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Glu Mobile Inc. (NASDAQ:GLUU)

Q1 2012 Earnings Conference Call

May 02, 2012 4:30 PM ET

Executives

Greg Cannon – VP of Finance, Corporate Controller

Niccolo de Masi – President and CEO

Eric Ludwig – EVP and CFO

Analysts

Sean McGowa – Needam & Company

Darren Aftahi – Northland Securities

Michael Graham – Cannacord Genuity

Atul Bagga – Lazard Capital

Mark Argento – Craig-Hallum Capital Group

Adam Krejcik - Roth Capital Partners

Greg Scott – B Riley & Co.

John Taylor – Arcadia Investment Corporation

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 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. 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 first quarter 2012 financial results conference call. This is Greg Cannon, VP, Finance from Glu Mobile. On the call today, we have CEO, Niccolo de Masi and CFO, Eric Ludwig.

During the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. Generally, these statements are identified by the use of the words such as expect, believe, anticipate, intend, and other words that denote future events. These forward-looking statements are subject to material risks and uncertainties that could cause 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 during this conference call. These risk factors are described in our press release and are more fully detailed under the caption and Risk Factors in the Form 10-Q filed with the Securities and Exchange Commission on March 14th, 2012.

During this call, we will present both GAAP and non-GAAP financial measures. Non-GAAP measures exclude the change in deferred revenues and royalties, amortization of in-process development contracts, amortization of intangibles, stock-based compensation charges, restructuring charges, changes in the fair value of the Blammo earn out, transitional costs, release of MIG pre-acquisition tax liabilities and foreign currency gains and losses primarily related to revaluation of assets and liabilities.

Additionally, we will be discussing adjusted EBITDA, which is defined as non-GAAP operating income or loss, excluding depreciation. 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 first quarter results.

The press release has also been furnished to the SEC as part of a Form 8-K. In addition, please note that the date of this conference call is May 2nd, 2012 and any forward-looking statements that we may make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events.

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

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

Niccolo de Masi

Good afternoon and a warm welcome to everyone joining us today. Before I begin, allow me to direct you to the supplemental presentation accompanying today’s earnings. It can be accessed via our investor website, glu.com/investors. In addition to the presentation, you will find video demos of our upcoming summer titles.

I am delighted to announce that in Q1 2012, we delivered $17.4 million of non-GAAP Smartphone revenue. This was ahead of expectations, representing 158% growth from the same period last year and a 17% growth quarter-on-quarter. The percentage of total non-GAAP revenue derived from Smartphones increased from 75% in Q4 ’11 to 81% in Q1 ’12. During the first quarter of 2012, we generated a modest adjusted EBITDA profit due to our strength Smartphone revenue, favorable gross margin expansion and tight cost controls. We anticipate the Smartphone revenue will continue to grow from Q1 levels in order to cover planned headcount growth, annual merit increases and direct marketing spend. Glu is expected to be sustainably adjusted EBITDA and operating cash flow positive from Q4 of this year onwards.

Underpinning these strong results were our update to our Q4 ’11 title launches as well as solid performances from new releases, Small Street and Samurai versus Zombies Defense. The latter was our first title from our Griptonite studio that we acquired last August. Both of these titles benefited from additional live beta testing prior to worldwide release. While launching later than originally anticipated, we believe this additional refinement period will lead to larger lifetime revenues and would have otherwise resulted from a more premature release.

Looking at these positive data points, we will be applying a similarly elongated live beta period for future new launches. This will reduce the number of titles reaching worldwide release in Q2. However, we believe in turn that this will set up Glu up for a strong second half of the year.

I am pleased to report that we’ve been able to add an additional three titles to this year’s launch schedule. We as such expect to launch 23 new titles throughout 2012 and detail the volume per quarter and the supplemental presentation which accompanies today’s earnings.

Small Street was our first title that launched in both English and Chinese. It peaked at number 57 top grossing in iOS and the US app store. However, it reached number one top grossing in China. Going forward, we will be actively pursuing more localization at launch wherever we find compelling returns on both cost and opportunity cost.

Blood and Glory launched in Q1 on Apple’s Mac OS store for desktops and laptops. These are first titles to do so on the store and peaked in the 45 top grossing Mac OS Apps. We intend to over time to follow our partners Apple and Google as they extend their app stores across a broader devised ecosystem and even into the living room.

Contributing to our strong performance was a full quarter of revenue from Stardom, the A list. This is the first gain from our 2011 acquisition of Toronto based Blammo Games. On a pre-user basis, it is the best monetizing casual title we ever leased to date. Blammo was performing above plan and we are pleased with the talent pool and overall business climate in Ontario. As a result, we are securing additional office space and accelerating the growth of this. We were delighted with yesterday’s visit to our offices by Ontario’s premier Dolphin Magenti [ph] and look forward to increasing the volume of high quality casual titles from Toronto.

