangsta and Bug Village. We delivered $9.7 million of total non-GAAP smartphone revenues in Q2. This represents 43% growth from Q1 2011 and 334% growth from the same period last year. Glu has become a majority smartphone revenue business, significantly ahead of schedule.

Our industry is still at a very early stage of development, and is continuing to evolve rapidly. As discussed during our May 26 Analyst Day, CPI advertising and Apple’s App Store has been heavily discouraged. As such, we replaced all of our CPI mechanisms with video advertising approximately halfway through Q2. When video ad networks have freemium inventory, our ability to replace CPI revenue streams has run as high as 75% on a dollar-for-dollar basis.

However, due to the large and growing Glu audience and still nascent stage of video advertising, we’ve unfortunately found ourselves earning through freemium inventory far faster than it can be provided by our video ad partners. This is a sign of Glu scale and leadership in innovative advertising solutions. And I believe it to be a high class problem in the long-term. However, throughout the remainder of 2011, it means that replacing CPI advertising revenues will be more challenging than originally anticipated.

Nevertheless, in ad purchase revenues on iOS continue to grow with pace and/or expected to become the significant majority of freemium revenues on IOS in Q3 and Q4.

Moving onto Android. We are particularly pleased with our growth on this platform. Not only has have been historic Glu strength, but our early support of all new Android initiatives is beginning to pay dividends. All advertising forms are permitted on Android and the rollout of in ad purchasing as well as a new storefront has allowed Glu to grow its market share in top-grossing titles. Recently we have had four of the top 30 grossing titles on the Android marketplace. As such we expect to be increasing investment and support for Android still further, over the next 12 months.

The daily global sales of Android devices have now overtaken iOS shipments and we believe the fragmented device landscape to increasingly be a barrier for smaller competitors. We believe Glu’s expertise and infrastructure for efficiently negotiating this fragmentation worldwide is an increasingly important competitive advantage for the company.

As such, we see a growing proportion of Glu smartphone revenues coming from the Android platform over the next 12 months. Plus, we’ve had a number of disappointing iOS title launches over the spring. We are pleased with the performance of Eternity Warriors, which is another high production value Action/Adventure success and leverages underlying portions of the Gun Bros engine.

We plan to bring this title to Android in the near future. I’m now pleased to announce three very exciting developments for Glu. Our first is that we recently struck a partnership agreement with China’s largest mobile entertainment company TOM Group, to create China’s leading smartphone game, storefront and community.

TOM Group is a cross platform media company controlled by Li Ka-shing and listed on the Hong Kong Stock Exchange. It has television, outdoor advertising, internet and mobile distribution assets in Greater China. Glu through our existing Beijing office will be providing the content and marketing to the partnership, with TOM contributing e-commerce infrastructure billing and distribution.

We’re excited to be working with such a unique and skilled partner and looks forward to capitalizing this China’s 920 million mobile phone users, transition from feature to smartphone gaming in the coming years.

Our second new development, as we reached agreement to acquire Toronto, Canada based Blammo games. As many of you may recall from last quarter’s earnings, Blammo joined our G-partners program to develop two titles.

The first of which will be launching in early 2012, Blammo is run by Christopher Locke, who is one of the creators as well as producer of several freemium top 10 grossing iOS titles including Smurfs’ Village and Zombie Café. The consideration for the transaction is solely payable in Glu common stock with the majority of the consideration contingent on the achievement of earn out milestones extracts through March 2015.

Glu will issue Blammo shareholders 1 million shares as initial consideration and will potentially issue up to 3.3 million additional shares, if Blammo meets certain net revenue targets during the earn out periods. Blammo brings Glu an injection of highly complementary talents and a proven track record in freemium, mass market, casual titles for smartphones. We’ve enjoyed working with Blammo thus far 2G partners and are very pleased with the team has now joined the Glu family for the long-term.

Our third new development is that we also reached agreement to acquire Francisco partner backed and Kirkland Washington based Griptonite. Griptonite is a successful DS PSP and iOS studio, which we’ll be migrating over the coming year into building freemium social mobile games.

With a strong and complete management team, over the long-term, we believe Griptonite brings Glu the ability to approximately double its current internal product development capacity. Based on the greatest sale area, we believe Griptonite will allow Glu to tap into a deep pool of gaming talents attractively in your headquarters. Glu is taking control of the entire Griptonite assets, which includes integrated art and development support from Griptonite’s Hyderabad India facility, as well as approximately $10 million of net cash on Griptonite’s balance sheet.

