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Executives

Greg Cannon – VP-Finance

Niccolo de Masi – CEO

Eric Ludwig – CFO

Analysts

Sean McGowan – Sean McGowan

Mike Hickey

Eric Wold

Atul Bagga

John Taylor

Adam Krejcik – Roth Capital Partners

Darren Aftahi

Glu Mobile, Inc. (GLUU) Q3 2012 Earnings Conference Call November 1, 2012 4:30 PM ET

Operator

Good afternoon, my name is Selena and I will be your conference operator today. At this time, I would like to welcome everyone to the Glu Mobile Third Quarter 2012 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I will now turn today’s conference call over to Mr. Greg Cannon. Please go ahead, sir.

Greg Cannon

Good afternoon, everyone and thank you for joining us on the Glu Mobile third 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 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 3differ 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 Risk Factors on the Form 10-Q filed with the Securities and Exchange Commission on August 9, 2012.

During this call we will present both GAAP and non-GAAP financial measures. Non-GAAP measure 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, impairment of goodwill, release of tax liabilities and foreign currency gains and losses primarily related to reevaluation 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, as 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 third 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 November 1, 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 the 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?

Niccolo de Masi

Good afternoon, and 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 two demo videos of title that we expect a launch between now and the next earnings call.

Q3 smartphone revenues came in slightly above the mid-point of our guidance range. On a year-over-year basis, that represented an increase of 73% and made up 86% of total non-GAAP revenues in Q3, compared to 69% in the third quarter of 2011. We are also favorable to guidance on the adjusted EBITDA loss due to OpEx management. Our third quarter smartphone revenues decline primarily from Q2 due to a combination of industry wide and Glu specific packers.

Looking at hardware sales the consumer smartphone upgrade cycle slowed in anticipation of new IOS and Amazon hardware launches. This resulted in slower sales for some device manufacturers and retrained expenditure by consumers on their associated ecosystems.

Advertising budgets were also soft due to the consumer pause. Glu nevertheless maximize their positioning for Apple fall IOS launches, we optimized and had five titles featured in the new IOS fixed store and on the launch weekend of the iPhone 5. All of our most significant titles have now been optimized for the iPhone 5.

We are disappointed with the super majority of releases from our newer studios in Q3. While new title launches were well received by consumers and critics and downloaded well organically. They exhibited week average revenue per daily active user up/down.

User reviews were strong typically ranging from 4 to 4.5 stars with solid feature placement and overall download on both the IOS and Android stores. They all grew from July to September. We are implementing a number of measures to ensure that our next product cycle will deliver higher up/down.

Eternity Warriors 2 was a bright star in the quarter. Launching on August 22, and generating $2 million in Q3. EW2 was particularly strong in Asian markets where it was featured by Google Play Korea and peaked at number 5 top grossing in that market. It was also Editor’s choice in China on IOS where it reached number 7 top grossing.

Glu’s investment in localization will accelerate for 2013, to match the rapid penetration of smartphones international markets.

Our second biggest title of Q3 Blood and Glory Legends generated approximately $800,000 during the one month of the quarter with live. This equated to approximately one-third of the launch revenue of the original. ARPDAU was inline with original title with lower organic download been the cause of reduced peak relative to the original. Going forward, we will launch Sequels, Further Apart in order to enhance pent-up consumer demand.

Turning now briefly to the Android platform. Carrier billing coverage continues to expand around the world with Verizon now expected to go live in the next few months. However, Google Play growth has under indexed against the continued uptick and daily Android device installations over the past six months. We anticipate, this will continue unless the Google Play Store launches in China. We have such expect iOS to remain our most significant platform through 2013.

We signed a partnership with London-listed Probability PLC last month in order to capitalize on the mobile real money gambling market in the U.K. Probability is the only publicly traded mobile gambling sheer-play in the role. We will revenue share with Probability who will create casino games branded with Glu IP. This partnership position Glu for expansion to the extent regulatory environment ease in other territories.

I’ll now turn to our product roadmap. Fundamentally, our hardcore games have begun evolving some single player action, arcade mechanics towards more connected community based game play. This migration started when we updated Big Time Gangsta in Q4 2011, with our first 4A into synchronous player versus player or PVP mechanics. We follow this up with the real time synchronous PVP update to Gun Bros, and if Deathmatch 3 that released on December 2011.

In late 2011, early 2012, we noted hardcore gaming consumer gravitating towards PVP and being to increase our investment in this area. These market trends have accelerated during the later year and we originally slated a number of PVP titles for launch late in 2012.

We acquired GameSpy Technology to help accelerate our PVP roadmap evolution. And are pleased to this integration has preceded the plan. August set a launch of Bombshells multiplayer on Android using GameSpy. In September 2012, we launched Indestructible our first title design from the group up with synchronous PVP. We’ve three additional PVP games in the pipeline all utilizing elements of GameSpy. Mobster Shootout, Dragon Storm and the Mobsters the Gangsters. PVP games typically catered to narrower demographics and other games on those. However, there are emergent game play create steps they can significantly enhanced ourselves and player retention.

We anticipate expanding the proportion of our revenues rise from PVP mechanics in the coming quarters. And doing so we expect to increase direct marketing cost as a percentage of revenue as we compete for the attention of hardcore PVP gamers.

With good execution we anticipate that higher time life values in our PVP games will more than compensate for this on the bottom line. Since I joined Glu in 2010 we are focused on our studios towards generating meaningful original IP and increasing production values. As a 100% premium and 90% cost to original IP Company we believe that we are industry leading in this arena.

We have now turned to improving ARPDAU and life time values, which will be our priority hence forth. Recent new hires are very much indicative of this monetization focus. We have also begun rebalancing studio staff to make room for dedicated retention and monetization over site and our team.