Glu continues to be a leader in launching freemium titles in both iOS and Android simultaneously. We’ve done so since Q4 2011 and in the fullness of time we’ll look to add the Amazon Kindle Fire to our simultaneous launch process. Both the iOS and Android platforms continue to grow their installed base of devices. In Q1, Android revenues were approximately 30% of total freemium revenues. Glu’s strength on the Android platform enabled two titles in Q1, Stardom and Samurai versus Zombies to achieve the time’s significantly higher total revenues on Android than iOS.

Glu continues to be a close partner of Google. In February, Glu was given a space on the Google booth at Mobile World Congress, Barcelona to demo the new Google beam technology that we integrated into Gun Bros. In March, Glu was one of the first companies integrating the new APK Expansion File technology that rolled out at GEC San Francisco.

Glu currently has more titles in the top 100 grossing on the US Google Play store than any public company competitor aside from Zynga. As you can see in our supplemental presentation, we have significantly more US Google Play market share than GREE, DNA, Activision, Disney, CapCom, GameLoft or EA. Last month, Glu was the launch partner for the new Google Play store which integrates the Android market into a holistic music, book and gaming shopping experience. We view Google Play as long term positive for Android revenues, particularly given opportunities to promote Google Play to the broader Google ecosystem of Chrome, Gmail and Google Plus.

Glu is the launch partner for the Amazon Kindle Fire and continues to bring new launches to this device and storefront. We continue to see ourselves well placed to benefit from the growth of Android globally as OEMs compete to offer ever more powerful devices and more compelling content experience for their consumers.

In Q2, we have thus far launched Little Kingdom and Deer Hunter Reloaded. We expect to launch three more titles in early July, Mutant Road Kill, Tavern Quest and Summer Camp. Launching in the second half of the summer will be another six titles. Gear and Guts, Attorney Warriors 2, Bombshells, Hell’s Bells, Hammer on the Run, Dragon Kings and Mita [ph] Dragon.

Our performance in Q1 led to a lower cash burn than anticipated in the quarter. It also reduced our anticipated cash burn to reach sustained adjusted EBITDA profitability in Q4. As a result, we gained the headroom to consummate our acquisition of the Deer Hunter trademark and domains from Atari, allowing us to take a long term control of the Deer Hunter brand assets. Our deployment of 100% cash consideration for this $5 million deal demonstrates our confidence in our balance sheet position as well as in achieving our 2012 objectives.

In Q1, 89% of our Smartphone revenues were derived from Glu owned IP. We anticipate that our acquisition of this iconic brand will be long term positive for gross margins. We are pleased to note that our latest Deer Hunter franchise release, Deer Hunter Reloaded is performing strongly by all measures. It is our second launch and second success from our Griptonite studio.

We finished Q1 2012 debt free with a net cash balance of approximately $29 million. After deducting the $5 million of cash consideration paid for the Deer Hunter brand, we continue to be comfortable, reaching profitability without needing to access additional capital. We are increasing full year guidance and now anticipate delivering approximately $80 million of 2012 non-GAAP Smartphone revenue. This equates to 90% year-over-year growth. We expect to finish the year with a net cash balance of approximately $18 million.

Q1 2012 capped off the sixth quarter of strong Smartphone revenue growth, which began with our first freemium launches in Q4 2010. Our high production value freemium games are often targeted at a narrow demographic than our casual competitors such as Zynger. Colin & company research on April 9, 2012 estimates app down from Zynga mobile titles such as Worthless Friends and Drop Something at approximately $0.01. Glu’s games by comparison deliver average app down that is approximately five times this figure.

Our performance is Q1 has allowed us to almost fully absorb the overhead increases associated with our studio acquisitions and doubling of product capacity last year. Our first product launches from these new studio teams have met or exceeded our original expectations. We as such look forward with confidence to the increased volume of launches and associated revenue that our additional teams will deliver in the second half of the year.

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

Eric Ludwig

Great. Thank you, Niccolo. I am very pleased with our results for the first quarter of 2012 which were ahead of expectation on every measure and represented a strong start to the year. In the last page of the supplemental presentation, you will find a key operating metric slide. This slide includes the last five quarters of metrics for the items that I will refer to in my script. As such I will not reference every quarter-over-quarter and year-over-year number when going through the results. I will first provide some details in the company’s financial results for the first quarter as well as certain operating metrics. I will conclude by reviewing our outlook for the second quarter and our increased guidance for the full year of 2012.

Summarizing some of our key financial highlights for the first quarter of 2012, total non-GAAP Smartphone revenue was $17.4 million, was up 158% on a year-over-year basis. As a result, non-GAAP Smartphone revenue accounted for 81% of total non-GAAP revenues, up from 75% in the prior quarter.

Original IP accounted for 75% of our total non-GAAP revenues. More importantly, original IP was 89% of total non-GAAP Smartphone revenues in the first quarter. Both of these metrics were up quarter-over-quarter and year-over-year.

We had 55 million downloads of our titles on Apple, Android and other platforms during the quarter and our accumulated downloads are now at 231 million. Our daily active users in the month of March 2012 were 3.2 million users, while our monthly active users were 29 million.

Q1 non-GAAP operating expenses of $19.1 million came in below our guidance. The outperformance on revenue, gross margin and OpEx resulted in our generating $539, 000 of adjusted EBITDA in Q1. Non-GAAP loss of $0.01 per basic share was favorable to our guidance. And lastly, we ended the first quarter with $28.9 million in cash in our balance sheet which was in line with our expectations.

