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Edited Transcript of GLUU earnings conference call or presentation 3-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Glu Mobile Inc Earnings Call

SAN FRANCISCO Jun 14, 2017 (Thomson StreetEvents) -- Edited Transcript of Glu Mobile Inc earnings conference call or presentation Wednesday, May 3, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric R. Ludwig

Glu Mobile Inc. - CFO, COO and EVP

* Gregory J. Cannon

Glu Mobile Inc. - Principal Accounting Officer, VP of Finance & IR and Corporate Controller

* Nick Earl

Glu Mobile Inc. - CEO, President and Director

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Conference Call Participants

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* Douglas Lippl Creutz

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Michael Hickey

The Benchmark Company, LLC, Research Division - Research Analyst

* Michael Patrick Graham

Canaccord Genuity Limited, Research Division - MD and Senior Equity Analyst

* San Q. Phan

Mizuho Securities USA LLC, Research Division - Director of Americas Equity Research

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q1 2017 Glu Mobile Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Greg Cannon. You may begin.

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Gregory J. Cannon, Glu Mobile Inc. - Principal Accounting Officer, VP of Finance & IR and Corporate Controller [2]

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Good afternoon, everyone, and thank you for joining us on the Glu Mobile First Quarter 2017 Financial Results Conference Call. This is Greg Cannon, VP of Finance and Investor Relations from Glu Mobile. On the call today, we have: President and CEO, Nick Earl; and COO 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. Any forward-looking statements that we may make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events. We 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 more fully in our documents filed with the SEC, specifically the most recent reports on Form 10-K and Form 10-Q.

During this call, we will present both GAAP and non-GAAP financial measures. The non-GAAP measures are not intended to be considered in isolation from, a substitute for or superior to our GAAP results, and we encourage investors to consider all measures before making an investment decision. For complete information regarding our non-GAAP financial information, the most directly comparable GAAP measures and a quantitative reconciliation of those figures, please refer to the supplemental presentation accompanying today's earnings call that can be accessed via our Investor website at www.glu.com/investors.

In order to comply with SEC guidance on the use of non-GAAP financial measures, we have changed the way we present and discuss certain and non-GAAP financial measures. Specifically, we no longer adjust for the change in deferred revenue when arriving at our non-GAAP measures. However, we will provide the change in deferred revenue and deferred cost of revenue information so that investors can calculate our non-GAAP results based on the same methodology we have used in prior quarters. Lastly, our supplemental presentation that can be accessed via our investor website has been updated to mirror the order of our prepared remarks. We encourage investors to follow along with the slides during this earnings call.

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

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Nick Earl, Glu Mobile Inc. - CEO, President and Director [3]

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Thanks, Greg. Thank you all for joining today's call. I'd like to welcome everyone as we discuss the prior quarter results as well as opportunities ahead this year and beyond. We had a very strong quarter that provided an early glimpse on how we were pivoting our product strategy as part of our efforts to transform Glu. These results also pave the way for a potentially outstanding year ahead. And as a result, I'm very pleased to say that we will be increasing our annual guidance from the midpoint of $220 million to a range of $280 million to $290 million. Eric will cover these details in a few minutes.

Q1 bookings were $69 million, which is approximately 28% above the midpoint of guidance. This bookings outperformance led to our bottom line result significantly exceeding our expectations. These results were driven by the strong performance from the titles we acquired through the Crowdstar acquisition, in particular, Design Home, and better-than-expected results from evergreen catalog titles as we implemented our new strategy. Please note that Q1 results include minimal impact from our latest launch, MLB Tap Sports Baseball 2017, which launched worldwide at the end of the quarter. This is our first offering in the Tap Sports Baseball franchise to feature content from Major League Baseball, which helped this title become the #1 free game in the U.S. App Store for iPhone for 6 days, which is a rare feat.

Let's dive deeper in Q1 drivers and updates on activities, with some of our key titles. And then I'd like to refresh everyone on our new strategic direction. Let me start with a few words on how we think about our games and manage them. We think of our games in 2 buckets. The first being growth games, which we formally call platform; the second being catalog games. Our catalog titles include 2 categories, which we call legacy and evergreen games. Legacy consists of about 80 titles that are sitting in the app stores, but not being actively refreshed and have very low cost associated with them.

In totality, these games are important to our business as they continue to contribute revenue without requiring headcount to support them. As for evergreen games, Glu had 6 key titles, which are existing games that we've continued applying renewed live operations efforts to, with a focus on lengthening and boosting their revenue tail. These titles are Covet Fashion, Deer Hunter 17, Kim Kardashian: Hollywood, Cooking Dash 2017, Gordon Ramsay and Racing Rivals. We began this initiative roughly 6 months ago, and we believe these efforts are playing a role in Q1's positive results, and we hope to extend these trends going forward.