As part of this rebalancing throughout 2013 we will hold total R&D OpEx flat in absolute terms from Q4, 2012 levels. One of the most significant steps we have taken in our efforts to improve monetization was a recent hiring of Matt Ricchetti as our first President of Studios.

A veteran of EA and Zynga. Matt was until recently VP of mobile at Kabam, where he was responsible for sustaining the impressive top growth in success of Kingdoms of Camelot and Arcane Empires. As further studios we look forward to his leadership and both increasing our ARPDAU across Glu’s portfolio, as well as shaping our longer term products strategy. Matt is a highly complimentary addition to the senior Glu executive team. I am excited by the wining combination created by his proven monetization track record for premium games and our scaled global development infrastructure.

The market has now expands into the point where by greater depths and titles can be rewarded with eight figure annual revenue outcome. We believe that our industry is evolution and growth will increasingly be about fewer more refined better monetizing titles. Going forward, we intend to hold the higher bar for more minimum acceptable ARPDAU in new releases. We will be more aggressive with regards to killing titles late in development, as well as providing additional refinement times where we anticipate strong incremental ROI.

As it been our fact to-date, updates support period will match success for every title on a case by case basis. Despite ARPDAU being low in many of our new third quarter launches we believe that our stronger views and over 52 million new Q3 installed illustrate our lateen long-term revenue potential.

Consistent with prior quarter, only 10% of these new downloads came from paid user acquisition with the balance delivered organically. We have thus far in Q4 launch Death Dome and the sequel to our most download title of all time, Contract Killer Two.

As with the super majority of Q3 titles downloads and reviews are strong that and Death’s Dome is below expectations. Thus far however Contract Killer Two is off to a solid start with the top 25 grossing iPad app and top 44 grossing iPhone app.

We are determined to prevent the reoccurrence of our weak Q3 new title performance. In order to do so and maximize Glu’s long-term growth, I have made the decision to delay five of our Q4 title launches. The delay is to enable our new President of Studios to review and refine the monetization system to his satisfaction.

As such by year-end we anticipate launching only two more title, New Action Franchise, Dragon Fair and the sequel to one of our biggest titles of all time Contract Killer Zombies. The run rate existing Q3 from new title launches has significantly, adversely impacted our prior Q4 expectation.

We have also recently experienced degradation and iOS advertising revenues as Apple has extended it prohibition of incentivize advertising to include any linkage to external HTML 5 sites.

This reduces revenue from the Tapjoy iOS channel. As a result our expectation for Q4 are being substantially lowered to reflect these factors as well as to delay our five new titles, well our President of Studios completes its 60-day review.

Eric will quantify these impacts to adjusted EBITDA in his prepared remarks. We anticipated adjusted EBITDA improvement in Q1, 2013 from Q4, 2012 guidance level. We remain comfortable that our cash balance affords us the investment headroom we need to read sustain profitability without access to additional capital.

Throughout my tenure, we have consistently made decisions through the lends of maximizing Glu’s long-term prospects. My confidence in Glu is positioning on positive global macro trends remains undiminished, as is our expectation of significant long-term. We are absolutely committed to and resolutely focused on improving market position in the coming quarters.

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

Eric Ludwig

Great. Thank you, Niccolo. Overall while our new title launches during third quarter underperformed compared to our expectations, we still achieve smartphone revenue growth with 70% on a year-over-year basis.

On the second to last page of the supplemental presentation, you will find a key operating metrics slide. This slide includes the last seven quarters of metrics for the items I will refer to you during this call. As such I will not reference every quarter-over-quarter and year-over-year number when reviewing our results.

First, I’ll provide some details in the company’s financial results for the third quarter as well as certain operating metrics. I will then conclude by reviewing our outlook for the fourth quarter and for the full year 2012.

Summarizing some of our key financial highlights for the third quarter of 2012, total non-GAAP smartphones revenues of 18.3 million were up 73% on a year-over-year basis and slightly above the midpoint of our earlier guidance. Non-GAAP smartphones revenues accounted for 86% of total non-GAAP revenues, compared to 59% for the third quarter last year.

Original IP accounted for 82% of our total non-GAAP revenues, and 91% of total non-GAAP smartphones revenues in the third quarter. These percentages were up year-over-year, but down slightly quarter-over-quarter as expected due to revenue from Call of Duty: Black Op Zombies that republish agreements for Mac edition.

Non-GAAP gross margins of 89.5% was in line with our guidance, but as expected down quarter-over-quarter due to the decline of original IP, I just mentioned and higher hosting cost due risking the first quarter results GameSpy includes. We had 52.8 million downloads of our titles on Apple, Android, and other platforms during the quarter and our cumulative downloads are now at 329.8 million.

Our daily active users in the month of September 2012 were 3.8 million, while our monthly active users were 37.7 million. Due to OpEx management, we were able to report an adjusted EBITDA loss of 2.1 million in Q3, which was above our prior guidance. Lastly, our non-GAAP net loss is $1.6 million, which is also significantly above our guidance range.

I now take a moment to drill down on our third quarter revenue, and highlight how we delivered against our guidance. During the third quarter, total non-GAAP revenue was 21.2 million, which is at the high end of our guidance range of 20.25 million to 21.25 million and was up 19% from the same year.

The year-over-year revenue growth was driven by the increase in non-GAAP smartphones revenues, which was 18.3 million also above the midpoint of our guidance range of 17.5 million to 18.5 million.

As Niccolo mentioned, the sequential decline in non-GAAP smartphone revenue resulted from the expected pause of consumer upgrades and anticipation of new hardware launches along with lower than anticipated amortization of recently launched titles.

The 11 titles we launched during the third quarter of 2012 accounted for 23% of our non GAAP smartphone revenues during the quarter. Of the 11 titles we launched during the third quarter, only Eternity Warriors Two and Blood & Glory Legend were financially successful.