I would like to take a moment to drill down on the first quarter revenues and highlight how we delivered against our guidance. During the first quarter, total non-GAAP revenue was $21.6 million, which exceeded our guidance range of $17.5 million to $18.5 million, and was up 26% from the same period last year. The growth was driven by the increase in non-GAAP Smartphone revenues which grew to $17.4 million and was above the high ended guidance of $15 million. This strong year over year and sequential growth in Smartphone revenues reflects a success of our recently launched titles in addition to the continued momentum of our existing titles.

Our two successful Q1 releases which launched mid quarter accounted for 8% of non-GAAP Smartphone revenue. Within our catalogue titles, the Q4 2011 releases accounted for 50% of total non-GAAP Smartphone revenues. Our largest revenue generating titles during the first quarter were Blood & Glory with $2.7 million, Frontline Commando at $2.3 million, Contract Killers Zombies and Contract Killer are both at $1.9 million each. In addition, Gun Bros was our sixth largest title this quarter at $1.2 million and has been live for 17 months through March 2012.

Our non-GAAP Smartphone revenue by platform for the first quarter of 2012 was 67% on the Apple platform, 28% on the Android and 5% on other platforms. Android as a percentage of total non-GAAP smartphone revenue decreased by 1% from fourth quarter, but in absolute dollars grew $527,000.

Our non-GAAP freemium Smartphone revenues increased 19% from Q4 to reach $16 million in Q1. Non-GAAP freemium Smartphone revenues accounted for 92% of our total non-GAAP Smartphone revenue during Q1.

During the first quarter of 2012, we had $2.5 million in our purchase billable transactions which was an increase from $1.5 million in the fourth quarter of last year. The average revenue for in our purchase transaction decreased to $5.79 in Q4 to $4.71 in Q1. This was due primarily to special promotions for our virtual goods which increased the volume of purchases and overall revenue but at a slightly lower ASP.

Our Legacy feature film business declined 18% quarter-over-quarter and 60% year-over-year, both on a non-GAAP basis and consistent with our guidance. Our feature film revenues now account for only 19% of total non-GAAP revenues. Our Legacy feature film business which has been in decline as expected is dominated by branded IP titles. Our freemium Smartphone titles have virtually all the original titles and now that we own the Deer Hunter brand, all of the 23 titles that will be released in 2012 will be original content.

Because of the increased revenue from our original IP, our non-GAAP gross margin was 88.4%, up 170 basis points quarter-over-quarter and significantly higher than the 77.8% reported during the same period last year. As a reminder, we include two items in our cost of sales. The first is royalties, the third party license holders which have been and will continue to decline. And the second is hosting costs for our freemium games which are increasing each quarter on an absolute basis due to the increase in our DAU and MAU.

I will now walk through some of our additional operating results for our first quarter of 2012. Total non-GAAP operating expenses in the first quarter were $19.1 million, which was below our guidance of $20 million. We were at favorable guidance to the left spending our variable marketing and slower or higher in the forecasting.

The combination of the better than expected revenues and _ 0:16:21.4 forecasting resulted in our ability to report adjusted EBITDA of $539,000 during the first quarter compared to our guidance of a loss of between $3.9 million and $4.7 million.

Our income tax expense during the first quarter was $440,000 and our non-GAAP net loss of $456,000 or a loss of $0.01 per basic share, also exceeded our guidance of a loss of between $5 million and $5.8 million or a loss of $0.08 to $0.09 per basic share.

It should be noted that we ended first quarter with $53.2 million weighted average basic shares. 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. As of March 31, 2012 our cash and cash equivalence balance was $28.9, million which was down from $32.2 million at December 31, 2011, but was in line with our expectations. During Q1 we used $4.1 million in cash and operating activities and $286,000 in capital expenditures, which was partially offset by $1.2 million of cash received and stock option exercises and the SPP contributions.

Now, turning to guidance. The second quarter of 2012, we currently expect non-GAAP revenue to be in the range of $20.5 million to $21.5 million, which includes $17.5 million to $18.5 million in non-GAAP Smartphone revenues. We are guiding non-GAAP Smartphone revenue to grow 6% quarter-over-quarter at the high end of the range and flat at the low end of the range. This is due to the fact that we are only launching two new titles in Q2, as we had elongated the data period for new titles.

We expect non-GAAP gross margin to be approximately 88% which is consisted with the first quarter and reflects the fact that we now own the Deer Hunter franchise.

Our non-GAAP OpEx for the second quarter is expected to be approximately $21.5 million which reflects increases for annuals raises, which occur on April 1. Higher bonus accruals for the increased outlook, additional marketing spend on the incremental revenue and the incremental R&D hiring.

Adjusted EBITDA loss to finance non-GAAP operating loss less depreciation of approximately $575,000 is expected to range from a loss of $2 million to $2.9 million.