Finally, and most importantly, as we move forward with our pivot to creative centric strategy, we are focused on developing a new generation of growth games which we believe will position the company for enhanced performance longer term. I will give details on these in a few minutes. First, I'd like to update you on quarterly activity with our portfolio focus on Crowdstar and our evergreen titles. An early glimpse of a new strategic direction we're heading in can be seen with our recently acquired Crowdstar studio, which is also a major contributor to our Q1 outperformance.

As we sit here today, 6 months post the Crowdstar acquisition, we view the studio as adding tremendous value to Glu Mobile and has played an important part in our decision today to raise our financial outlook for 2017. Both Covet Fashion and Design Home are responding well to user acquisition strategies we have been applying to the studio -- and sorry, and the studio's becoming more deeply integrated into the operations of Glu every day. Design Home has been key bookings contributor for us, peaking at #28 and sitting today at #36 top grossing game on the U.S. iPhone charts.

Based on what we've seen from this game's performance, we believe that Design Home can be a large contributor of bookings growth this year, well into 2018. We've analyzed the data from this game closely, and believe there are significant ROI opportunity from further investment and user acquisition this year. Eric will provide more details. We also saw solid performance from our evergreen titles, as we've begun investing in live operations. This new approach delivered results that exceeded our forecast. Since last August, we have seen many of our evergreens delivers flat to growing performance, not easy to do in our business. Importantly, this effort is one of our crucial -- is one very crucial outcome of our partnership with Tencent. We have learned a great deal from the strategies they have shared with us, and are continuing to leverage their knowledge to help us grow our other titles.

Let me share a few updates on our key evergreen titles. Deer Hunter 16, which has been rebranded Deer Hunter 17, released an underwater hunting update in Q1, which has increased its revenue run rate. This update also drove significant improvement to paid acquisition ROI, which allowed us to profitably spend on the title. We are optimistic that this franchise can continue to grow as new content and modes are introduced. Kim Kardashian: Hollywood. We released a significant update in December with a new look that provided a bump in bookings and was followed with solid performance in Q1. We saw approximately flat bookings from this title from Q4 '16 to Q1 '17, the first time that this has happened in its history. We'll continue to invest in new features in the hopes, continue improvement including subscriptions that were introduced in Q1 and planned summer updates to celebrate the third anniversary of the game. Kim herself returned to social media early this year, including work with us on updates and to help promote the game.

The Dash franchise. Cooking Dash and Gordon Ramsay: Dash continue to deliver consistent revenues. The team will be releasing a big 2.0 update this year, and we expect good things to follow. And finally, Racing Rivals. We completed the transfer from the franchise -- the transfer of the franchise from our Long Beach offices to a very talented studio led by former EA and Zynga executive, Travis Boatman. Given the team's experience in running live games like Madden Mobile, we believe they are uniquely positioned to take the franchise to new heights. In addition, Carbonated, in collaboration with Universal Studios, just released its 6.2 update featuring content from the blockbuster smash, The Fate of the Furious, propelling it back into the U.S. 100 top grossing mobile games in iOS.

Now let's move to our longer-term view, and how we're implementing a creative-driven strategy that we believe will drive better growth and profit performance over time. Our mission at Glu is to create top 10 grossing games and apps that stack revenues year-over-year, while better managing strategic evergreen titles in our catalog to drive a baseline level of revenue and profit on which to grow. To execute this mission, we have shifted to a product-centric strategy and culture. Our objective is to be more stable, profitably growing the company over time, driven by smart bets on heads supported by strategically managed evergreen games that generate more annuity-like economics.

Our strategy to make start -- smart investments on potential new blockbusters is based on our creative-driven approach, where we empower proven leaders and their teams to pursue their creative passion. It's a fundamental change in the way we develop product and our intent is to deliver games that grow year-over-year versus the painful, shark fin results that our industry so commonly delivers. Moving to a model that features steadier bookings growth over time, we expect will supply us with more predictable, repeatable bookings. We believe these new growth games will come to define Glu in time. We are putting a design constructed plays that applies our collective learnings over our history of launching and running more than 80 games.

We expect that future titles from Glu will include the following: First, highly social elements that are designed to foster higher engagement, retention and monetization. Features like guilds, chats, gifting, tournaments and light dating. Second, much deeper metagames that are designed to create deeper engagement and monetization. Really, the macro reason for coming back and playing. Three, deeper elder games, what the player does to experience -- what the player does deepen the experience a month after they start playing. Four, deeper monetization. We built the playbook that all of our dev teams are using to create deeper spending features. Five, more live events, synchronized and targeted UA to create more qualified installs, and therefore, more monetization. And six, more and better content updates that are designed to create stronger engagement.