Our non GAAP smartphone revenue by platform for the third quarter of 2012 was 60% on the Apple platform, 32% on the Android and 7% on other smartphone platforms. Our non GAAP freemium smartphone revenues were $16.5 million up 103% from the prior year and down 14% compared to Q2 2012.

Non GAAP freemium smartphone revenues accounted for 90% of our total non GAAP smartphone revenue during the quarter. During the third quarter of 2012 we had $1.9 million in in-app purchase billable transactions, down 25% as compared to the prior quarter.

The average revenue per in-app purchase transaction increased from $5.06 in Q2 to $5.07 in Q3. The quarter over quarter increase in ASPs related to – orders too success in Android, especially in Korea and promotions of higher of price packages for previously released titles.

Our legacy feature phone business declined 22% quarter-over-quarter and 60% year over year on a non-GAAP basis but was within our guidance. Our feature phone revenues now account for only 14% of total non-GAAP revenues and is still dominated by branded IP titles.

During the third quarter, our non-GAAP gross margin was 89.5% inline with our guidance. Non-GAAP gross margins were up 190 basis points from 91.4% in the second quarter of 2012 although up 850 basis points from 81% last Q3.

As I mentioned previously the sequential decline reflects slightly higher hosting costs related to the GameSpy acquisition. In addition, we had marginally higher royalty cost due to publishing Call of Duty Zombies for Mac edition on Android devices.

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 in absolute dollars. And the second is hosting costs for our freemium games which are increasing sue to the increase in our dollar amount. Increasing server-based social functionality and upcoming releases will also add to hosting costs.

I will next walk through some additional operating results for our third quarter of 2012. Total non-GAAP operating expenses were $21.6 million in the third quarter and lower than our guidance reflecting a lower studio bonuses driven by the weak performances of Q3 titles and lower than expected head count.

The combination of inline revenue in gross margins, along with favorable management of OpEx resulted in our reporting and adjusted EBITDA loss of $2.1 million during the quarter. This beat our prior earlier guidance for an adjusted EBITDA loss between $3.1 million and $4 million.

As a result we reported a non GAAP net loss of $1.6 million or a loss of $0.03 per basic share, which also is favorable with our guidance of a loss of 3.9 to 4.8 million or a loss of $0.06 to $0.07 for basic share. We ended the third quarter with 64.4 million weighted average basic shares.

I don’t normal detailed the current quarter GAAP financial items, but this quarter we had three that I’d like to explain. First, we recorded $4.8 million benefit to the income statements for the Blammo earnout as we reversed much of the prior quarter’s mark-to-market expenses for the earnout. The primary driver of this benefit is due to the lower revenue forecasts and thus reduced assumption regarding their achievement of the earnout shares due to the disappointment of other title Campers this quarter.

Approximately $1 million of this benefit is due just for the Glu stock price decline quarter-over-quarter with the balance relating to the forecast change for Campers as well as lower forecast for future Blammo launches.

The second item is an impairment of goodwill of $3.6 million related to our APAC reporting unit. This relates to our annual goodwill review we perform every year during the third quarter. The goodwill impairment is a result of the lower net present value forecast for our APAC reporting unit due to accelerated declines in local China feature phone revenues and our recent restructuring of our operations in APAC.

And lastly we recorded $1.1 million income tax benefit in the quarter due primarily to the released valuation allowance of $570,000 as a result of our GameSpy acquisition. Additionally there was a tax benefit related to our blended effective tax rate due to the Blammo mark-to-market earnout adjustment I just discussed. 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 September 30, 2012, our cash and equivalents totaled $24.1 million, which was down slightly from $24.5 million on June 30, 2012 but still better than our expectations.

During Q3, we used $2.6 million of cash in operating activities and $591,000 in capital expenditures, which were offset by $913,000 acquired from IGN as part of the GameSpy acquisition. We also received $1.7 million from stock option and warrant exercises as well as ESPP contributions and experienced a $47,000 foreign exchange gain on our balance sheet accounts.

Now turning to guidance. Our fourth quarter guidance is being substantially reduced from implied figures represented on August 2nd earnings call. Smartphone revenues have been reduced by approximately $9 million for the fourth quarter as a mid point and there are four key factors driving this reduction.

First, slightly over half of the reduction in our fourth quarter guidance is due to the fact that nine of the 11 titles we launched in the third quarter were financial disappointments. We’ve stated on the August that we were using historical batting average and applying those historical success and failure rates to our Q3 released slide for trading our financial forecast. Unfortunately our batting average significantly worsened with the third quarter releases and this has had direct effect on the four revenues expected from that quarterly batch titles.

Secondly, our pre-third quarter catalogue titles have experienced monetization degradation during the third quarter at a rate that we did not forecast. The supplemental presentation highlights that from June to September for our largest titles iOS decreased from $0.085 to $0.075. This has resulted in a projected reduction in our catalogue for the fourth quarter of approximately $1 million.

Third, two days after our October 9th preannouncement press release Apple informed us of its pro edition of incentivize advertising to include any linkage to external HTML 5 sites, which is affecting our revenues from the direct channel. This has resulted in an approximate 6.5% reduction of our prior fourth quarter guidance or a $1.75 million reduction in fourth quarter guidance.

And then lastly, the remaining $2 million or so of the reduction is due to our decision to push several titles out of the fourth quarter so that our new President of Studios, Matt Ricchetti can perform an in-depth review of modernization. I would also note that we hired Matt subsequent to our October 9th preannouncement press release.

We now anticipate releasing four titles in the fourth quarter, Death Dome and Contract Killer Two both of which have already launched, and Contract Killer Zombies 2: Evelyn’s Story and Dragon Fighter both watching late in the quarter and having a small contribution to revenue.