During the second quarter, we will have a net $2.2 million GAAP income tax benefit which is the result of a $2.4 million non-cash release of MIG at pre-acquisition tax liabilities upon the expiration of the Statute of Limitation in China. But this will be offset by $200,000 of actual income tax expense. For non-GAAP guidance purposes, and when we report actual results for Q2, we will back out the one time income tax benefit from our non-GAAP result.

Our non-GAAP net loss excluding the $2.4 million tax benefit will be between $2.7 million and $3.6 million or a loss of between $0.04 and $0.06 per weighted average basic share.

In additional to the income tax benefit I just described, excluded from our guidance for Q2, 2012 and the non-GAAP figures, are $846,000 of amortization of intangibles in cost of sales, $495, 000 of amortization and intangibles and OpEx, $119,000 of transitional and restructuring costs and $1.2 million of stock based compensation. And the $1.2 million in the stock based compensation excludes any fair value adjustments related to the Blammo earn out which we talked about the last two calls, we won’t forecast.

Weighted average common shares outstanding for the second quarter of 2012 are expected to be approximately $63.7 million and $70.7 million diluted. Finally we expect our cash balance to be approximately $22 million by the end of the second quarter, which reflects the $5 million cash payment made in early April to Atari for the Deer Hunter brand assets.

In regards to the full year of 2012, we are increasing our revenue and profitability guidance due to the Q1 bid and the increased title release slate that was outlined in this supplemental presentation. We are increasing the number of new titles we are launching from 20 to 23. Five titles were launched in the first half of the year and 18 titles released in the second half of the year with nine titles in each quarter.

We currently expect non-GAAP revenue to be in the range of $86.7 million to $91.7 million, which includes $76.5 million to $81.5million in non-GAAP Smartphone revenues compared to our previous guidance of $71 million to $75 million.

We expect to finish Q4 2012 with a breakeven non-GAAP operating result and expect to be mildly profitable on an adjusted EBITDA basis. For the full year of 2012 we expect 54 million basic shares and 71 million diluted shares. We expect to be cash flow positive from operations in the fourth quarter and will end the year with at least $18 million of cash which factors in the $5 million payment already made to Atari, and we reiterate our prior statement that we will reach profitability without leaving tax, the capital markets and without taking on any debt.

I will close by saying that we are very pleased with our robust first quarter results. We believe the Glu is well positioned to maintain the momentum for the remainder of the year due to our strong catalogue of freemium original IP titles and the backend and loaded title release slides.

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

Question-And-Answer Session

Operator

(Operator instructions) your first question comes from the line of Sean McGowa, Needam.

Sean McGowa – Needam & Company

Thank you guys. Two questions. One regarding the guidance. It seems like the impact on the bottom line from the top line bit in the first quarter, seems a lot greater than what would be implied in your full year guidance. You are opening the full year revenue but it doesn’t – if I read between the lines, it seems like the bottom line impact is all that -- is significant relative to what we just saw in the first quarter and what seems to be going on in second quarter. And then the second question is, could you just talk generally about your positioning on Amazon as sort of a semi separate platform. Is Android -- but is own marketplace. How are you positioning that relative to Google? Thank you.

Eric Ludwig

Sure. I will take the first question and Niccolo can follow up the second question. So Sean, in regards to the full bit and raise flowing though, we obviously had a very strong Q1. OpEx was lower than guidance. But as I mentioned on the call we do have OpEx increasing pretty substantially quarter-to-quarter, partly due to Q1 was somewhat suppressed in marketing spend, and we were slower to hire some R&D folks that we were planning on. But we have raises every April that go into effect in April. So that’s going to up 50 OpEx. Then we have the updated revenue guidance that we just have flown through here and that was an incremental roughly 15% to 20% of variable marketing spend. So it’s probably tempered just from that component of OpEx going up over the year.

Sean McGowa – Needam & Company

Okay. Thanks.

Niccolo de Masi

We are quite bullish on the long term prospects for Amazon to have a successful global gaming store. They have all the ingredients for success. They have billing, they a brand, they have traffic and now they have an integrated store that can compete with iTunes and Google Play in its own right. It’s only on one device right now, the Kindle Fire. Of course we expect Amazon to expand the range and number of models which they bring to the store out on. But thus far seems to be a great competitor for the iPad in terms of the amount of revenue that someone as successful as Blue is on Android or in the iOS tablet can generate per consumer. We haven’t broken it out specifically. It’s of course still growing from a small base given the limited size of devices for our quarter or so, a quarter or two, but we have positioned ourselves as seriously with that as we have with the Google Play store and Apple’s app store. So we have dedicated still the marketing functions. We have dedicated device coverage and Glu integration and we’ll be bringing our titles there over the longer term simultaneously along with Google Play and Apple’s app store.

Operator

Your next question comes from the line of Darren Aftahi, Northland Securities.

Darren Aftahi – Northland Securities

Hi guys. Thanks for taking my question. Congrats on the quarter. Just a couple of things. Could you perhaps give us any color on what the impact of China was on your app revenue and perhaps how it’s trended recently with Apple’s recent selling quarter? And then two, has carry billing or integration that with Google Play impacted monetization on Google at all? Then my third question is, there’s a push out of some of these titles perhaps into the back half of the year if that was the case. Is any of that from the confidence you guys have in Deer Hunter Reloaded thus far? Thanks.