We intend to greenlight only those games that deliver this design treatment going forward. To best position us for consistent hit generation, we have implemented a pre-greenlight process focused on rapid prototyping with very small, agile and muscular teams. The fail fast, exceed fast approach that keeps us focused and disciplined. Once greenlight, we will commit investment and move to a larger team structure. The games that do get built will be supported by Glu infrastructure, our solid balance sheet and the systems analytics we've invested in to drive user acquisition and grow ad revenue. This approach is also fueled by our new scaled studio model to give our teams what they need to do their best work, we are building creative centers, to better foster innovation and instill a prototyping philosophy. The continuous innovation approach to both creating blockbuster growth game concepts and enhancing our evergreen titles.

Teams are charged with developing blue ocean game concepts using the design treatment I've outlined. As for existing evergreen games, our teams are employing dedicated approaches to prototyping, including game jams to create new LTV driving features, modes and systems that are released via updates. These innovations are designed to refresh our games, keep the catalog vibrant, enhance retention, engagement and monetization. In my experience, it takes a creative focus strategy to drive great products and more lasting value in the business. Now is the right time for Glu to move in this direction. We believe this is an opportune moment in the industry to build on our leadership position.

At a time when investment and game development is challenged, we are working to build a powerhouse development and publishing house where talent wants to work. This is evident not just in our recent hires but in an energy and enthusiasm we are seeing across the global organization. At our annual Glu University event last month, we had more than 100 of our studio developers share ideas and best practices, generating a learning for all of our teams to move further and faster. Our current roster of 5 creative leaders has proven winners across a number of gaming categories: RPG, simulation, sports, narrative, casual and lifestyle.

Mike Olsen, our newest creative leader hire, and the creative leader behind Tiger Woods PGA and Star Wars: Galaxy of Heroes, has in just a few weeks put his core team in play and demonstrated across the company what rapid prototyping looks like. We're very excited about the early work from Mike's team, which we expect will lead to a new title in 2018. We expect to bring additional creative leaders and teams onboard over that time to broaden Glu's array of game expertise and deepen our pipeline.

Looking forward to the rest of 2017. In addition to Taylor Swift launch, there will be 2 other titles that we'll put into beta testing that are potential launches this year. First, an update on Taylor Swift. Our Toronto studio where we developed and run Kim Kardashian: Hollywood has been working closely with Taylor and her team. What we're building has potential to redefine the traditional celebrity-based game, and while we don't anticipate being as focused on celebrity vehicles under our new strategy, we do see strong potential with Taylor.

We expect the launch window to be later this year. We will be providing a full update on the game's innovative design and launch plans on our next earnings call. As mentioned, we also have 2 new games that will be launched into beta this year. Launch decisions and timing will be based on the beta results of each game. The first, Car Town Racing, is expected to go into beta before the end of Q2, and if it performs well, will likely be released worldwide in Q4. This is an accessible driving game with a simple yet addictive core loop and a deep RPG based metagame. More on Car Town Racing once we have the beta data in hand. The other title we are putting into beta in the second half of 2017 is a zombie-based shooter from our Moscow studio. This studio has done excellent work refreshing Deer Hunter 17, a great example of our new approach to evergreens, and we are very optimistic about this new shooter. More on this as beta data becomes available as well.

The final topic I would like to address is around cost structure. Now that we have defined our new strategy, begun making progress in improving the performance of our evergreen titles, added another growth game and integrated Crowdstar, I will be turning my attention to how we controlled and lower our operating expenses in order to improve our bottom line results. This will be the core focus for Eric and me in the month of May, and we will outline details in the next call. We will invest in content and UA acquisition in an effort to drive bookings from evergreen and growth titles. However, we will also look to control and reduce expenses that are not directly related to growing our top line. Our user acquisition and content investments will be data-driven and based on a thorough review and analysis of the expected return to build meaningful bookings over time. Both Eric and I are committed to redefining the way that Glu operates, and that includes ensuring that we are focused on running in an optimal way, in order to drive our profitability.

I'll now pass it over to Eric to cover financials, and I'll come back at the end for final comments.

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Eric R. Ludwig, Glu Mobile Inc. - CFO, COO and EVP [4]

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Great. Thank you, Nick, and good afternoon to all joining our call. I will provide further details to the factors behind our strong financial results for the first quarter of 2017 and then discuss our second quarter and full year guidance. Consistent with our financial presentation, and for all information aside from bookings or otherwise stated below, we will discuss results on a GAAP basis and refer you to changes in deferred revenue, the deferred cost of revenue and a non-GAAP operating expense total in our financial tables. This data will provide a GAAP to non-GAAP reconciliations of the quarter's financial results based on the same methodology we used in prior quarters. As Nick said, we significantly exceeded our Q1 guidance. We are off to a terrific start for the full year. We continue to view 2017 as a transition and investment year that we believe will position us for sustainable bookings growth and profitability in the long term.