As a result, we currently expect our fourth quarter 2012 non-GAAP revenues to be in the range of $19.5 million to $20.5 million, which includes 17.5 to 18.5 in non-GAAP smartphone revenues, slightly down sequentially from the third quarter to mid-quarter of the range for the reasons I discussed above.

We expect non-GAAP gross margin during the fourth quarter to be approximately 90% which is in line with the third quarter, and this reflects increasing original IP from our fourth quarter releases. Our non-GAAP OpEx for the fourth quarter is expected to be approximately $22.2 million.

And as Niccolo indicated, we will be rebalancing studio staff throughout 2013 to make room for dedicated retention and modernization and over-sizing our studios which will hold total R&D OpEx flat in absolute terms from the Q4, 2012 levels of $13.3 million per quarter.

Given these expectations, adjusted EBITDA defined as non-GAAP operating loss less depreciation of approximately $650,000 is expected to be a loss of $3.1 million to $4 million. This adjusted EBITDA figure is below our preannouncement of breakeven or better due solely to the Apple change which occurred two days after our preannouncement and the conscious decision to push several titles in the fourth quarter to enable management team to perform an in-depth review of modernization.

As I detailed above, as in those two items both of which occurred after the preannouncement, we would be guiding to adjusted EBITDA of breakeven or better. Our non-GAAP net loss including $500,000 tax expense will be a loss between 4.2 million and 5.1 million more loss between $0.06 and $0.08 per weighted-average basic shares.

Excluded from guidance for Q4, from the non-GAAP figures are 1.1 million of amortization of intangibles in cogs, $495,000 of amortization in OpEx, a $650,000 restructuring charge and $1.2 million of stock based compensation. The $1.2 million stock based compensation excludes any fair value adjustments up or down related to the Blammo earnout.

Weighted average common shares outstanding for the fourth quarter of 2012 are expected to be approximately 65.9 million basic and 69.9 million diluted. Finally, we expect our cash balance to be approximate $21.5 million at the end of the fourth quarter, down quarter-over-quarter primarily due to the project to restructuring payments and a back in loaded revenue assumptions.

We are adjusting our full year 2012 revenue and profitable guidance to reflect our updated Q4 expectations. We currently expect total non-GAAP revenues to be in the range of 86.4 million to 87.4 million, which includes 73.6 million to 74.6 million in non-GAAP smartphone revenues.

Our smart phone revenue guidance for the full year of 2012 represents 77% growth on a year-over-year basis at the midpoint. And we now expect the adjusted EBITDA loss of approximately 3.5 million to 4.4 million for the full year 2012. And for the full year we expect 64.4 million basic and 69.6 million diluted shares.

We are not providing any update to 2013 at this point. Our 2013 planning process is yet to begin and we also adjusted results modernization work that Matt and his team is kicking off. However, as Niccolo mentioned, we do expect adjusted EBITDA to improve in the fourth quarter guidance I just mentioned to the first quarter of 2013, due to the titles that were published.

One key requirement when preparing our 2013 plan will be that the current cash we have on hand will be sufficient to operate the business up to and through stain profitability as such we do not anticipate raising equity or incurring debt between now and end of 2013. I will close by saying that Glu is a highly scaled studio organization that creates very high and premium titles.

Our recent GameSpy acquisition has provided us with the scale backend server technology to create great social games, and that is at the ground running and we are excited about the expertise he brings to Glu. We believe we’ve taken the right steps in solving our sub power modernization, and we look forward to improving our up down and life time values of our titles throughout 2013.

I will not turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Sean McGowan.

Niccolo de Masi

Hello Sean.

Sean McGowan – Sean McGowan

Hi Eric. Couple of questions about the performance here, some of these titles. Is it a issue in your mind primarily of trial or is there something else that you can identify. And second related to that, what does it say, how you’re adjusting your batting average assumptions going forward?

Eric Ludwig

Okay. Let me take the second question first. So there is a few things going on as best we understand it. Consumer taste have certainly evolved in the past 12 months away from games which don’t have a heavy community element to it, whether that’s in the form of player versus player, communities to features or its in the form of corporation. And more successful top grossing games are certainly retaining players with deaths around person-to-person interaction.

So we’ve seen degradation obviously in the existing catalogue and we have also seen new tittles not make us much money for daily active user as we have in the past. Now we think there is a significant portion of consumer taste that goes into that.

There have been some other impacts to obviously ARPDOW going into Q4. And Eric had detailed that around incentivized advertising, the last elements of that being cut off or nodded.

The last component of ARPDOW is something that we believe we will do better on and very identified steps will be taken to do better on them. That is really an – the level of call it e-commerce merchandizing aggregation that we have thought through and bills into titles.

So, these games are not suffering from a lack of consumer reception or downloads. We are simply not making as much money per user as we have in the past and as other games are currently. So, going forward it’s a mixture of retooling the style of games being built, retooling the size of progression and investment players can make in our games regardless of the style. And that’s something which obviously will take some time to address.

So in that covers probably the current and the future product challenges and when Eric talks we’re going to model that.

Niccolo de Masi

Yeah, Sean thanks. It’s got three key components to how we model things and give guidance. First is our historical batting average, second is the actual revenue curves of what a title was, successful title – medium successful title can do and non successful can do. And then lastly is whether we have those titles already released when we provided guidance or we do not have them released.

So when you look back to the third quarter guidance we’ve been coming off of first half of 2012 that had only four out of five successful batting average. We were looking at our cumulative batting average, not just that recent when we set our guidance, but when you’re coming off of pretty successful run rate.