Eric Ludwig

Great. So some of the questions that we may need to get you to give a little more color on the second question. But on China, we’re not breaking out specific details on China, but we have seen an uptick in revenue from China. As Niccolo mentioned in his prepared script, we launched Small Street, both English and Chinese versions day and date of the launch and so that title go to number one top grossing in China. We are launching more titles in Chinese and in the Asian theatre. So definitely we’ll be seeing Asia on both Google and Apple up ticking. But it’s still a relatively small number in the totality of our revenue. And then let me turn it over to Niccolo. The second question was about Google Play.

Niccolo de Masi

Yeah, look in China obviously the user base is starting to grow. Of course we’re going to follow Apple and Google where they ship their store. We will naturally be more exposed to. Remember in China you’ve got the phenomenon of jail broken phones and there’s a more difficult mechanism for frankly obtaining cash from end consumers. So you’re still China many more users than equivalent revenue from a mock of the US. So your question Google Play was I think around whether there was any plan implications. Yes. The storefront migration.

Darren Aftahi – Northland Securities

But basically if you’ve seen an uptick in monetization from integrated carrier billing.

Niccolo de Masi

It’s a very gradual trend. So they’ve been adding carriers for the better – for over a year now. We continue to see the platforms as very equivalent. Apple and Android, Google Play is very similar with regards to lifetime value and app down metrics and that kind of thing which is good news. So Google’s continued enhancements of the store experience billing options are definitely making that platform head to head competitive with where Apple is from our perspective. I don’t think we’ve seen massive cords between that certain carriers have come online, but I think that you’re going to continue to see Glu do well with Google Play and Google Play itself we think is evolving positively with regards to the new integrated music games and app storefront books et cetera.

Your last question was on titles pushing out. So as I said in my script, this is a deliberate action to give us more time to benefit titles in their beta period the same way that we’ve obviously had a benefit in Small Street, Stardom, Zombies and Deer Hunter Reloaded. Now we’ve met our bid guidance for nine quarters, every quarter since I’ve been here. So we have guided obviously taking into consideration the timing of launches and also the current belief of success around Deer Hunter Reloaded, Little Kingdom, Samurai versus Zombies, et cetera. So does that answer your question on that one?

Darren Aftahi – Northland Securities

Yes. Thanks.

Operator

Your next question comes from the line of Michael Graham, Cannacord.

Michael Graham – Cannacord Genuity

Hey guys, can you hear me okay?

Niccolo de Masi

Yes Mike, we can hear you fine.

Michael Graham – Cannacord Genuity

Oh yes, thanks. Sorry. A little technical problem. Hey, congrats on the quarter. Very impressive and I have two questions. One is just you show in your slides that Gun Bros is converting to payers at a rate of 2.1% and it’s got a really high app down. So I just wonder if you could give us a comment on what it is about that game that’s working so well and what other games you have high hopes for or what lessons you’re taking from that? So is that something that can continue to improve or not? And then second question is, I’d just love to get your high level thoughts on the consolidation that’s going on in the sector. There have been a couple of acquisitions in the last couple of weeks. Just how do you see that playing out and where do you see Glu playing in that activity? Thanks.

Niccolo de Masi

Okay. Well, the conversions we broke out on Gun Bros and Contract Killer are showing both a conversion to actual parting with cash and actual micro transaction during that purchase, which is banging around 1% or so and then we’ve shown the additional conversions of users who aren’t parting with cash but are engaging with on offer interactive ad. So the 2.2% number is a combination of those two. It’s not solely people paying with cash. It’s paying with cash or converting to some kind of action which Glu gets paid for through our ad partners. Gun Brothers is our first title. It’s our biggest killer of revenue title and it’s also the most mature user base we have in the company. So if you look at the average app down across the company which is around $5.50 that we’ve shown you on that slide, you can see that Gun Brothers has ticked up quarter on quarter since we’ve been breaking this out. Specifically a lot of that I would attribute to the fact that it is a very engaged and frankly very mature user base at this point.

The user base has been getting a higher and higher percentage of highly engaged payers and wells and obviously it’s not driving the same number of new people through the door it did a year ago. So you’d expect to see this kind of behavior on all titles that have been going for eight quarters or so on or five quarters so on and it’s nothing out of the ordinary for Glu. As we said in my script, all of our titles are averaging a really pretty healthy app down compared to other casual mobile titles and you can imagine looking at where the average for Glu is of app down where Gun Bros and Contract Killers are. You’re seeing a pretty good spread there among those titles relative to our average and it’s not a massive spread either. On a consolidation topic, obviously it continues at pace. So you saw GREE and Funzio get announced yesterday. We think Glu has everything that takes to be a successful standalone company.

There’s no doubt in our mind that ever since we’ve doubled product capacity, our batting average so to speak continues to improve quarter-on-quarter. We think we’re getting better at refining titles that are coming out and we think we have the scale it takes to be a successful independent company cross platform. It’s early days in mobile gaming and we all know – we show this in our deck early on. There is a factor of five or six to be had still in gross and the number of users that have a Smartphone. So we very much believe it’s going to be an exciting three, four, five years here for us and we’re comfortable that we’re as able to be a consolidator or as we are to be consolidated at the right price in the coming years.