Revenue was $56.8 million for the quarter, up 4% from the prior year's first quarter, with our 5 largest titles representing 58% of the total. 48% of total revenue came from titles where we paid a royalty, and we ended the quarter with $73.2 million in cash. Bookings were $69 million, a 28% increase over last year's first quarter and $15 million above the midpoint of our guidance. The quarter's bookings increase, which includes the first full quarter of Crowdstar, was driven by continued strong momentum from Design Home and outperformance from key Evergreen titles. This outperformance in Design Homes speaks to the power of combining a great IP with Glu's scaled operations, user acquisition function and our in-game ad revenue capabilities. We expected to see modest declines in our evergreen games and are pleased to report that our key evergreen titles outperformed our expectation, demonstrating early success in our efforts to increase focus on daily game operations to reenergize these titles.

And looking more closely at bookings, the biggest contributor was Design Home, at $14.9 million, with Covet Fashion at $11.5 million; Ramsay: Dash was $7.9 million; Cooking Dash was $7.1 million; while Kim Kardashian: Hollywood was $6.9 million; and Deer Hunter 2017 was $5.3 million. In Deer Hunter '17, bookings were up over $1.5 million sequentially from Q4, and it's a great example of effective live operations from our evergreen strategy. Bookings generated from ads and other offers was 14% of total bookings. This is down slightly from the fourth quarter due to the first quarter being seasonally light on ads. Additionally, Crowdstar began their implementation of ads in Design Home in Q1, so they did not have a full quarter of contribution.

Turning to the expense side. Adjusted platform commissions were $17.8 million. Adjusted royalties came in at $5.3 million and hosting costs were $1.8 million. Total adjusted operating expenses were $45.7 million, an increase over the first quarter, primarily due to added user acquisition cost, which helped drive the strong top line results. Additionally, first quarter results also included a $3.7 million pretax restructuring charge related to severance and lease termination costs.

Turning to the balance sheet. We ended the first quarter with a cash balance of $73.2 million. This was a decrease of $29 million over the prior quarter due to $15 million of cash used in operations. On the cash inflows during the quarter, Apple only made 2 payments in the first quarter, given the timing of their calendar. Cash outflows during the quarter excluding prepaid royalties, which I'll talk about next, included annual bonus payouts for our successful studios last year as well as severance and lease restructuring payments that we talked about last quarter. Additionally, we paid $14.2 million in previously signed royalty minimum guarantees. These outflows were as expected, and we highlighted them on the February earnings call.

I'd like to provide a brief update on our restructuring plan, which included both a headcount reduction, facilities consolidation and a new corporate headquarters. Consistent with our plan to maintain appropriate SG&A expense levels, we reduced headcount by a net 55 employees and ended the first quarter with a workforce of 699 employees. We also made progress in terms of eliminating facilities in Washington and Oregon. And we're also very close to signing a lease on a new headquarters in San Francisco, which will help be our creative skills space that Nick's talked about. Now turning to guidance. For the second quarter and full year 2017, I am pleased to say that the strong performance that we reported in bookings in the first quarter has thus far continued in the current quarter, and we are increasing our booking guidance significantly for the full year. This momentum is fueled by our ability to provide frequent updates, live operations, tournaments and events to evergreen titles and the continued strong contribution from our growth games, namely Design Home, Covet Fashion and MLB Tap Sports Baseball 2017. The investments we have made in attracting proven industry talent, revitalizing our evergreen titles and improving our operating efficiencies support our decision to raise our bookings guidance for the full year. Our goal remains to produce top 10 grossing games with stack revenue and generate profitable growth longer-term. This is supported by active management of our evergreen titles to enhance our bookings potential. As Nick mentioned, on the heels of our are successful MLB Tap Sports Baseball 2017 launch in March, we expect to launch our Taylor Swift game by the end of the year. Baseball is off to a good start, and we factored it into our expected performance in our 2017 guidance. For the second quarter, we expect bookings to increase sequentially and be in the range of $71 million to $73 million. This guidance assumes seasonality for our female-centric titles, Covet Fashion, Gordon Ramsay: Dash, Cooking Dash and Kim Kardashian: Hollywood as well as continuing contribution from Design Home and MLB. Adjusted platform commissions are expected to be $17.9 million to $18.3 million. Adjusted royalties in the range of $5.6 million to $5.8 million and hosting of $1.7 million. And adjusted operating expenses is expected to be between $58.7 million to $59.1 million, which assumes marketing to be approximately 36.4% of bookings for the quarter.

Now let me talk about that. So starting with the second quarter, we are significantly increasing our user acquisition investment on Design Home. 2017, as I've said, is about investing in content and creative leaders. We believe that Design Home is in a unique place in its life cycle where forward investments and user acquisition will benefit both bookings growth this year and next year, but also provide increasing contribution margin in 2018. This decision is based in our internal quantitative analysis on the recent actual lifetime values of Design Home paying users and our projected total bookings from these paying players.

Based on our internal ROI analysis, we believe it is the right time to make these investments to support what we believe will be stronger growth in the long-term. We believe the Design Home user acquisition spent today has an expected payback within approximately 9 months, and will be comfortably ROI positive over 24 months of expected revenue generation. A portion of our significant bookings upgrade today is due to this investment. We expect the second quarter to be the peak quarter in terms of UA spend and investment for the year, and we intend to dial back this marketing investment. Modestly in Design Home in the third quarter, and then significantly again in the fourth quarter.