The transaction consideration consists of Glu issuing a fixed total of 6.1 million shares. Glu’s total head count will grow by approximately 200 as a result of these two acquisitions. We expect significant smartphone revenue impact from both Griptonite and Blammo will be gaining Q2 2012. Approximately doubling internal studio capacity, we believe these acquisitions will allow the enlarge Glu to grow smartphone revenues at least 90% between H2 2011 and H2 2012.

Glu’s transformative progress of the past 18 months, cross an important threshold this past quarter, moving from a majority feature phone, to majority smartphone business. With the addition of Blammo and Griptonite, Glu has the capacity and expertise to compete with even the largest global players.

Challenges await us over the next 18 months, as well as undoubtedly a few bumps in a road. However, we believe our blend of cautious optimism and diligent execution will continue to allow us to navigate successfully.

I now hand you over to Eric Ludwig for analysis of our financial results and operating metrics, as well as more detailed information on the impact of our acquisition over the next 12 months.

Eric Ludwig

Great. Thank you, Niccolo. I’m pleased to report that we’ve continuing to see strong performance that have maintained the momentum during the second quarter of 2011. First, let me summarize some of our key financial highlights for Q2. Total non-GAAP smartphone revenue of $9.7 million was up 43% quarter-over-quarter and 334% on a year-over-year basis. Total non-GAAP revenues were $17.9 million which was both on a quarter-over-quarter and year-over-year basis. Original IP accounted for 49% of overall non-GAAP revenues, which resulted in improved gross margin of 83%.

In addition, Original IP represents 73% of our total non-GAAP smartphone revenues and reflects our shift to Original IP titles. We generate a small operating profit for the quarter and cash flow from operations of $457,000 was better than expected and we ended the quarter with $26.4 million in cash in our balance sheet, significantly above guidance due to our performance in the operating line plus warrant in stock option exercises.

Our growth in smartphone revenues reflects the overall strength of our freemium product portfolio including continued traction with Gun Bros and the successful launch of the Contract Killer, Big Time Gangsta and Bug Village. Let’s take a moment to drill down on our second quarter revenues and highlight how we delivered against our guidance.

Total non-GAAP revenue for the second quarter was $17.9 million, which is above our revised guidance range of $16 million to $17 million up 4% on a quarter-over-quarter basis and up 13% from the year ago quarter. Non-GAAP smartphone revenue grew 43% quarter-over-quarter and 334% year-over-year to $9.7 million, which is above the revised guidance range we provided on May 26 up $8.25 million to $8.75 million.

As Niccolo mentioned in his prepared remarks, our non-GAAP smartphone revenues were 54% of total non-GAAP revenues and for the first time our greater than our non-GAAP future phone revenues. Our non-GAAP premium smartphone revenues increased 64% on a quarter-over-quarter basis and 2,234% on a year-over-year basis. Freemium revenue accounted for 79% of our non-GAAP smartphone revenues in the second quarter of 2011 compared to 69% during the first quarter of 2011.

Included in non-GAAP smartphone revenue results is $3 million of revenues from CPI offers on the Apple platform, which is approximately $2 million in the month of April and $1 million in May, we pulled off CPI offers from our games on the Apple platform by the end of May.

I would now to provide some title specific revenue figures on a few of our titles. First, Gun Bros continue to be our most successful freemium title lifetime today, and this quarter despite the decoration in CPI revenues, it generated $2.2 million of non-GAAP smartphone revenues essentially flat from $2.3 million in the first quarter of 2011.

More importantly, when shipping out 1.5 million of CPI revenue from Q1 and 1.1 million of CPI from Q2. The organic growth in micro transactions for Gun Bros was 238% or a 29% quarter-over-quarter increase.

Second, Contract Killer launched on March 24 and for the second quarter of 2011 it generated $2.5 million in total non-GAAP premium revenues, 36% of which was in CPI. Revenue from Original IP accounted for 49% of non-GAAP revenues up from 35% in the first quarter of 2011 and 19% in the same period last year.

The increase reflects the impact of new Original freemium titles continued strong performance of existing titles along with the ongoing de-emphasis on the future phone business. We expect this trend to continue as over 80% of our anticipated smartphone title launches in 2011 our royalty-free.