Eric Ludwig

I think the one thing I would add to that Mike is, if you look at the R&D capacity that Glu now has with the Griptonite and Blammo transaction, we have 500 developers in R&D spread across 24 development teams in seven locations. From what we understand about Zynga they have less than 500 people in the entire mobile division and all these private company competitors that we’re going head to head with are pretty much probably sub 100 employees spread across one to three titles that may be very successful but they’re very thin, number of titles, number of team. So we think as Glu continues to scale we’ll be adding some teams over the course of the year. We are the skilled player in mobile, freemium mobile.

Niccolo de Masi

Yeah. We’re operationally diversified and we have a very clearly focused strategy which is to be in the content segment of the value chain and to partner closely with Apple, Google, Amazon, Microsoft. We’re not trying to compete with Apple, Google, Amazon, Microsoft and their stores. We believe we’ve got a really healthy, viable and rapidly growing business over time by being a pure content player.

Michael Graham – Cannacord Genuity

Okay. Thanks a lot.

Operator

Your next question comes from the line of Atul Bagga, Lazard Capital.

Atul Bagga – Lazard Capital

Hey guys, congratulations on the great quarter and thanks for taking my questions. I have a couple of questions for you. A, I wanted to understand a little bit about app performance in Q1. How much do you attribute to the usage app performance versus monetizational performance? And a related question would be, if you look at some of your newer games, Frontline Commando, Samurai and even the games that you launched in early Q2, how do you compare the monetization and the engagement metrics on these games versus your old games during the same buyer cycle? So if you were to compare Contract Killer, Contract Killer Zombies, Gun Brothers, during the launch versus the new games, how would these games compare in terms of monetization as a less engagement? And the last question I had regarding your advertising revenues, I would have thought in Q1 probably that number would be a little challenge just given the seasonality. Ccan you talk a little bit on that? We saw some nice uptick in non-incented ads during Q1. What do you attribute that to? Thank you.

Eric Ludwig

Wow, three questions Atul. Thank you for that. I’ll take the last one and then Niccolo and I can go back and forth on answering probably to a small degree your other two questions. On the ad revenues in Q1, we actually had – because we launched fewer titles in Q1, we were able to do more cross promotion campaigns with other third party developers and that really made up for the seasonality drought that we thought we would have in Q1 as we had mentioned the last conference call. Then on the performance of titles, original titles versus the new titles, Niccolo you want to go back and forth on this one or sub part of questions there.

Niccolo de Masi

So Atul, there has not been some massive step change in the quality of app down retention. I think what we’re finding if you look from Q4 to Q1 is that certainly our older titles that have been updated are showing that the retention in our games continues to be there and it continues to show that the brand network effects that we have built by having sometimes 20 million, 30 million people install and play our bigger titles is delivering that network halo viral effects and continue to bring in sufficient new players to match the drift out of churning or less active players. We showed you the app down on Gun Bros and Contract Killer last quarter and the numbers were not radically different than they are this quarter.

They were a little bit lower. Both titles are aging. Both titles are gaining the greater percentage of payers, more engaged players, many wells, et cetera into the user base. Glu has been building games – our successful games for the last almost 18 months have been all in a similar zone of targeted demographics, hyper action values, higher app down, produce all the retention obviously and we’re trying to ensure that we keep driving the key learnings of our titles in the past year broadly in the organization. We had a quarter last year where obviously our casual performance was dramatically softer than it has been so far this year, with titles like Small Street and Little Kingdom just out and Stardom continued to do well.

So we’re a learning organization. We’re very proud of the fact that we do have many locations that can grow organically, but we’ve been carrying along the whole organization together to be able to improve retention, app down and hence lifetime value. So lots of improvements still to come on those topics quarter on quarter and particularly later half of – second half of this year, later quarter in this year when we’ll continue to bring out next generation monetization retention mechanisms. But I think that you’ve probably seen pretty good evidence now from us for a number of quarters at being a successful learning machine overall by team, by genre.

Atul Bagga – Lazard Capital

Would you guys be sharing some of the same metrics for other games, specifically for Frontline Commando and Samurai? The app down metrics at least?

Eric Ludwig

Not at this point right now. We don’t have them handy nor are we sharing those. Right now we’re really trying to show some of the older titles and showing the improvements on the older titles. But right now what’s in the supplemental deck is what we’re sharing.

Niccolo de Masi

But look Atul, we have a history of improving disclosures and I think that we are firmly the most transparent mobile freemium gaming company. No one else breaks out app down like we do. So we are happy to take that into consideration in future quarters.

Atul Bagga – Lazard Capital

Great. Well thank you guys.

Operator

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

Mark Argento – Craig-Hallum Capital Group

Good afternoon guys.

Eric Ludwig

Hi Mark, how are you doing?