And looking at the full year, we are increasing our bookings guidance to be in the range of $280 million to $290 million, representing a significant increase at the midpoint over last year's $214 million. Keep in mind as you model the second half of the year, that we would anticipate our usual booking seasonality with Q4 expected to be our strongest quarter. Adjusted platform commissions are expected to be $70.7 million to $73.2 million; adjusted royalties in the range for the full year $22.5 million to $23.3 million; and hosting cost from $7.2 million to $7.5 million. And our adjusted operating expenses is expected to be between $203.4 million to $207.8 million, which assumes marketing to be approximately 28% of bookings for the year.

To quantify our investment in UA over the next 3 quarters, we intend to invest approximately incrementally $30 million over Q2 to Q4, if you compare a Q1 UA as a percentage of bookings to the remainder of the year. This additional increase in UA investment will not reduce our prior guidance of ending 2017 with cash of at least $60 million due to the Q1 beat coupled with a payback time horizon of this UA investment.

In thinking about our guidance for the quarter and for the full year, our longer-term trajectory, we believe it's useful to think about Glu's transformation in 3 phases. Phase 1 is Q1 of this year to Q3 of this year, where we are seeing strong bookings performance and obviously upgraded because of that. And we expect that our UA investment with outline will keep us in a loss position through the third quarter. Phase 2 is from the fourth quarter of this year through the first half of 2018. We're currently anticipating being break-even or better cumulatively during this phase, with some quarter-to-quarter variability based on seasonality and bookings performance as events unfold.

And then as we hit the midpoint of 2018, we anticipate moving into Phase 3, where we begin to see the fruits of our creative leader investments, which we expect will position Glu to deliver more sustainable bookings growth and profitability on a go-forward basis.

Now we are mindful of the fact that our investment in Design Home UA is expected to generate losses at bookings level we have previously stated would be break-even or better. We believe this is the right time for this level of investment, but as Nick mentioned earlier, we will continue to look at all expenses to ensure that all headcount and spend is supporting bookings generating activities, and we will continuously assess all expenses.

So before wrapping up, I wanted to mention that Greg Cannon, our Vice President of Finance and IR, will be leaving Glu effective May 15. Greg's been with Glu for 10.5 years. He's been my trusted right-hand man the entire time. Greg will be taking a leadership role at a private company closer to home, so he can spend more time with the family. In filling Greg's role, I've split the role into 2: Accounting; and Finance and IR. I've recently hired Gordon Lee as our VP of Accounting, reporting to me. Gordon joined Glu last month from Twitter, where he was Worldwide Corporate Controller and he previously worked at PriceWaterhouseCoopers. So I'd like to thank Greg for his hard work, loyalty and wish him the best. So in conclusion, we are excited about the growth opportunities in front of us, and believe we made significant progress in reaching our goal of generating strong bookings growth that will translate into more predictable, steady profitability, which we believe will enhance stockholder value over the long-term.

With that, we will open the up the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from Doug Creutz of Cowen.

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Douglas Lippl Creutz, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [2]

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Your comments about UA for Design Home, do appear to represent a pretty significant philosophical shift in the company in terms of what you're willing to spend to acquire users. And that may well have been overdue. But as we're looking forward, is this something you expect to be, sort of consistent across all of your growth games, where you're going to be spending higher on UA initially? Or is this something really specific to Design Home?

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Eric R. Ludwig, Glu Mobile Inc. - CFO, COO and EVP [3]

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Yes. Great question, Doug. So Design Home is a title that has had a larger Day 120 LTV than we've ever seen. We are also comparing and looking at the comparisons between Design Home and Covet, its sister title. Covet had a very, very long, 2-year curve, lifetime value curve, whereas Glu's other titles typically have kind of a 90- or 120-day growth curve, and then really flatten out. And that's kind of been why our useful life of paying customers have been around 90 days in Glu's historical products. So we are believing that Design Home is unique versus other titles that Glu has seen. If in the future, we had another title that had a similar profile where LTV is expected to be much bigger than the CPI, you could envision us spending similar amounts and having a similar approach. But as I mentioned, Doug, in my prepared remarks, we're anticipating that the payback, so the amount -- the CPI to acquire versus the break-even payback of that CPI is approximately about 9 months for this Design Home title. And we think we can generate revenue over, tailing revenue, but over a 24-month period. So if that sort of setup happens again, we will most likely continue this sort of engagements behavior. But the historical titles we've had, has not had that profile before.