Secondly, the revenue curves, as I mentioned, would have been slightly higher revenue figures because we saw on the third quarter some monetization decreasing in (inaudible) as well as this quarter we’re seeing the tax rate incentivize numbers going down as well. So, we will be clearly also adjusting – revenue curves. And then lastly, when we gave our third quarter guidance, I mentioned this quite clearly on the call last quarter, we only had one out of nine titles which ultimately became 11 titles, that was live as in the earnings call date. So, significant number of variability there.

And as I mentioned on that call back then that we were using historical batting averages and if we exceeded that batting average, we would see increased numbers above our guidance, and unfortunately nine titles were pretty much financial failures and we certainly were expecting probably two of those titles to be much more successful, which would have driven probably another 3 to $5 million of revenue in the third quarter had two of those been financial successes depending upon the timing of launch.

So, obviously where we are today is we’ve adjusted our revenue curves to reflect the monetization degradation, as well as the tax rate situation. We also have only four titles launching because we pushed five titles into next year and so we are obviously already know, Contract Killer should be looking like, because they are already live. And then we’re looking at our historical batting average for the two titles that are yet to launch. So, I think we’re looking at them with the recent information adjusted in the numbers when providing this guidance.

Sean McGowan – Sean McGowan

And you do expect those five titles to launch. They’ve been pushed into the first quarter?

Niccolo de Masi

The five have been fifth.

Sean McGowan

The five, I mean are you going to examine them and possibly kill them or they are certainly going to be launched?

Niccolo de Masi

Look, we’re on a weak to Mr. Wakids review. So, I think by the time we’re certainly at our next earnings call, we’re going to have completed that completed in annual plan, looked at a refreshed view of a roadmap to 2013, what may involve killing one of those, may involve killing more of those, may involve delaying some of those further. Ultimately it will probably be a range of those items. But as of today, we did not – we certainly do not expect as of today, all of them to be killed. We think that a good portion of them are refineable.

Sean McGowan – Sean McGowan

Okay. Thank you.

Niccolo de Masi

Thanks, Sean.

Operator

Your next question comes from Mike Hickey.

Mike Hickey

Talent retention seems to continue to be a problem in space and I am just curious how you are working through this process, now that maybe performed well, come in from the prior expectations, especially now that as you kind of increase the monetization for social community in a certain pace, a real skill set, that’s pretty hard to find?

Niccolo de Masi

Yeah, so believe it or not, actually I think Glu does very well on the retention historically. Since I have been here I can’t recall – as we believe of course terminated, but we have never lost key pieces of talent in the studio organization or actually for that matter of any function. And I think that ultimately speaks to the culture we have as well as the fact that where interesting business that positions – the smaller hungry or most startup like environment if you compares to something like NEA, but ultimately I think able to attract talent at the moment is probably reached an old time high.

There are skill sets we need, and the skill sets we need to address that and address retention of our customers, but for us its sort of step one, keep the people we have. Step two, continue working harder and attracting people that can help address. The product issues we’ve identified and begun to tackle. And I think actually the recruiting environment is big or not improved in the past quarter. There have been substantial reductions in force from the whole host of Glu competitors.

So we’re finding this a better recruiting environment than actually I have seen since I’ve been at Glu, and so that is a sort of silver lining for us which is that everybody at Gle recognizes that we make digitally great games. Consumers enjoy playing our games. We have a pretty dual base as you saw it grew from last quarter to this one, but we have to work it on is (inaudible). The same dual base with even 10, 20, 30, 40, 50% higher opt out to transform this business. And that’s an exciting for people. Its exciting goal for our studio teams to be focused on.

Mike Hickey

With that speaks well...

Niccolo de Masi

My moment seeds itself and course, and so as we get a bigger and bigger core of modulation talent, I think there is certain opportunities to continue to build on that trial.

Mike Hickey

And in the math, it sounds like a fairly expensive with deal process, is there any low hanging fruits that he has kind of noticed right away that can help you through the soft buyer, or is this kind of a quarter two hour before or you know the – deeper changes needs to be made?

Niccolo de Masi

So I don’t want to speak prematurely. This is the most senior appointment we’ve made since my joining Glu and we’ll make sure we give him and else the time to make sure that we ultimately come out with a plan that we can beat me and be it the next year. I’ll say that, we’ve consistently been aggressive about looking the long term, even if there is a short term softness. And we want to make sure we get all of the softness out of the way so to speak and make those right decisions now. So, we’ll plenty aggressive about retooling as well as giving things time as well as looking at the balance of products for next year.

There certainly are always a list of some short term wins or the product, the question comes down to is it enough to make the product competitive given that the product is always of course a moving competitive feast against what else is out there in the market and what else our competitors are working on. And so, it’s a moving target if kind of call it incremental ROI for every week or month the development you put into something. And I think at this point, those probably are even balance between quicker wins and more fundamental re-factoring in games which needs to be addressed.

I’ll tell you as I said in my prepared remarks, we saw this coming close to a year ago and began planning for this evolution for Glu that’s why we bought GameSpy, and so I would kicked off games with PVP and they were originally slated to launch in the December time period.

So, some of the games are already well advanced in the direction of what I would Freemium 2.0 gaming. And I think those will be ones which will be re-finable. Other titles of course that haven’t moved in a Freemium 2.0 direction we will have a cap on the theoretical performance of those. That doesn’t mean they can’t be successful, games like Contract Killer 2 are very much a Freemium 1.0 single player action arcade game. But you can see that if it’s prosecuted well in the execution the game can still be comfortably top 25 iPad, top 5 iPhone grossing. And so our portfolio is likely to be a balance between improved execution on Freemium 1.0 products and Freemium 2.0 reevaluate relation next year.

Mike Hickey

Okay. Thanks guys. Best of luck.

Niccolo de Masi

Thanks.

Operator

Your next question comes from Eric Wold.