In regards to new and total installs of our titles as of June 30, 2011, we had $101.9 million cumulative installs on the Apple and the Android platforms and social networking websites including Facebook. This is a sequential increase of approximately 31.8 million new installs in the first quarter. This increase is due to the continued popularity of Gun Bros, Contract Killer, Bug Village and Big Time Gangsta.

During the second quarter of 2011, we had 999,000 in App purchase billable transactions, which was an increase in 755,000 in the first quarter of this year. And the average revenue per in app purchase increase from $2.31 to $4.07 due mainly the higher price points for our virtual goods.

Looking at our monthly active users and our daily active users for the month of June 2011, we had 16.5 million monthly active users up from 11.9 million monthly active users in March 2011. We had 1,639,000 million daily active users for the month of June 2011 across Apple, Android and Facebook up from our March 2011 DAU of 953,000 which represents a 72% quarter-over-quarter increase. This growth is due largely due to the continued success with Gun Bros and the successful launch of the Contract Killer, Bug Village and Big Time Gangsta.

Turning to our future phone business, similar to the first quarter of 2011 this business performed better than we expected, despite declining 20% – 21% over the prior quarter and 40% over the second quarter a year ago, both on an non-GAAP basis, we anticipate the year-over-year rate of decline to accelerate as we have focused our development resources solely on smartphones. I will now walk through the operating results for our second quarter of 2011 followed by our view of our outlook for the third quarter ending September 30, 2011.

During the second quarter of 2011 non-GAAP gross margin was 82.7%, which is up from 69% a year-ago and up from 77.8% non-GAAP gross margin in the first quarter of this year. As a reminder, the two items that we include in our cost of sales, our royalties to third party license holders, and hosting costs for our freemium gains, which are increasing each quarter on an absolute basis, due to the increase in our DAU and MAU.

Total non-GAAP operating expenses in the second quarter of 2011 were $14.8 million, up 10% from $13.5 million during the first quarter this year. This was slightly lower than our revised Q2 guidance of $14.9 million. The combination of the better than expected revenues and OpEx coming in lower than expected resulted in a non-GAAP profit from operations for the second quarter of $29,000, which was well above our revised guidance of a loss of between $1.3 million and $2.1 million.

Our non-GAAP net loss of $506,000 or a loss of $0.01 per basic share exceeded our revised guidance of a loss of between $1.9 million to $2.7 or a loss guided loss of $0.04 to $0.05 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 $26.4 million as of June 30, 2011 up from $24.4 million at March 31, 2011. During Q2, we used $457,000 of cash in operations used $875,000 for CapEx, received $3,250,000 million of proceeds from warrant and stock option exercises and experienced an increasing cash from FX revaluations of $93,000.

We are pleased we’ve exceeded our expectations across all key operating metrics during the first half of fiscal 2011 and before I go over guidance for the third quarter, I want to spend a few minutes talking through how we are dealing the Blammo games and Griptonite acquisitions.

First is the Zynga IPO filing in July was much earlier than we and others have anticipated. Zynga has been incredibly equated us having purchased over 15 companies in the last 18 months and increasing percentage of those focusing on mobile. Glu already has a scale sales marketing and G&A function, but we have been capacity constraint in our development studio side resulting from our commitment to controlling OpEx as a company transition to freemium products over the last two years.

Given our very healthy balance sheet with over $26 million in cash and no debt we believe this is a right time to forward investment studio capacity due to the momentum we are seeing in the industry. As such, we are chosen to execute two transactions that are designed to accelerate our smartphone revenue growth in 2012 and beyond.

Neither these transactions will generate meaningful revenue in 2012 we anticipate Q1 2012 for the first Blammo title and Q2 2012 for the first Griptonite titles. Because of this our operating expenses and cash burn will increase substantially primarily in R&D until these doubled studio capacity starts to generate revenues.

For the third quarter of 2011, we currently expect non-GAAP revenue to be in the range of $15 million to $16 million, which includes $9 million to $9.5 million in non-GAAP smartphone revenues I wouldn’t point out that total revenues are declining due to the continued quarter-over-quarter decreases in feature phone revenues, which is approximately $2 million the decline this quarter.

In addition, the essentially flat quarter-over-quarter smartphone revenues is due to a loss of approximately 2.4 million in CPI revenues in the Apple platform, which we did not expect to replace this quarter by other premium advertising inventory, that Niccolo talked about.

