Glu Mobile : Reports Third Quarter 2015 Financial Results

Glu Mobile Inc. (NASDAQ:GLUU), a leading global developer and publisher of free-to-play games for smartphone and tablet devices, today announced financial results for its third quarter ended September 30, 2015.

“We were satisfied with our financial results in the third quarter, including our ability to exceed revenue and EBITDA expectations,” stated Niccolo de Masi, Chairman and Chief Executive Officer of Glu. “During the quarter, our results were driven by the ongoing strength of our catalog as well as the continued outperformance of our Cooking Dash game.”

de Masi continued, “The supermajority of titles launched in 2015 have underperformed as solid monetization rates were offset by significantly lower-than-expected install volumes. We have strengthened our studio with the hiring of a new CTO and President of Studios, as well as Board with the appointment of Greg Brandeau. We remain on the lookout for accretive and strategic uses of our strong balance sheet.”

de Masi concluded, “We believe Glu is well positioned given the potential promotional power of our exclusive, multi-year celebrity gaming partnerships. We are proud to announce that Glu has now signed partnerships with celebrities who in turn have over 1 billion* social followers. We are similarly pleased with the opportunity to bring Tencent’s chart-topping shooter WeFire to new territories where Glu has a strong publishing operation.”

Third Quarter 2015 Financial Highlights:

• Revenue: Total GAAP revenue was $63.3 million in the third quarter of 2015 compared to $64.8 million in the third quarter of 2014. Total non-GAAP revenue was $64.4 million in the third quarter of 2015, compared to $83.6 million in the third quarter of 2014. Non-GAAP revenue excludes changes in deferred revenue and litigation settlement proceeds.
• Gross Margin: GAAP gross margin was 53% in the third quarter of 2015 compared to 58% in the third quarter of 2014. Non-GAAP gross margin was 59% in the third quarter of 2015 compared to 60% in the third quarter of 2014. Non-GAAP gross margin excludes changes in deferred revenue and litigation settlement proceeds, change in deferred cost of revenue, amortization of intangible assets and non-cash warrant expense.
• GAAP Operating Income/(Loss): GAAP operating income was $389,000 in the third quarter of 2015 compared to a loss of $(106,000) in the third quarter of 2014.
• Non-GAAP Operating Income: Non-GAAP operating income was $7.7 million in the third quarter of 2015 compared to $14.8 million during the third quarter of 2014. Non-GAAP operating income excludes changes in deferred revenue and deferred cost of revenue, amortization of intangible assets, non-cash warrant expense, stock-based compensation expense, restructuring charges, change in fair value of the Blammo earnout, transitional costs and litigation costs and settlement proceeds.
• Adjusted EBITDA: Adjusted EBITDA was $8.5 million for the third quarter of 2015, compared to $15.4 million during the third quarter of 2014. Adjusted EBITDA is defined as non-GAAP operating income excluding depreciation.
• GAAP Net Income and EPS: GAAP net income was $158,000 for the third quarter of 2015 compared to $10.4 million for the third quarter of 2014. GAAP diluted EPS was approximately breakeven for the third quarter of 2015, based on 131.5 million weighted-average diluted shares outstanding, compared to a GAAP diluted EPS of $0.10 for the third quarter of 2014, based on 105.4 million diluted weighted-average shares outstanding.
• Non-GAAP Net Income and EPS: Non-GAAP net income was $7.7 million for the third quarter of 2015 compared to $17.3 million for the third quarter of 2014. Non-GAAP diluted EPS was $0.06 for the third quarter of 2015 based on 131.5 million weighted-average diluted shares outstanding, compared to non-GAAP diluted EPS of $0.16 for the third quarter of 2014 based on 105.4 million weighted-average diluted shares outstanding.
• Cash and Cash Flows: As of September 30, 2015, Glu had cash and cash equivalents of $182.3 million compared to $189.7 million at the end of the prior quarter. The company continues to have no debt. Cash flows used in operations were $(7.8) million for the third quarter of 2015 compared to $2.5 million cash generated from operations for the third quarter of 2014.

A reconciliation of GAAP to non-GAAP results has been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading “Use of Non-GAAP Financial Measures.”