Eric Wold

Good afternoon. Couple of questions, one on the – maybe give us a sense on the differences between the five titles that were delayed that are getting an additional level of scrutiny will get ready over next 60 days of course the two they are still going to be launched in the quarter, what’s that about those two that kept them on the calendar or were they actually reviewed?

Niccolo de Masi

So, we are – scarce, time is all your scarce commodity and so I intend not to focus on the titles where of course we see the biggest alignment between his skill sets where consumer taste in the market have move to, and titles that are sufficiently complete that is disproportionate at work to change something – that can finished as oppose to still being published. So the titles that are releasing are ones which we’re more comfortable are in the Contract Killer 2 mold and offensive, they might be a premium 1.0, unconnected experience, but we believe that the fans based for the titles and style of game is well executed can still find a significant revenue base for us.

The titles that are being pushed out or ones where we feel that either it has great prospects, but it needs to have a re-factoring or a deepening of the monetization system and/or titles which haven’t finished in one premium 1.0 stake and still have merit in trying to advance and deepen monetization to do better than their original versions. So they are sequels like Guns Brothers 2 which we previous announced which are now moving out in the first quarter, and that’s an example of the title where we feel there is fan based title could do something in Q4, but ultimately we want to make sure that we are keeping space with where monetization is moved in the market and where consumer expectation have move in the market with regards to community based interactions at launch and monetization improvement at launch.

Eric Wold

Okay. And then question for Eric, you mentioned that plan on keeping R&D flat at Q4 levels and you said there would be a 13.3 million in Q4 this year and then flat from there going forward?

Eric Ludwig

That’s correct, yeah.

Eric Wold

And I might have missed it the in the opening I thought, I did it, what dropped it from Q2 to Q3 to bring it back up to Q4?

Eric Ludwig

Yeah. That was really bonus accruals and somewhat small hindering in the R&D.

Eric Wold

Okay. And I know – I know you are not talking too much about next year, but if R&D is going to be held flat next year at Q4 levels what should we think about just conceptually speaking the other operating expenses lines?

Eric Ludwig

Yeah. We try to avoid too much about 2013, though G&A has been flat for probably three years and so that’s probably a pretty assumptions and as we’ve said before we kept sales and marketing head count very, very tightened flat, so really where any sales of marketing would grow would be around any variable marketing spend as revenue grew on sales on marketing.

Eric Wold

Okay. Thank you, guys.

Eric Ludwig

Thanks.

Operator

(Operator Instructions) Your next question comes from Atul Bagga.

Atul Bagga

Hey, guys. Thanks for taking my question. I have couple of questions for you. A, it’s seems in the last three to six months some of the emerging markets have growing pretty fast especially countries like India and of course Korea has grown pretty fast on Google Play. Can you talk specifically what your plans are? How do you see these markets emerging? Are you planning any specific titles for these markets? And then second, on the trading card games, what are your views on that particular general? And if you’re – if you guys are planning any games in general? Thank you.

Niccolo de Masi

Okay. So as I said in my prepared remarks we have begun investing in international markets the localization. We’ve increased our games in 2012. We’ll probably continue to try and keep our investment of taste with the growth of this smartphone overseas. We’ve also seen great growth in Korea and games like Eternity Warriors Two were in the top five grow in Google Play in Korea. We do exceptionally well relatively speaking in China. We’ve had a presence in China for coming up on four years now overall and we expect to continue investing in China in Korea. Other emerging markets I agree, India, Russia, Brazil are of course some horizon in the next, 12, 18 months and we’re going to keep pace of investment there where we see market traction where we see progress with Apple and Google’s own investments.

Ultimately, we’ve begun launching games increasingly with multiple languages from the start. And so games in this – in Q4 they’re going live will have Korean, Chinese, English if not a host of European and Japanese languages in there also. Games for next year will only be launching with multiple languages, the only question is how many and which ones. We do not have this type of launching in the near term that are market specific.

So we continue to be a global development organization trying to build titles that can do pretty well everywhere. And obviously we’ve noticed, as I’m sure you have tool that our games do pretty well in Korea, pretty well in China, pretty well in the U.S. this consumer reception there. There is less consumer reception in Japan. And Japan has dominated car battle games in the top ten grossing on (inaudible) we do not believe that the sole future of gaming on a worldwide basis is going to be 2D card battle games.

So I don’t believe that 80% of the top ten grossing games in Japan are card battle that means the whole world is going to go 80% card battle. I think we’ve had some card battle games and successful in the last couple of quarters. And a lot of them have been using the PVP community to drive that. There will be a portion of the market which caters for well particularly on smaller form factors like the iPhone. You probably notice that tool of our games rank often 20, 30, 40, 50 slots higher on top grossing on the iPad then they do in the iPhone and that’s because we have games with longer session times historically that looks better and play better on a bigger phone factor. Things like the Ipad Mini and more Tablet competition and penetration is good for Glu’s freemium 1.0 style game.

But we do agree that the card, bubble games highlight the power in TVP and the importance of shorter session times and so strategically we want more of a roadmap next year to think about shorter session times, community and driving monetization from a mixture of the two. That’s the piece of the market that we learn from. That’s a piece of the market we are trying to learn from and but Glu has never brought out replicant games and so we are not on track. We are bringing out a huge slate of replicant 2D card bubble games.

Atul Bagga

Helpful. Thank you.

Operator

Your next question comes from John Taylor.

John Taylor

I think you have Eric you have referenced the percent of revenue that came from new titles in the quarter, could you give us kind of what a normalized number looks like or kind of maybe back to John’s question about batting average, that maybe what you typically assume?

Eric Ludwig

Yeah sure John thanks. So what I referenced was in Q3 our 11 titles about Vintage for that quarter were $4.2 million and $2.7 of that $4.2 million came from just the two successful titles EW Two being a $2 million and Blood & Glory Legend being $2.8 million.