This implies that our in app purchases are increasing quarter-over-quarter, by the same amount at the high end of our guidance range, as Niccolo mentioned we view the shortage and freemium advertising to be a sign of our scale and a high-class for the long-term.

We know that (inaudible) division has said they are currently experiencing very similar inventory shortages and our supplemental deck also just slide that outlines this exact phenomena from Q2 to Q3 between in-app purchases, CPI and premium revenues.

We expect non-GAAP gross margin to be approximately 80% and our non-GAAP OpEx for the third quarter to be approximately $19.5 million, which is up sequentially by approximately $4.7 million and reflects that approximately $3.4 million increase in R&D for Blammo games and Griptonite a $1.1 million increase in sales and marketing and a $200,000 increase in G&A.

It should be noted that the R&D increase of $3.4 million for Blammo games and Griptonite only reflects two months contribution of those expenses. So for modeling purposes you should add an additional $2 million so that’s bigger for run rate purposes in Q4.

Non-GAAP operating loss is expected to range from a loss of $6.7 to $7.5 million. We expect income tax expense for the third quarter of 2011 to be approximately $685,000 and non-GAAP net loss that expected to be a loss of between $7.4 million to $8.2 or a loss of between $0.12 and $0.14 per basic share.

Excluded from our non-GAAP figures that I just provided our $661,000 of amortization of intangibles in cost of sales, and $675,000 of stock-based compensation. Once we complete the purchase accounting for both these acquisitions, I anticipate the amortization of intangibles, stock-based compensation and possibly in-process R&D expenses to increase in the GAAP income statement as well as certain deal costs in transitional expenses.

Weighted average common shares outstanding for the third quarter of 2011 are expected to be approximately 60.2 million basic and 67.2 million diluted. This reflects $587,000 basic and diluted shares from Blammo games, due to two months contribution during the quarter, and 3.5 million basic in diluted shares for two months Griptonite.

For the fourth quarter, our outstanding shares will be 62.8 million basic and 70.4 million diluted due to $900,000 basic and diluted Blammo shares and 5.5 million basis and 5.6 million shares for Griptonite. For Blammo games, this excludes the earn out shares at 1,000 shares held in escrow and for Griptonite the difference from the approximately $6.1 million total shares consideration is due to the 600,000 escrow shares, which will be released at the end of 2012.

I would point out, that we already using zero cash in the Glu stainable balance sheet to purchase Blammo games and Griptonite, as both of these transactions are for equity only with those issuing approximately 7.1 million shares, excluding the 3.3 million Blammo games earn out to approximately double our capacity. Additionally we are receiving $10 million of cash on the Griptonite balance sheet, which we will use to fund the transition of that studio to freemium.

We anticipate ending 2011 with $23.8 million in total cash, which implies total cash burn over the next two quarters of $12.6 million, and we will continue to burn cash until the end of 2012. Although, we are not providing specific 2012 guidance at this point, we did want to provide some color on our revenue and breakeven targets with the combined organizations.

With the approximate doubling of capacity of our teams, we expect second half 2012 smartphone revenues to grow at least 90% over second half 2011. Additionally at an 85% target gross margin in 2012, our quarterly non-GAAP breakeven occurs at quarterly revenue levels of $25 million.

Before turning the call over to operator I will close by saying that we are really pleased with our results in the second quarter. We believe that with the additional studio capacity of Blammo games and Griptonite, Google further accelerate our position as a leader in the freemium social mobile gaming space.

I will now turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Darren Aftahi with Northland Securities.

Darren Aftahi – Northland Securities

Hi guys, So couple of questions, one kind of high level strategically, is this going to be become more of a kind of rollup strategy, we’re assuming capital with the gaming studios with the smaller players not being able to compete, on scale and can we I mean just kind of beginning of an acquisition spree for you, or do you feel like you have the capacity you know to kind of compete going forward and then I have a couple of follow up financial questions.

Greg Cannon

Okay so I’ll take that one Darren, this certainly is not the beginning of a rollup strategy, there is compelling reasons for each one of these acquisitions as well as compelling value frankly, so you know Blammo is one which is highly complementary DNA which we felt that our rate and time to market of building that given our track record with casual titles, which is not been the strong as action adventure meant that structuring something over the next three or four years to secure a team that we believe is world-class is the right place to middle in a sense. Griptonite you know I think you are well aware Darren the fact that we have on office in all of almost all the BRIC countries now.