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Nick Earl, Glu Mobile Inc. - CEO, President and Director [4]

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It's Nick. Doug, let me just add a couple of comments, because I think this is a really important point for where we are right now. And this is one of those extraordinary opportunities that I've been lucky to have been a part of at other companies, to have something that has -- it's even that we don't understand just yet, but we feel is very high, certainly relative to everything else we got. So this is just one of these moments where we can really get behind it. You've got a very sophisticated user acquisition machine and process here. And we can cut it off at any time if we feel like this is not going in the right direction or maybe going below our ROI hurdle rate. It's very easy to do, we can literally cut it off that day. But we want to -- we really wanted to put a -- draw a line in the sand, and invest in this in a big way, because this just has such, such enormous potential. And we feel like this is the perfect time and this is a perfect product in which to invest seriously like this.

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Operator [5]

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Our next question comes Darren Aftahi of Roth Capital Partners.

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Unidentified Analyst, [6]

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This is [Dylan] in for Darren. First of all, I have a question related to operating expenses. And how much of that is related to maybe mostly marketing expense? And how variable are those expenses relative to revenue? And I have a few follow-ups, if I may.

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Eric R. Ludwig, Glu Mobile Inc. - CFO, COO and EVP [7]

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Yes, sure. So [Dylan], our guidance for the year of $280 million to $290 million has an assumption of 28% of full year UA, as a percentage of bookings. So it's about $77 million to $80 million is coming from that level. So as you kind of go back and compare our full year guidance last quarter to our full year guide this quarter, virtually, all of its -- all of the increase in our OpEx is coming from UA spend, and this has been the topic du jour of this exact earnings call, is to really explain why we're doing that, and why we believe it's the right time to do that, and why it sets us up to get the Phase 2 and Phase 3 of Nick's strategy -- Nick and my strategy.

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Unidentified Analyst, [8]

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And then, how about going forward. If you sort of back out the San Francisco office spend, what sort of normalized number there, related to OpEx?

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Eric R. Ludwig, Glu Mobile Inc. - CFO, COO and EVP [9]

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Yes. We have yet to even sign a lease for the San Francisco office lease. So this guidance here has limited amount from the office itself for the full year. I mean we expect to move in maybe in the November time frame into our office. We'll have some CapEx in the third quarter of probably about $4 million or $5 million of CapEx for build out. So from a cash perspective, my $60 million minimum cash threshold balance already assumes about $5 million of cash being deployed in the third quarter. But from an OpEx perspective, very, very limited. But that will be next year, you'll see an uptick in cost from that.

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Unidentified Analyst, [10]

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And one more, if I may. On the royalty payments that are going to celebrities, is there any way to look at this going forward? Any sort of trend rate that we'll see with the expenses there?

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Eric R. Ludwig, Glu Mobile Inc. - CFO, COO and EVP [11]

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Yes. I mean, I guess what I would do there is I would point you to our new IR, Jack. We've started it about last quarter, breaking out -- this is on the cash outflow side as opposed to the P&L side. But on the cash outflow side, we started to break out our cash from operations into 2 line items. One is cash used or generated from operations, excluding the prepayments of royalties. And then the next one is the cash advanced for royalty advances. So the point here is we deployed a lot of capital over the last 2 years or signed a lot of licenses. Some of those still had some payment obligations of prepayments that were coming due this year. And what we wanted to give is visibility around those isolated payments because they will be less being done a go forward basis as Nick talked about the last call it, 3 earnings calls. We're dialing back from doing new big minimum guarantee celebrity licenses. But we still, as we enter this year, had about $26 million of obligations that have been signed up for in the past that have yet to be paid. And so that's why on the condensed cash flow statement, we're now isolating that line item so that you can see it. And so that's really where I would highlight the cash outflow on licenses. Then in terms of royalties, we'll always talk about royalties on the earnings calls. And our guidance this year was that we would have about $22 million of royalty expense that will be hitting the P&L. So $22 million on the $280 million revolver. So about a 10% effective blended royalty rate around these licenses.

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Operator [12]

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Our next question comes from San Phan of Mizuho.

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San Q. Phan, Mizuho Securities USA LLC, Research Division - Director of Americas Equity Research [13]

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So with the greatest focus on evergreen properties versus new titles that’s the case in the past, can you give us some context on the magnitude of the UA differences for live service content drops versus new games in the unique scenario that you described for Design Home?

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Eric R. Ludwig, Glu Mobile Inc. - CFO, COO and EVP [14]

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Yes, sure. So I'd say historically, we have spent roughly 15% to 20% of Glu's bookings expense on user acquisition spend. You would see that whether we had launched a title in a quarter. It may have trended to the higher level to 20% maybe in the quarter of a launch. So our historical spend in total was about that level. And this is, as I've talked before, most of, even our evergreen titles to date, Kim Kardashian, Cooking Dash, Ramsay: Dash, Deer Hunter. These are predominantly single player games that have relatively quick playing lives within the games. And then ergo, relatively quick payback curves and lower lifetime values. And so we've kind of spent in that 15% to 20% of revenue levels on a go-forward basis, as we launched titles that are growth titles, you've had all of our growth titles that Nick talked about, we'll have many elements that should have much longer, useful lives, much more player engagement, et cetera. So I would expect that those games would have longer lives, have higher LTVs and have the ability for us to do different spend horizons, spend dollar amounts. Now over time, we still are very, very rigid, as Nick mentioned, on ROI. We have rigid ROI categories that we go after for each of these titles. But each one of them is title by title dependent. It's dependent upon the title CPI, the cost per install as well as the lifetime value expected for that title. So every title has its own ROI curve and ROI investment decision.