We certainly of the nine titles that were pretty much significantly underperformed has some expectations certainly probably two of the nine doing better than they did out there. Certainly two more successful titles would have been probably another $1.5 million to $2.5 million per title. So you can kind of see where the Q3 number is disappointed and the follow on affect as I mentioned for Q3 titles underperforming and the knock on affect it had into the fourth quarter as well.

But if you go back and look at our fourth quarter of last year for example we had eight titles of launch, four that were successful and there was four titles in $6.1 million with kind of an average of half (inaudible) in the quarter than those same four titles is about $8.5, $8.7 million in the first quarter. So you can see successful titles have a knock on affect and then under indexing obviously has the counter affect that we saw in this quarter.

John Taylor

Okay great. It’s really helpful. And then you haven’t really talked about the cost to customer acquisition very much. I see how GameSpy integrated and so on with the Tapjoy thing, the new Apple rules and so on, can you talk a little bit about what you’re seeing in terms of customer acquisition to give the downloads, or more importantly, to find somebody who might be willing to pay?

Eric Ludwig

Sure. So, generally speaking, I think we are reading the blogs that there are a lot of commentators on this industry claiming that it is costing more and more. Now, as we said in my prepared remarks, 52 million people installed Glu games in Q3, which is a pretty massive number, we now had over third of 1 billion install game from Glu cumulatively. 90% of those installs, so 45 million, 46 million of those install came organically. So that’s a mixture word of mouth, mixture of Glu featuring, mixture of possibly some Glu thought promotion, but majority of it is just traditional word of mouth and people liking these games and then getting good reviews and like get good reviews, Apple and Google stores tend to push them up the chart.

So, I think it’s pretty consistent on the past probably year or two. We don’t view our businesses marketing driven. We do of course spend some money on inorganic installed. But ultimately it’s not something it’s a driver of success, good titles we believe sell themselves. Our titles are – have downloaded themselves in Q3. Now getting consumer cash office has been the weakness in what transpired.

As we look forward, I think ultimately this is a XX events for Glu. We make about 30% of our revenue historically from some form of advertising. If consumers are being thought over, it means that we are able to make more money from other publishers effectively advertising our games to try and get them to download their games.

So, yes, I think if your strategy is reliant on inorganic paid downloaders, things are getting more expensive for you. So when 90% of our downloaders are organic and we’re making 30% from advertising, I think the net effect of higher price per install so to speak is probably net strategically positive for Glu in the long run and the medium term it’s probably neutral or positive for revenue for us.

John Taylor

Okay. Great. And then last question. Again, maybe without going into too much detail about next year, but can you give us a rough sense of what this Q count next year might look like relative to this Q count you planned to finish up for this year?

Niccolo de Masi

I mean, I think one of the things that we have probably gotten a little bit too fixated on as a company this year has been how many things have we launched and exactly when in the quarter, and this is honestly cut down operational flexibility around killing off titles later in development as well as holding titles to try and improve their ARPDAU later.

And so this is a metric which we are certainly not going to be focusing people on for next year, largely because, games are becoming community base services. And so, what’s going to matter going forward is going to bid you have a big title that can be top 10, 20, 30 grossing and sit there for the year. And we’re focus right now, as you can imagine with our new Preside of Studios is higher, we’re focused on a strategy to increased our probabilities dramatically of building those communities, retaining those communities and making money from those communities.

It doesn’t take (inaudible) titles at all to not only power the existing revenue base, but grow revenue if/or able to get them sitting high in the grossing ranks and staying in the gross ranks. And they also would improve visibility for us. If life comes title of longer visibility improves.

But, other than that I think its premature to me to comment on things like SKU count other than to repeat what I said in my prepared remarks which as we believe that the markets evolve in the direction of bigger, fewer or better fundamentally.

Niccolo de Masi

Yeah, I think John, also if we can more to improve our monetization and betting average of future title you can look at 2012, where we launched five titles in the first half of the year and 11 in the third quarter and four in the back half for total 20, and nine of those in the third quarter was financially significantly unsuccessful. So have we don’t have those nine, we would have only launch 11 titles and we still want to grow revenue 75% year-over-year. So, I think absolute number one, that we’re trying to get away from and focusing more on – more likelihood of success with better monetization and that you will be hearing for most in 2013.

John Taylor

Okay. Great. Thank you.

Niccolo de Masi

Thank you, John.

Operator

Your next question comes from Adam Krejcik (ROTH Capital Partners)

Adam Krejcik – Roth Capital Partners

Yes. I just had one quick question, it around ARPDAU. just wondering if you could comment on why ARPDAU decline for the older games, the pre Q3 release games, about 11% or 12% quarter on quarter. And then, is that a trend that you expect to kind of happen with these premium one final games? Thanks.

Niccolo de Masi

Yeah. As with all of things to do analytics, you have the data and then the cause and effect and interpretation of that leaves some room for debate. As best we can tell, if you look at the slides that we presented in our IR deck today, you can see that the percentage of people paying as a fraction of our monthly active users decline on a number of large titles between July and September and June to September. And our hypnosis is obviously is that percentage of people paying has reduced by virtue of the fact that they are staying on the community based PDP games for longer or at least the payers out. Interesting enough, some of the strength that we’ve had in Korea has ultimately been driven by higher ARPDOW, driven by higher percentage pain in some case like the Eternity Warriors 2.

And so, we obviously think that there is a significant element of consumer taste to this. It lives us to believe there is a lot of welcome room left and reception left on premium under those products international markets, and hence the investment localization. But it also highlights for us the importance of doing better building what we call the medigame or emergent gameplay around users creating their own debt. Because there are lot more reason for you to stay in your game, if you know the people, you are playing with and against. And ultimately more reason for you to pay, and more reason for you to pay more, and more reason for you to pay more continually. And that drives up life time value long term and that makes of course the tail fatter and longer and more predictable.