So we have a low cost development locations however, the opportunity of the stroke of Appen to nearly double internal studio capacity at a great price were something which we obviously initially looked at and then spent a lot of time drawing up detail integration plans to ensure the success of once we consummate, but I think you can take this as certainly a one off not the beginning of more aggression on this front because we feel that we have all the assets we need for at least the foreseeable future and to get through to profitability.

Darren Aftahi – Northland Securities

Just a quick follow-up on that so. When you say double capacity I think you had said 25 to 30 games kind of annually, does that kind of put that number kind of a double with these two acquisitions?

Greg Cannon

Well, so the way to think about our internal capacity is by team. Blue had something like 10 or 11 teams internally at the moment. Griptonite brings another 10 or 11ish teams subject to how large each team is. I remember that we’re running games as a said, so successful titles like Gun Bros and Eternity Warriors and Contract Killer and Big Time Gangsta, Bug Village, those occupy full teams full time. So those teams are occupied supporting existing services effectively not able to launch new titles.

So we are focused on revenue not title volume, but the number of teams is certainly doubling. So, whether or not that is a team that’s permanently supporting the success or is a team that’s taking multiple shots on goal per year to find a success. We have tried so many of those opportunities every year. So it correlates with revenue quite well over the long-term.

Darren Aftahi – Northland Securities

Great. And just two kind of financial, one on the $31 million installs in the quarter, can you breakdown the split between Apple and Google and then Eric if you don’t mind repeating the 2012 kind of potential guidance numbers little slower, I didn’t catch all of that, thanks.

Eric Ludwig

Yeah, sure. So I won’t go with specific numbers, but it’s such a good 70,30 iOS Android on the $301.8 million installs, so Apple in terms of revenue is still are largest smartphone platform, but Android this quarter definitely had major uptick and in terms of downloads as well, we’ve seen some great download traction this quarter on Android. And then on 2012, which specific numbers were you talking about on just the revenue figures?

Darren Aftahi – Northland Securities

I think you are talking about back half of the year, but you just kind of rattle off bunch of numbers that you’ve just kind of talk about you know the initial kind of (inaudible) you said you are going to give?

Greg Cannon

Yeah, so the (inaudible) we said that, with this double capacity from Griptonite and Blammo that we will see second half 2011 smartphone revenues grow 90% on a year-over-year basis. So second half 2011 to second half 2012 we are going see at least a 90% increase second half to second half on smartphones. And then our – you using 85% target gross margin or breakeven, non-GAAP breakeven will occur at roughly $25 million a quarter level.

Darren Aftahi – Northland Securities

Great. Thank you.

Eric Ludwig

Thank you, Darren.

Operator

Your next question comes from the line of Atul Bagga with Think Equity.

Atul Bagga – Think Equity

Hi. Thanks for taking my call and congrats on the quarter, handful of question for you. A. You guys gave us the number for MAU and DAU for June and March I was wondering if you can share something around for the quarter Q2, and Q1 what was the combined MAU versus Q1?

Eric Ludwig

Yeah. So Atul, what we’ve been doing historically is just been giving the month – the last month of the quarter MAU and DAU and so the numbers I mentioned were the quarter-end numbers, we haven’t been giving the mid-quarter numbers and so those are really the numbers that we have, and so if you look at the trend, even if you look at the supplemental presentations you’ll see the September of last year, December of last year March of this year, and June of this year figures.

Atul Bagga – Think Equity

And in terms of Gun Brothers and Contract Killer, can you talk a little bit about the linearity of usage, what is MAU DAU for Gun Brothers Q1 to Q2 or and for Contract Killer maybe month-over-month how have you seem I don’t know if you can share the exact number, but if even directionally if you can talk about how the usage has been trending for these two games?

Eric Ludwig

Yeah, so this is Eric here, so we have seen from Q – from March to June within those figures Gun Bros has been essentially flat in terms of daily active and monthly active users, and you can probably remember we did not put out a substantial release on Gun Bros in the second quarter, that release came in early July when we released 2.0 on the iPhone with multiplayer. And then in Contract Killer from we just launched that title at the end of March and so the monthly actives and the daily actives were pretty skew given we only had seven days a data and so from March seven days a data to June for a full month we obviously saw substantial increase to the figures that we have there.