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San Q. Phan, Mizuho Securities USA LLC, Research Division - Director of Americas Equity Research [15]

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That's great. And then, we've also noticed for the several past quarters, Android has historically been underperforming against iOS. And we kind of saw that flip this quarter. Was there anything going on, anything specific on games not related to the platform or anything else that we may be missing?

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Eric R. Ludwig, Glu Mobile Inc. - CFO, COO and EVP [16]

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Yes. I'd say this example, this quarter was directly related to Design Home. That title has a higher LTV on Android than on iOS, which is very surprising. We've seen that maybe one other time before. And ergo, the revenue mix for that title is more favored towards Android versus our other games. And so that shifted the overall bookings as a percentage for Android versus iOS to increase.

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Operator [17]

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Our next question comes from Michael Graham of Canaccord.

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Michael Patrick Graham, Canaccord Genuity Limited, Research Division - MD and Senior Equity Analyst [18]

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Just a couple on, I guess, first, Eric, can you just refresh us on the differences between revenue and bookings this quarter because there's a much bigger spread there. I also wanted to ask about what color you could give us around what assumptions you're making for Taylor Swift in your guidance. You're not so much in terms of like dollars, but just performance-wise like relative to Kim Kardashian or relative to anything else? How are you sort of forecasting Taylor Swift when you give your guidance for the year?

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Eric R. Ludwig, Glu Mobile Inc. - CFO, COO and EVP [19]

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Yes, great. I'll tackle both of those questions and maybe Nick can chime in on Taylor as well. Just our nomenclature definition: for us, bookings is the revenue generated in a given calendar month. So if I'm a user, I spent $10 in Design Home in the month of May, I will count that as bookings in the month of May. That will be a Q2 bookings item. This last quarter in Q1, we had $69 million of January 1 to March 31 bookings revenue. Then there is GAAP revenue, or what we call revenue. And our GAAP revenue, we defer the revenue recognized from the durable goods in the games over the expected useful life of the paying players. So each of our games has a different paying player life. So some -- most of our games historically had roughly a 90-day paying player life. And so we would recognize that bookings if I spent $100 in January, I'd recognize that $33 in January, $33 in February, $33 in March, and that would be my GAAP revenue, my revenue. So the disparity this quarter on bookings of $69 million to revenue of $56 million is, we had a high spike in bookings this quarter. We're recognizing that over anywhere from 3 to 7 months. Some of our more social games have longer paying player lives. And that's why you'll see this disparity on the non-GAAP reconciliation of the GAAP to non-GAAP reconciliation, you'll see $12.2 million of change in deferred revenue as well as change in deferred commissions. And then in terms of Taylor Swift...

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Nick Earl, Glu Mobile Inc. - CEO, President and Director [20]

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Yes, Michael, let me just try to jump in there. We recognize that there is tremendous thirst and hunger to understand more about Taylor in terms of timing and what the game is. And as I mentioned on my scripted part, we're just not ready to talk about it yet. We will, however, go into excruciating detail on the next earnings call. We really look forward to that. What I can say is it's a truly innovative design that we think will really redefine the way that we all look and use celebrity-based games. And given that this is -- this is -- one of the biggest launches that we've got going forward in the celebrity space, we are putting everything we can possibly put behind this. What I learned at EA is that you want to make sure you've got a very impactful launch and impactful announcement on any big game. And so we just want all the elements to come together. So that's the reason why we're waiting on this. But it will be later this year. And we think this could really sort of redefine the space.

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Operator [21]

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Our next question comes from Mike Hickey of Benchmark Company.

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Michael Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [22]

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Hey Nick, Eric, thanks for taking the questions guys, and congrats on the quarter and Greg, good luck, nice working with you over the years. I guess my first question is, just on obviously strong sequential bookings, year-over-year bookings growth. But sort of curious why you're seeing your MAUs, your player metrics, your MAUs and DAUs, actually decline sequentially and year-over-year, I think you talked about the relationship between bookings growth I guess, and the decline in those player metrics, that would be helpful.