Recent Developments and Strategic Initiatives:

• Today we announced the hiring of new President of Studios, Nick Earl. Nick is a seasoned gaming veteran, having most recently held senior studio roles at Electronic Arts and Kabam.
• Today we announced a partnership to bring Tencent’s chart-topping shooter game, WeFire, to North and South America, EMEA, Australia and New Zealand.
• Announced today that we have signed exclusive partnerships with celebrities totaling over one billion social followers whose games will be live by the end of 2017*.
• In October, Tim Wilson joined Glu as Global Chief Technology Officer, bringing to the company a strong background in global technology and engineering leadership acquired through his extensive career in gaming, including serving in multiple CTO positions at Electronic Arts.
• In September, we announced the availability of Deer Hunter 2016 as well as Deer Hunter VR, the company’s first title developed exclusively for Oculus.
• In September, Greg Brandeau, former CTO of Walt Disney Animation Studios and former SVP of Technology for Pixar Animation Studios, joined Glu’s Board of Directors.

“The ongoing traction with our catalog titles resulted in a better-than-expected third quarter,” stated Eric R. Ludwig, Chief Operating Officer and Chief Financial Officer. “We are confident that the combination of our long-term strategy and strong balance sheet, positions us well to scale Glu to the next level and generate greater shareholder value over time.”

Business Outlook as of November 5, 2015:

The following forward-looking statements reflect expectations as of November 5, 2015. Results may be materially different and are affected by many factors, such as: consumer demand for mobile entertainment and specifically Glu’s products; consumer demand for smartphones, tablets and next-generation platforms; our ability to improve the monetization of our titles and continue to successfully launch and update new games; development delays on Glu's products; continued uncertainty in the global economic environment; competition in the industry; storefront featuring; changes in foreign exchange rates; Glu's effective tax rate and other factors detailed in this release and in Glu's SEC filings.

Fourth Quarter Expectations – Quarter Ending December 31, 2015:

• Non-GAAP revenue is expected to be between $50.0 million and $52.0 million.
• Non-GAAP gross margin is expected to be approximately 62.7%.
• Non-GAAP operating expenses are expected to be between $35.1 million and $35.3 million.
• Adjusted EBITDA, defined as non-GAAP operating income/(loss) excluding depreciation of approximately $0.7 million, is expected to range from a loss of $(2.0) million to $(3.0) million.
• Income tax is expected to be an expense of approximately $0.2 million.
• Non-GAAP net income/(loss) is expected to be between $(2.9) million and ($3.9) million, or between $(0.02) and $(0.03) per weighted-average basic share outstanding, which excludes approximately $3.5 million of anticipated stock-based compensation expense and $2.3 million for amortization of intangibles.
• Weighted-average common shares outstanding are expected to be approximately 128.0 million basic and 129.3 million diluted.

2015 Expectations – Full Year Ending December 31, 2015:

• Non-GAAP revenue is expected to be between $234.3 million and $236.3 million.
• Non-GAAP gross margin is expected to be approximately 61.5%.
• Adjusted EBITDA is expected to range from $11.0 million to $12.0 million.
• Non-GAAP net income is expected to be between $7.6 million and $8.6 million, or between $0.06 and $0.07 per weighted-average diluted share outstanding, which excludes approximately $11.7 million of anticipated stock-based compensation expense, $9.7 million for amortization of intangibles and the proceeds from the settlement of the Hothead Games litigation, net of costs incurred.
• Weighted-average common shares outstanding are expected to be approximately 118.8 million basic and 122.8 million diluted.
• We expect to have cash and short-term investments at December 31, 2015 of at least $170.0 million with no debt.

Quarterly Conference Call

Glu will discuss its quarterly results via teleconference today at 1:30 p.m. Pacific Time (4:30 p.m. Eastern Time). Please dial (866) 582-8907, or if outside the U.S., (760) 298-5046, with conference ID # 50395369 to access the conference call at least five minutes prior to the 1:30 p.m. Pacific Time start time. A live webcast and replay of the call will also be available on the investor relations portion of the company's website at www.glu.com/investors. An audio replay will be available between 4:30 p.m. Pacific Time, November 5, 2015, and 8:59 p.m. Pacific Time, November 12, 2015, by calling (855) 859-2056, or (404) 537-3406, with conference ID # 50395369.