Atul Bagga – Think Equity

But what about for Contract Killer, even directionally if you can talk about from May to June and June to July, how the numbers have been trending?

Eric Ludwig

Yeah, so from May to June we are relatively flat.

Atul Bagga – Think Equity

And July?

Eric Ludwig

How did July get in front of me, but it’s basically hanging up there as far as I know.

Atul Bagga – Think Equity

Got you. And you know Eternity Warrior, seems like that has been a pretty nice pick for you guys, but some of the other games that you guys launched recently did not do as well, can you talk about what your learning curve? Is it mostly on the development side? Is it more on the marketing issues and what are you guys going to do different for your new game?

Eric Ludwig

Niccolo I’ll let you take one, we’re at different locations here, so Niccolo you want to take that?

Niccolo de Masi

Fine, so Atul sorry, you are asking what’s different about our marketing going forward?

Atul Bagga – Think Equity

No my question was you know Eternity Warrior did pretty well for you guys, but some other games did not do as well and so what are you learning from the games that did not do as well as you expected, do you think, do you see these more as a development issues? Was it mostly a marketing issue? And what are you guys going to different going forward?

Niccolo de Masi

It’s certainly not a marketing issue. In terms of our ability to capitalize on the newest, latest and most innovative direct marketing and in direct marketing channels we are absolutely always leading the pack there.

There is no doubt that losing CPI advertising on iOS means that you know there is twofold effects, there is less efficient use of our real estate in advertising revenues and at the same time we have a diminished ability to market as effectively when we choose to. However, that’s been that’s across all titles, not specific to any one title.

So I think is almost entirely product specific for this quarter, which is that we have found the Glu’s action adventure DNA and 3D DNA and get results apply to the right demographic in the right way, we found that once we had one great casual success so far this year, in Bug Village, one of the reasons why we determine that’s adding something like Blammo games to the Glu family make sense is largely due to the fact that we probably don’t have at least as much evidenced casual D&A yet, so I think it’s been all the tools and tricks the trade with regards to targeting users who are looking for low friction as opposed to looking for deep game play and features that’s kind of the difference between the Action/Adventure and casual demographics.

Atul Bagga – Think Equity

And my last question, I’ll go back in the queue. In terms of losing CPI definitely heard everyone in terms of distribution, when you look at Glu Mobile versus small startup and in terms of just on the competitive landscape, who do you think incrementally, who it is positive for or for who it is more negative, is it mostly for the startups or company like Glu or TinyCo that we guide?

Eric Ludwig

So just to be clear in your question, you are asking about what the – who is most adversely impacted by the loss of CPI?

Atul Bagga – Think Equity

Right.

Eric Ludwig

Right. I think it’s probably pretty broad, they’d be percentage impacts are the same for anybody who is been able to capitalize on any advertising form and that tends to be mid-sized and up players. I mean obviously if you are two guys in the room, you’re probably spending all of your money just getting the game out the door and you are not able to market it at all.

If you are TinyCo size and Glu size, EA size, Zynga size, these are the companies that have most of the traffic, most of the audience, most of the titles and so we’re probably always going to make the most out of advertising channels that work in advertising monetization techniques that make use of our audience.

But I don’t think there has been a particular disadvantage for anybody although what I will say is that because Glu is always first to the new trends as we evidenced with CPI in a lot of ways, we were first to make it work. We are not apologetic about that at all. We’ll continue to be first to make new mechanisms work and new channels work.

Atul Bagga – Think Equity

Fair enough. Thank you. I’ll go back in the queue.

Eric Ludwig

Thanks Atul.

Niccolo de Masi

Thank you.

Operator

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

Adam Krejcik – Roth Capital Partners

Yeah, hi guys, couple of questions. I just – I guess first top level Niccolo and/or Eric just kind of getting your thoughts or feel, are gamers on mobile devices are they – are you seeing them become more discriminating in terms of quality you know the products yet, and if so is that changing your development schedules you know I think you made a comment about not been as focused on quantity maybe more for quality.

Just trying to get a sense of how you guys look at the next 6 to 12 months if that impact is maybe causing you guys to you know spend a little more time invest a little bit more in games and perhaps you could give us an update I think in the past you said, you know around $0.5 million to develop a freemium game including sales and marketing is that budget changing at all?