So other than Adam, we don’t have a better (inaudible) what happened in the past quarter. As Eric mentioned, question or two ago, we are going to be applying, we are applying that forward to Q4 guidance and so on. And so we’re not being roast tented about believing that trend will reverse or stay the same, we believe that trend will be applied to all premium one that owe single player type experiences.

Adam Krejcik – Roth Capital Partners

Thanks for that. And then I guess follow-up, do you think kind of broadly speaking those games that are on the top 10 Glu seen on IOS Android. I mean are they taking just larger and larger chunk of the pie. In other words, the industry is still growing, but those successful games are generating even more so and kind of pushing everything else out?

Eric Ludwig

Yeah. I mean, it’s hard to say, if it’s been more, and if so, how much more. However, I can say that it’s not reducing. So we have noticed that there has been less of a revenue differential between titles that are probably made 20 to 50 top grossing. But sure there is probably more of a share being held by the top 10. There is also a disproportionate benefit that seems to be in being first with the big success in that category.

And so you look back at games like Gun Bros and Contract Killer, the games that have been first to a category snipping top down shooter in those cases. And then kind of an iconic success, they also by virtue that have better viral word-of-mouth spread appeal and they also have longer tails on them. So look I think it’s a pretty natural thing Adam when you look at the evolution of the internet and content portals and content generally.

There tends to be market growth, there are at some point tends to be increasing opportunity for top ten success as they tend to often be flattening a differential between stuff just outside that. The tale is getting bigger, the market is getting bigger. As we said despite being somewhat sequentially down or handle year-on-year and we are expressing ourselves to be up year-on-year for the full year implications even with this reduced Q4 expectations.

Adam Krejcik – Roth Capital Partners

Okay. Got it. Thanks. Thanks for the color.

Niccolo de Masi

Great. Thanks, Adam.

Operator

And your final question comes from Darren Aftahi.

Darren Aftahi

Thanks for taking my question. Just a couple of – can you talk a little bit about Asia Pac? I know you talked about further investment in 2013 in localization what that contributed as a percentage of revenue in the quarter?

Niccolo de Masi

Sure. So China, Japan and Korea this quarter were by 16% of total smartphone revenue and that was up quarter-over-quarter pretty substantially.

Darren Aftahi

Okay. And then another clarification I think, Niccolo, you have said lag time between sequels it can be further apart. I mean it’s going to just in corporate more updates and building franchise value over period of time, just a little bit more clarity on that would be great?

Eric Ludwig

Yeah. So obviously it’s interesting to us. In a Q3 we had EW2 will be quite successful. The number of titles that were low on the ARPDAU but good on the review and good on downloads. We also have Blood & Glory: Legend which was a sequel of Blood & Glory but it wasn’t as I would say progresses a sequel as something like (inaudible). So the game mechanic was similar. We had new environment, we had new enemies, but unsurprisingly ARPDAU turn about to be the same on Blood & Glory Legend as it was on Blood and Glory original.

What change, however was the download lower and so most of the revenue which we said it was 30%, 40% of the peak of the original. Most of that weakness or softness was due to fewer downloads. And that we believe in that case was due to being only nine months or so – eight or nine months or so after the original launch of Blood and Glory in Q4, 2011. So as we look forward for that franchise and look forward for all of our franchises, there are two things you recognize as they do. One, we should be looking at space in 12 months or better on the sequel. Two, we need to make sure that the execution of the sequel differentiates the game play from the original because people invest in the original title.

They don’t want to leave the original title when they have a highly events, character progression and often character and weapon systems they’ve built out. So, on the one hand we like the fact they’re staking original gain, but there is an audience size where Glu is obviously nicely addressing when you have something like 50 million installs in the quarter, but significant chunk of the overall iOS and Android ecosystem.

And so we obviously be confident of the fact that getting users to refresh, those require innovation in the game site. And so Contract Killer 2, if you look at it, it has now in the snippy mechanic, but it also has things like (inaudible) and on the ground run and gun strategy to it, not simply the original shouldn’t people head out to window. And so we advanced production values, there we’ve advanced the core gain loop. And I think players are obviously responding to that based on where it is right now.

Darren Aftahi

Great. And couple for Eric, I think in your prepared remarks Niccolo talked about the PVP increasing direct marketing costs, do you quantify that. And I think in the past you’ve talked about roughly 24 to 25 million of quarterly sales being breakeven level, that still hold through just given your models through this quarter? Thanks.

Eric Ludwig

Sure. Thanks, Darren. So, we’re slightly upticking our variable marketing cost. I think previously we were in the 15-ish percent of incremental revenue, we spent on variable marketing cost and that’s ticking up into the high teens, maybe 20%. So, it’s a slight uptick. So, not a massive material change to overall breakeven level. So, nothing being updated today on the massive increase to breakeven levels.

Darren Aftahi

And then on breakeven, you’re still kind of at the 24, 25 million in sales to get to that point?

Eric Ludwig

Yeah, we’re not making a big – there is not much changing in the model, so if and when we do update that, I wouldn’t expect it to be materially higher than the 25 million number.

Darren Aftahi

Great. Thank you.

Eric Ludwig

All right. Thanks Darren.

Operator

And there are no further questions at this time.

Niccolo de Masi

All right. Well, I would like to thank my colleagues for their efforts and their shareholders for their continued support. We are determined to improve ARPDAU and continue to grow smartphone revenue year-on-year. Thank you again for joining the call.

Eric Ludwig

Thank you.

Operator

Thank you. This will conclude today’s conference call. You may now disconnect your line.

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