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Eric R. Ludwig, Glu Mobile Inc. - CFO, COO and EVP [23]

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Yes, sure. I mean, I'll take that stab. In looking at Slide 23 of the investor deck, you see a slight decline in MAU to DAU or DAU to DAU in Q1 relatively flat from Q4. On a year-over-year basis, it's down from $4.9 million -- I would say the Q -- this is more about a Q1 2016, kind of very fast titles that came in. We had Frontline Commando and Kendall and Kylie in the installs that in the DAU, that in the MAU in Q1 of last year. As you see the revenue from those titles this quarter, we don't even list Frontline Commando and Kendall and Kylie may not even be on the pie chart either. So the year-over-year comparison is really comparing to some of our older celebrity games that were unsuccessful, that are not really persisting and pertaining -- retaining. And I would say, really looking at the trend from Q3 of '16 to now, you're starting to see that evergreen strategy paying off, coupled with the platform strategy or the growth title strategy of Covet and Design Home. And you see growth from Q3 of $3.5 million DAU up to the $4.2 million we had in Q1. So I think it's really a tale of 2 viewpoints and time horizons.

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Michael Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [24]

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Okay. Next question. I guess on Design Home. I think this is what you call still a fairly new game. Obviously, you're confident. You're showing that through planned spend and user acquisition. So maybe you can provide as much evidence as you can to why you feel this game can drive long-term player retention or engagement, which obviously is an important piece of the puzzle, especially the second half of your year?

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Nick Earl, Glu Mobile Inc. - CEO, President and Director [25]

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Yes. Good question. Because you're right, because it's so central to this year and 2018. We have spent an inordinate amount of time really deeply analyzing all of the KPIs, really understanding the player base, understanding what the future updates look like. The user behavior, especially as they start to get into the over experience. We're about 6 months in for this game. And we are seeing KPIs and evidence that we just don't see in other games, that actually sort of ring true with some of the hits that I've been involved with in previous companies. And it's really that number analysis, more than a gut feeling, of course, that is really sort of defining our confidence in how we want to spend. And then this is -- add that to the fact that our ROI just looks really good on a user acquisition spend basis. As mentioned, we've got a really sophisticated system. We can dial it up very quickly as in like minutes, or we can dial it back or we can shut it off. So we have sort of supreme flexibility with our system. The intention we wanted to kind of lay out today is really go after this, because you just, in this industry, don't have a lot of opportunities like this. So it's kind of magical moments. So we really did want to lay it out as something that we're going to go after. But we will watch it very closely. It's just that everything we're seeing right now, with the way the game responds, with its retention, the monetization, the conversion, the engagement factor and the number of what we call stars, which are sort of our terminology for whales inside of the Crowdstar games, are incredibly healthy. And so the more users we can get on to this game, the better that we're going to do. And we just -- we're trying to define where that ceiling is.

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Michael Hickey, The Benchmark Company, LLC, Research Division - Research Analyst [26]

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Okay. Last one for me. And maybe this is somewhat naïve on my part. But I'm curious on Design Home and maybe broadly speaking to the rest of your portfolio, when you think about Tencent, their strategic relationship with you. How should we think about the opportunity of your games in China, in that region in the future, because obviously, it's a big mobile market now and it feels like a geography that's underrepresented in your portfolio.

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Nick Earl, Glu Mobile Inc. - CEO, President and Director [27]

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Yes. Thanks for that, Mike. Yes, that's a great question. And it brings up a point we haven't really talked about. But we are incredibly aware that the U.S. is in overall sort of shares dropped. It's kind of a surprising number. I think it's probably 20%, 25%, 30% of the global market. And we are not, to your point, in sort of the big one of China right now. We continue to talk to Tencent about the opportunity there. And I think that's certainly an opportunity and a potential path in the future of how we can take our experiences and use the incredible capability that Tencent has, especially with their distribution platform in China and Asia in general. So we would never rule that out. We're not focused on it right now, because frankly we think there's a lot we can address in the Western markets. And then when it comes to Tencent, the most value we're getting from, and we think this is just an enormous amount of value is, they are teaching us how to operate live services. And given that we've got so many games that are on the app store, and 6 or 7 or 8 that we can really put effort against right now. We can apply those learnings and we have applied those learnings. And they have just been incredibly generous. I mean, just unbelievably generous in sharing their techniques and their learnings on how to operate these live services. They've been doing it for as long as anyone in the industry. And it has been welcome information for us. So that really is the crux of our sort of learnings and partnership with Tencent right now. In the future, we'll see if their games come our way and our games go their way. That's to be determined.

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Operator [28]

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There are no further questions. I'd like to turn the call back over to CEO, Nick Earl, for any closing remarks.

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Nick Earl, Glu Mobile Inc. - CEO, President and Director [29]

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Great. Thank you. The activity in our studios is running at a high level, as we increase our focus on evergreen titles and accelerate the prototyping process for growth games that should begin hitting in the second half of 2018. We think our strategic approach can reshape the investment profile of Glu over the next few years by launching 3 to 4 growth games each year on top of our existing catalog. We believe we can create dependable, predictable, profitable growth in bookings. And combined with more disciplined management around game investment and development, we are aiming to make Glu more consistently profitable. Thanks again for joining us, and we hope -- wish you all a good day. Thank you.

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Operator [30]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.