Mark Argento – Craig-Hallum Capital Group

Good, thanks. When we’re looking at the trends of the MAU and DAU relative, we saw quarter-on-quarter MAU come in a little bit yet DAU continues to work higher. Is that just a function really of the fewer games being released in the quarter and should we see this trend continue for next quarter until you get into the media part of your release schedule? And then my second question is if you could just touch a little bit on your direct marketing spend and marketing spend and what channels you’re seeing some decent uptick in terms of driving some new users. Thanks.

Niccolo de Masi

Okay. So DAU/MAU ratio increased for Glue from Q4 to Q1 and this is actually nothing but a positive sign. It means that our users are on average stickier. It’s a function of the natural churns. They always bring in new users into the business and you’re always finding people that are churning off of games. So that ratio has increased, most likely because newer titles, whether launched in Q4 in Q1 have had a higher DAU/MAU ratio in of themselves and so it’s brought up the overall average across the business. So yeah, we obviously hope in the longer term to be able to continue to hold or grow the DAU ratio as the year unfolds. On the direct marketing front, Glu is a pretty modest direct marketing spender relative to a lot of our competitors, particularly in the private space. So we put our money into investing in product quality and titles that sell themselves and we put that investment in because our partners Apple, Google, Amazon, Microsoft, feature our games for free in return for supporting their platform as well as we do.

So our best margin is often featured placement from the storefront owners. The rest of our direct marketing spend goes into the same mix of ad networks that we generate our ad dollars from. It’s the Mino Medias and the Top Choice and the AdMobs and the iAds and we also have other marketing mechanisms, social media, Twitter, Facebook and so on. But there’s been no change in the overall mix of philosophy in terms of relatively modest direct markets here and spending only where we see a clear ROI per product.

Eric Ludwig

Yeah and Mark just to add to that. If you look at our Q1 Non-GAAP sales and marketing as a percentage of revenue it’s 20% for the quarter. That’s roughly half headcount and the other half is the direct marketing spend. So we’re running a pretty tight ship in terms of how much money we’re spending in marketing, certainly compared to our private peers who we hear stories are spending 50% plus of their revenue on direct marketing campaigns.

Mark Argento – Craig-Hallum Capital Group

Thank you.

Operator

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

Adam Krejcik - Roth Capital Partners

Hey guys. Just two quick questions for me. The first one, in that pipeline of games this year, just wondering which is the one from Blammo? Is that in the Q3 or unnamed in Q4?

Eric Ludwig

No, that would be summer camp in Q – I believe it’s early Q3.

Adam Krejcik - Roth Capital Partners

And is it targeting a similar kind of demographic as Stardom?

Niccolo de Masi

Yes, absolutely.

Adam Krejcik - Roth Capital Partners

Got it. And then my second question is – sorry?

Niccolo de Masi

So we like teams building things they’re good at. So there needs to be a trend across the organization.

Adam Krejcik - Roth Capital Partners

Absolutely. My second question is on the four year raise in revenue guidance. How much is that is being driven by three new titles being added to the slate versus just increased confidence in your existing titles and future titles that you had already announced?

Eric Ludwig

Yeah, sure. So obviously the beat for the quarter was added to the full year and then we added roughly another $3 million for the full year. How much of it was really from the title release slate, we’ve been saying we’re going to be releasing 20 plus titles for this year. So probably most of the increase to 23 titles was more us just raising that number, but it was already in our numbers and just telling the street right now that we’re doing 23 titles. So it wasn’t that we pulled in a title from 2012 or 2013. That was just more of us giving three more titles that were already in our mix. So it’s more around the metrics we’ve seen in the modernization of the titles we’ve had.

Adam Krejcik - Roth Capital Partners

Great. Thanks a lot and nice quarter.

Operator

Your next question comes from the line of Greg Scott, B Riley.

Greg Scott – B Riley & Co.

Hi. Good afternoon guys. Congrats. You actually just answered my first question about the title release slate. But with nine games in Q3 and nine games launched in Q4, that’s a pretty hefty amount. I’m just wondering how you guys are looking to manage that so these games don’t get lost in the shuffle with that many games being released.

Niccolo de Masi

Well, we have great relationships with our storefront partners and if you look at our featuring track record in the past nine quarters, you’ll see that it’s very close to 100%. It’s 90% plus of title they’re featured by both Apple and Google. So featuring lasts for one or two weeks. We’re hence able to put a title out almost week after week after week and hope for a solid week of featuring per title without it leading to any kind of channel conflict or channel market share tension. We also of course manage our roadmap so that there is not conflict within genres. So you do your best subject to title timing and then the refinement period is embedded to make sure that you’re putting out not 10 games with the same mechanic all in the same quarter. But this is certainly one of – it’s a high class problem. Glu is successfully bringing out a lot of titles this year, many more than almost every other company in the space and we believe that this volume is certainly sustainable for us and we’ll be successful on all platforms that we typically market this to.

Greg Scott – B Riley & Co.

That’s very helpful. And then just, this is more of a bigger picture question, but on the heels of you guys acquiring the Deer Hunter brand, given your strength and your strengthening IP portfolio, are there any thoughts about maybe trying to leverage that IP in terms of licensing or other future revenue streams?