Disclosure Using Social Media Channels and Calculation of Social Followers

Glu currently announces material information to its investors using SEC filings, press releases, public conference calls and webcasts. Glu uses these channels as well as social media channels to announce information about the company, games, employees and other issues. Given SEC guidance regarding the use of social media channels to announce material information to investors, Glu is notifying investors, the media, its players and others interested in the company that in the future, it might choose to communicate material information via social media channels or, it is possible that information it discloses through social media channels may be deemed to be material. Therefore, Glu encourages investors, the media, players and others interested in Glu to review the information posted on the company forum (http://ggnbb.glu.com/forum.php) and the company Facebook site (https://www.facebook.com/glumobile), the company twitter account (https://twitter.com/glumobile) and Mr. de Masi’s twitter account (https://twitter.com/niccolodemasi). Investors, the media, players or other interested parties can subscribe to the company blog and twitter feed and Mr. de Masi’s twitter feed at the addresses listed above. Any updates to the list of social media channels Glu will use to announce material information will be posted on the Investor Relations page of the company's website at www.glu.com/investors.

*Glu calculates the aggregate number of social followers of a particular celebrity licensor by adding the total followers on Facebook, Twitter, Instagram, Vevo and Vine for such celebrity. There is fan overlap among these social channels and among Glu’s various celebrity licensors, and such aggregate numbers have not been deduplicated.

The more than 1 billion total social followers supporting celebrity titles that Glu expects to be live by the end of 2017 is based on the combined Facebook, Twitter, Instagram, Vevo, and Vine audiences of Katy Perry, Kim Kardashian West, Kendall and Kylie Jenner, Britney Spears, Nicki Minaj, Jason Statham and additional yet-to-be announced celebrities as of September 30, 2015.

Use of Non-GAAP Financial Measures

To supplement Glu's unaudited condensed consolidated financial data presented in accordance with GAAP, Glu uses certain non-GAAP measures of financial performance. The presentation of these non-GAAP financial measures is not intended to be considered in isolation from, as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Glu's results of operations as determined in accordance with GAAP. The non-GAAP financial measures used by Glu include historical and estimated non-GAAP revenue, non-GAAP smartphone revenue, non-GAAP cost of revenue, non-GAAP operating expenses, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating income/(loss), non-GAAP net income/(loss) and non-GAAP basic and diluted net income/(loss) per share. These non-GAAP financial measures exclude the following items from Glu's unaudited consolidated statements of operations:

• Change in deferred revenue and deferred cost of revenue;
• Amortization of intangible assets;
• Non-cash warrant expense;
• Stock-based compensation expense;
• Restructuring charges;
• Change in fair value of Blammo earnout;
• Litigation settlement proceeds and costs;
• Transitional costs;
• Release of tax liabilities and valuation allowance; and
• Foreign currency exchange gains and losses primarily related to the revaluation of assets and liabilities.

In addition, Glu has included in this release “Adjusted EBITDA” figures which are used to evaluate Glu’s operating performance. Adjusted EBITDA is defined as non-GAAP operating income/(loss) excluding depreciation. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by non-GAAP revenue.

Glu may consider whether significant non-recurring items that arise in the future should also be excluded in calculating the non-GAAP financial measures it uses.

Glu believes that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information regarding Glu's performance by excluding certain items that may not be indicative of Glu's core business, operating results or future outlook. Glu's management uses, and believes that investors benefit from referring to, these non-GAAP financial measures in assessing Glu's operating results, as well as when planning, forecasting and analyzing future periods. These non-GAAP financial measures also facilitate comparisons of Glu's performance to prior periods.