Eric Ludwig

Okay, so I think it’s a fair statement Adam, to say that the overall smartphone tablet gaming market is moving from innovators into early adopters into you know in all ways kind of early majority if you look at the sort of standard (inaudible) adoption in developed nations, and developing nations you are still in kind of the innovators phase, now what it means where you get through the kind of early majority as places like, U.S. will probably get to that market after Christmas, you’ll get a sizable chunk of the overall smartphone tablet market being from people who have upgraded and what that means is we actually getting a twofold effect.

so you are getting many more people playing games for the first time on mobile devices, you are also getting many more people who are switching out from other gaming platforms to handheld platforms, and so what that means is you kind of have this sort of bifurcating of demographics, where you have at the same time more concerning Action/Adventure gamers who are switching out, but they’ve played games before and they know what they want.

You then also are having a lot of the Facebook demographic I think at smartphones for the first time, sort of this quarter next quarter these quarters in developed countries. And that means if there is a couple of phenomenon going on, the first one is the markets getting bigger of course, the second is that you know lot of ways you are seeing growth in the casual half of the industry, the same way you saw growth in 2008, 2009 on Facebook, where you saw simpler games with maybe lower production values over 2D, the very social, do very well.

Overall however I would say that the ability to compete with a minimum viable product is of course kind of always be a moving feast. I mean it is in every industry, you can’t launch the same car model today you could 10 years ago and be successful and you can’t do the same with a game in any sub demographic.

So, we are – yes we are going to be more careful about ensuring that we bring out with a competitive minimum viable product when we bring titles to launch and that’s different than sort of what is a beta test or a minimum viable product.

However, you know overtime, we are not trying right now to lengthen development cycles at all. And so that’s not going to move cost to launch dramatically over the next 12 months. However, what we’re finding of course is that we have to launch competitively. We have to make sure we supported competitively a bare after.

And the reason Adam why that’s not entirely intuitive is to why times and cost are not increasing, is because Glu is building up a portfolio of engines which we’re able to re-use more frequently, and so we’re probably able to control time and cost better than we would earlier on when I stared at Glu or better than we could if we were smaller and to the overall.

Adam Krejcik – Roth Capital Partners

Okay. That’s helpful. And then I guess switching earlier you said downloads for iOS, Android were roughly 70, 30 is this representative of the revenue split on smartphone or is it still by a small – greater degree towards iOS?

Eric Ludwig

Yeah. So last quarter it was a much greater degree towards iOS, this quarter we’ve actually seen with the advent of you know purchasing on the Android marketplace that the Android revenue is up ticking. So we’re getting a bit closer to that 70, 30 but not quite there yet in terms of revenue on the Android device.

Adam Krejcik – Roth Capital Partners

Okay, and then final question on sales and marketing, I noticed it’s actually ticked down in absolute dollars this quarter in Q2, just trying to get a sense of are you actually going to be saving some cost in sales and marketing yourself since you are not going to be also doing in that advertising, or you just finding more efficient channels what’s kind of your outlook for that sales and marketing budget for the rest of the year? Thanks.

Eric Ludwig

Yeah, so Adam thanks, thanks for the questions. In the Q2 phenomena of sales and marketing coming in a bit lower than forecast and down sequentially was mainly a function of the disruption we had in CPI and lack of updates that we had well we are waiting to figure out what we are going to do in CPI in the second quarter, my guidance for the third quarter did have a up ticking quarter-to-quarter from Q2, Q3 by $1.1 million, so I think it’s getting it back to a more normalized level given the different marketing channels and opportunities that we are focused on so. I think Q2 was a bit annalistic, due to the CPI pick up in the middle of the quarter.

Adam Krejcik – Roth Capital Partners

Okay. Thank you very much.

Eric Ludwig

Thanks a lot, Adam.

Operator

(Operator Instructions) Your next question comes from the line of Mark Argento with Craig Hallum Capital.

Mark Argento – Craig Hallum Capital

Yeah, hi, good afternoon guys.

Niccolo de Masi

Hi.

Eric Ludwig

Hi, Mark.

Mark Argento – Craig Hallum Capital

When you are thinking a little bit more about these acquisitions, are these guys still working on games for other publishers at this point? How quickly can you actually get them in production on your pipeline?

Eric Ludwig

Well, so Blammo are already more or less working at a 100% for us, since that we are moving from a gPartners model to a consolidated perspective if you consider it as such. And Blammo will be growing. So their capacity will grow over the next 18 months.