Niccolo de Masi

Look, we’re all about revenue and driving bottom line contribution in the long term. So as we build bigger and bigger brands with more and more downloads, we are of course open to merchandizing opportunities, brand extensions, you name it, not only for Deer Hunter but also for Gun Brothers, Contract Killer, the whole kit and caboodle of titles that have tens of millions of installs and players of their history. So for sure we will slowly but surely look at those opportunities as long as the cost and opportunity cost is dramatically less than the anticipated return.

Greg Scott – B Riley & Co.

Great, thanks. Congrats guys.

Operator

(Operator instructions). Your next question comes from the line of John Taylor, Arcadia Investment.

John Taylor – Arcadia Investment Corporation

Hi. I’ve got a couple of questions too if I may. There’s a pretty interesting trend going on in the customer acquisition cost. It looks like your sales and marketing number as you mentioned has been pretty tightly controlled and half of that has gone into promotion, the rest to headcount and over the last few quarters that number has been dropping. So I wonder if there’s a way you can give us a sense of where you expect that to stabilize, particularly in light of the two nine new release quarters coming up. Any way to talk about that?

Eric Ludwig

Yeah. Sure, John. So in slide 30 of our deck – on the supplemental deck we have our long term target. So you’re correct. Our sales and marketing has been trending down and when we acquired Griptonite and Blammo back in Q2 or Q3 of last year, we stated very clearly that we would scale the G&A and scale the sales and marketing in terms of headcount and adding 200 more R&D developers, adding 12 more development teams with the accompanying titles was not going to require more account managers for Apple and Google, more marketing folks. So we’re really seeing that leverage because of that factor and that’s played out clearly and where we see that sales and marketing going to is roughly 18% to 19%. So we’re getting pretty close to our long term target, but as revenue increases that fixed cost of headcount will stay pretty stable and then we’ll get a little bit more on the variable marketing leverage from the revenue that grows. So that’s really where the leverage comes from.

John Taylor – Arcadia Investment Corporation

Yeah. Particularly impressed with the sales and marketing impact on new installs. It looks like that number has been dropping pretty dramatically. So this backs up what Niccolo you were saying earlier about the virility of some of your titles and so on. So is that a sustainable trend?

Niccolo de Masi

Well, we continue to maintain that our strategy is the most sustainable approach to this, which is we are putting our overall OpEx budget mostly into creating differentiated products that will spread themselves long term through word of mouth and that our storefront partners will feature and market for free. So it’s always possible to spend more money on direct marketing. But we think the competitors of ours who put their OpEx into marketing instead of product differentiation are obviously going to eventually find out that that’s not sustainable and that what we’re doing is far in a way the most appropriate way of driving long term sustainable front line.

John Taylor – Arcadia Investment Corporation

Well, with discoverability particularly a challenge right now, yeah.

Niccolo de Masi

Well, it’s always going to be a challenge. Let’s remember that when we started in this business Apple – when I started at Glu there was 100,000, 200,000 apps on the Apple store and now it’s 600,000. So it’s only increasing and it only continued to increase as the app economy will probably grow by multiples, factors of five, maybe even 10 in the next few years and the only way you can really hang on to your share and grow your share is making sure the titles will sell themselves, will retain consumers themselves and will spread via word of mouth over and above and beyond the featured placement we endeavor to achieve.

John Taylor – Arcadia Investment Corporation

Yeah, cool. Okay and then I have a question on the app down. So the title – go back to that title you released simultaneously in the US and China. How much variability is there between those two markets? And I’m also curious if you’re seeing much variability between the iOS version and the Android version say in the western markets.

Niccolo de Masi

So I said on an earlier question that app down lifetime value are very similar for Glu on Android and on iOS once users start playing the game. You may not always complete the complete the download in some cases, but once users actually start playing, app down lifetime value is very similar on those platforms in the US. For other markets of course there is an adjustment factor that has to be thrown in to account for GEP per capita differences. Disposable incomes are lower in China than the US. So you’re going to see lower app down and lower lifetime values even with the same retention period as you have here.

John Taylor – Arcadia Investment Corporation

Can you scale that for us? Two times, three times, five times?

Eric Ludwig

Yeah. It’s certainly a factor over five for sure. We won’t give the specifics, but it’s definitely over a factor of five and I think you’ll see that data played out in terms of China as a percentage of the downloads, versus China as a percentage of the revenues and I think iOS this last quarter trying to add about 10% of the downloads and about 2% of the revenue. So that right there is kind of indicative differential of people that are either not monetizing or monetizing as well.

Niccolo de Masi

The three clear, that’s across the whole iOS Apple ecosystem. That’s not a grey stat.

John Taylor – Arcadia Investment Corporation

Right. I get it. Okay, great. That’s really helpful. Thanks.

Operator

And there are no further questions at this time. I will now like to turn the floor back over to management.

Niccolo de Masi

All right. 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 freemium mobile gaming company. Thank you again for joining the call and we’ll see you next quarter.

Eric Ludwig

Great. Thanks a lot.

Operator

And this concludes today’s conference call. You may now disconnect.

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