Cautions Regarding Forward-Looking Statements

This news release contains forward-looking statements, including those regarding our “Business Outlook as of November 5, 2015” (“Fourth Quarter Expectations – Quarter Ending December 30, 2015” and “2015 Expectations – Full Year Ending December 31, 2015”), and the statements regarding that we have signed exclusive, multi-year partnerships with celebrities with over 1 billion social followers and expect games featuring these celebrities to be live by the end of 2017; the strengthening of our studios with the hiring of a new CTO and President of Studios and the strengthening of our Board with the appointment of Greg Brandeau; looking out for accretive and strategic uses of our strong balance sheet; being well positioned given the promotional power of our exclusive, multi-year celebrity gaming partnerships; bringing Tencent’s chart-topping shooter WeFire to new territories where Glu has a strong publishing operation; ongoing traction with our catalog titles; and the combination of our long-term strategy and strong balance sheet positioning Glu to scale to the next level and generate greater shareholder value over time. 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. Investors should consider important risk factors, which include: the risks identified under "Business Outlook as of November 5, 2015"; the risk that Glu does not realize the anticipated strategic benefits from our celebrity partnerships; the risk that the success of WeFire in Asia does not correlate to strong performance in the markets where we plan to publish the game; the risk that the number of social followers of our celebrity partners does not correlate to strong performance for our celebrity titles; the risk that consumer demand for smartphones, tablets and next-generation platforms does not grow as significantly as we anticipate or that we will be unable to capitalize on any such growth; the risk that we do not realize a sufficient return on our investment with respect to our efforts to develop free-to-play games for smartphones, tablets and next-generation platforms, the risk that we will not be able to maintain our good relationships with Apple and Google; the risk that our development expenses for games for smartphones, tablets and next-generation platforms are greater than we anticipate; the risk that our recently and newly launched games are less popular than anticipated or decline in popularity and monetization rate more quickly than we anticipate; the risk that our newly released games will be of a quality less than desired by reviewers and consumers; the risk that the mobile games market, particularly with respect to free-to-play gaming, is smaller than anticipated; the risk that we may lose a key intellectual property license; the risk that we are unable to recruit and retain qualified personnel for developing and maintaining the games in our product pipeline resulting in reduced monetization of a game, product launch delays or games being eliminated from our pipeline altogether and other risks detailed under the caption "Risk Factors" in our Form 10-Q filed with the Securities and Exchange Commission on August 7, 2015 and our other SEC filings. You can locate these reports through our website at http://www.glu.com/investors. We are under no obligation, and expressly disclaim any obligation, to update or alter our forward-looking statements whether as a result of new information, future events or otherwise.

About Glu Mobile

Glu Mobile (GLUU) is a leading global developer and publisher of free-to-play games for smartphone and tablet devices. Glu is focused on creating compelling original IP games such as CONTRACT KILLER, COOKING DASH, DEER HUNTER, DINER DASH, DINO HUNTER: DEADLY SHORES, ETERNITY WARRIORS, FRONTLINE COMMANDO, RACING RIVALS, TAP SPORTS BASEBALL and TAP SPORTS FOOTBALL, and branded IP games including KIM KARDASHIAN: HOLLYWOOD, ROBOCOP: THE OFFICIAL GAME, MISSION IMPOSSIBLE: ROGUE NATION and SNIPER X WITH JASON STATHAM on the App Store, Google Play, Amazon Appstore, Facebook, Mac App Store, and Windows Phone. Glu’s unique technology platform enables its titles to be accessible to a broad audience of consumers globally. Founded in 2001, Glu is headquartered in San Francisco with major U.S. offices outside Seattle and in Long Beach, and international locations in Canada, China, India, Japan, Korea, and Russia. Consumers can find high-quality entertainment wherever they see the ‘g’ character logo or at www.glu.com.

For live updates, please follow Glu via Twitter at www.twitter.com/glumobile or become a Glu fan at www.facebook.com/glumobile.

CONTRACT KILLER, COOKING DASH, DEER HUNTER, DINER DASH, DINO HUNTER: DEADLY SHORES, ETERNITY WARRIORS, FRONTLINE COMMANDO, RACING RIVALS, TAP SPORTS BASEBALL, TAP SPORTS FOOTBALL, SNIPER X, GLU, GLU MOBILE, and the 'g' character logo are trademarks of Glu Mobile Inc.

In addition to the reasons stated above, which are generally applicable to each of the items Glu excludes from its non-GAAP financial measures, Glu believes it is appropriate to exclude certain items for the following reasons:

Change in Deferred Revenue and Deferred Cost of Revenue. At the date we sell certain premium games and micro-transactions, Glu has an obligation to provide additional services and incremental unspecified digital content in the future without an additional fee. In these cases, we recognize the revenue and any associated cost of revenue, including platform commissions and royalties, on a straight-line basis over the estimated life of the paying user. Internally, Glu’s management excludes the impact of the changes in deferred revenue and deferred cost of revenue related to its premium and free-to-play games in its non-GAAP financial measures when evaluating the company’s operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. Glu believes that excluding the impact of the changes in deferred revenue and deferred cost of revenue from its operating results is important to facilitate comparisons to prior periods and to understand Glu’s operations.

Amortization of Intangible Assets. When analyzing the operating performance of an acquired entity, Glu's management focuses on the total return provided by the investment (i.e., operating profit generated from the acquired entity as compared to the purchase price paid) without taking into consideration any allocations made for accounting purposes. Because the purchase price for an acquisition necessarily reflects the accounting value assigned to intangible assets (including acquired in-process technology and goodwill), when analyzing the operating performance of an acquisition in subsequent periods, Glu's management excludes the GAAP impact of acquired intangible assets to its financial results. Glu believes that such an approach is useful in understanding the long-term return provided by an acquisition and that investors benefit from a supplemental non-GAAP financial measure that excludes the accounting expense associated with acquired intangible assets.