So they can accommodate more than one title at a time. Griptonite is a much larger entity of course and it is a mixture of winding down on projects they’re finishing and starting new projects as soon as possible once work through freemium, indoctrination, training, pre-production, et cetera. So we’ve guided to most of the initial revenue impact from there, initial titles coming into the Q2 2012.

But I think we’re comfortable that over half of their teams or approximately half to over half of their teams are able to start on a timeframe that will get them to launch in Q2 2012 and the rest will be coming thereafter.

Mark Argento – Craig Hallum Capital

So given the new capacity, if you had to work out, full-year 2012 number and that you guys have talked, it’s kind of 20 plus gains for this year and ‘11 now with additional capacity, you literally double that number for 2012 on a run rate when fully integrated?

Eric Ludwig

Well we’ve got in for H2 2012 to be 90% bigger than H2 2011 in terms of smartphone revenues. So that’s not far off doubling on a run rate basis then.

Mark Argento – Craig Hallum Capital

I guess my question is do you anticipate you know as the end market gets bigger the install base of hardware gets bigger...

Eric Ludwig

Yep.

Mark Argento – Craig Hallum Capital

Do you anticipate spending more money per game and maybe doing of course you are going to be doing more games if not double the number games of maybe bigger games or more spending games, where you are able to drive bigger higher production value, but a lot higher revenue per game it’s not leverage go on that way?

Eric Ludwig

I think that will occur naturally and its already occurring. However, all – I’ll sort of reiterate on my comments earlier on the fact that you know we – Utopia for us is games as a service whereby each team is supporting a highly successful many franchise with substantial audience base, substantial revenues and so Utopia is actually not having defined new successes right.

Utopia is trying to support 20 titles with 20 teams full time that are producing substantial in growing revenues, and they’re kind of permanent ongoing investments. But between now and Utopia, you’ll always have a mixture of taking shots on goals, trying titles out, they done all these, lend themselves to an audience base of merits the full team permanently once its launched and then you recycle that team and you try and find something that does work.

But yes I agree with you directionally. In the Action/Adventure space you are going to get more investments for higher quality production values, more features, deeper game play over time.

The casual space, the mass target base a little bit difference, it’s about low friction there and so I think you are going to see different types of investments made in social features and then reducing friction as opposed to 3D high production value, big clients et cetera.

Mark Argento – Craig Hallum Capital

When you look at the way the freemium market is evolving much like the premium market continues do well. Freemium is of course growing very rapidly and those are the little tabu, but any chance to think about maybe having a premium model or maybe hybrid model where you’re charging and then there is some in-game type revenue opportunities as well.

Eric Ludwig

Well, so currently, no, simply because we think the evidence that Apple’s application store and the top hundred grossing, I think has gone from something like a third of them being freemium in the past six months to being two-thirds or more freemium. So we know what consumers are responding to in terms of engagement and revenues.

So we believe fundamentally, as we have, since I started here that freemium is going to make us more money. But it’s all about that arbitrage mark between how much bigger is the audience base when it’s zero to download as appose to $0.99 or a $1.02. First is what’s the lifetime and what’s the lifetime value?

So we keep a close tab on that. However, given the way that Apples and Androids policies have as all everyone’s favoring a freemium model because they believe as what consumers are coming to expect now. So you’re seeing more and more platforms I think adopt you know freemium generally.

Niccolo de Masi

Yeah, but Mark we are capitalist. So if the market shifted from being freemium to partial premium and partial freemium. I’m sure we would looking over of where the money is flowing and adjust, but right now it’s not what the indicators are showing.

Eric Ludwig

Absolutely.

Mark Argento – Craig Hallum Capital

It seems like that a $1 price point. It seems to validate releasing the consumer’s mind that it’s a premium game even though it’s not a high hurdle.

Eric Ludwig

Right.

Mark Argento – Craig Hallum Capital

And this is interesting we think about that again a hybrid model, but all was stay tuned. Thank guys.

Eric Ludwig

Great. Thanks a lot Mark.

Operator

Hence there are no further questions at this time.

Niccolo de Masi

Okay. Well in closing, I’d like to thank my colleagues for their efforts and our shareholders for their support. As we continue to build momentum to become the world’s leading social mobile gaming company. Thank you again for joining the call.

Eric Ludwig

Great. Thanks everyone.

Niccolo de Masi

Take care.

Operator

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

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