Non-cash Warrant Expense. In the third and fourth quarters of 2014 and the first nine months of 2015, Glu recorded a non-cash charge related to the vesting of warrants to purchase shares of common stock issued to brand holders as part of third party licensing, development and publishing arrangements. These charges were computed using the Black-Scholes valuation model and were recorded in cost of revenue. When evaluating the performance of its consolidated results, Glu does not consider non-cash warrant expense as it places a greater emphasis on overall stockholder dilution rather than the accounting charges associated with the vesting of any warrants. As the non-cash warrant expense impacts comparability from period to period Glu believes that investors benefit from a supplemental non-GAAP financial measure that excludes these charges.

Stock-Based Compensation Expense. The Company applies the fair value provisions of ASC 718, Compensation-Stock Compensation (“ASC 718”). ASC 718 requires the recognition of compensation expense, using a fair-value based method, for costs related to all share-based payments. Included in the stock compensation expense was the contingent consideration that was subsequently issued to the Blammo employees who were former shareholders of Blammo, which was recorded as research and development expense over the term of the earn-out periods, since these employees were primarily employed in product development. Glu re-measured the fair value of the contingent consideration each reporting period and only recorded a compensation expense for the portion of the earn-out target which was achieved. When evaluating the performance of its consolidated results, Glu does not consider stock-based compensation charges. Likewise, Glu's management team excludes stock-based compensation expense from its short and long-term operating plans. In contrast, Glu's management team is held accountable for cash-based compensation and such amounts are included in its operating plans. Further, when considering the impact of equity award grants, Glu places a greater emphasis on overall stockholder dilution rather than the accounting charges associated with such grants. Glu believes it is useful to provide a non-GAAP financial measure that excludes stock-based compensation in order to better understand the long-term performance of its business.

Restructuring Charges. Glu undertook restructuring activities in the second, third and fourth quarters of 2014 and recorded cash restructuring charges due to the termination of certain employees in its China, Europe and U.S. offices. Glu recorded the severance costs as an operating expense when it communicated the benefit arrangement to the employee and no significant future services, other than a minimum retention period, were required of the employee to earn the termination benefits. Glu believes that these restructuring charges do not reflect its ongoing operations and that investors benefit from a supplemental non-GAAP financial measure that excludes these charges.

Change in Fair Value of Blammo Earnout. As part of the acquisition of Blammo, Glu committed to issue additional consideration in the form of Glu’s common stock to the former, non-employee Blammo shareholders if certain revenue targets were achieved. Glu recorded the estimated contingent consideration liability at acquisition and adjusted the fair value of the liability each reporting period. When analyzing the operating performance of an acquired entity, Glu’s management focuses on the total return provided by the investment (i.e., operating profit generated from the acquired entity as compared to the purchase price paid including the final amounts paid for contingent consideration) without taking into consideration any expenses recognized post-acquisition related to the change in fair value of the contingent consideration. Because the final purchase price paid for an acquisition necessarily reflects the accounting value assigned to both the consideration, including the contingent consideration, paid and to the intangible assets (including goodwill) acquired, when analyzing the operating performance of an acquisition in subsequent periods, the Company’s management excludes the GAAP impact of any adjustments to the fair value of these acquisition-related balances to its financial results. Glu believes that the fair value adjustments affect comparability from period to period and that investors benefit from a supplemental non-GAAP financial measure that excludes these charges.

Litigation Settlement Proceeds and Costs. These proceeds and expenses consist primarily of one-time settlement payments received from, and legal fees incurred in connection with, intellectual property infringement matters. The Company has treated the settlement proceeds as a multiple element arrangement and has allocated a significant portion of the proceeds to revenue as deemed royalty revenue for the settlement of past infringement. The residual proceeds have been allocated to contra general and administrative expenses and offset legal fees incurred. The Company excludes these proceeds and costs from its non-GAAP measures as these proceeds and costs are isolated, unpredictable and not expected to recur regularly, and the Company believes that these non-recurring proceeds and costs have no direct correlation to the operation of the Company’s ongoing core business.

Transitional Costs. GAAP requires expenses to be recognized for various types of events associated with a business acquisition such as legal, accounting and other deal related expenses. Glu has incurred various costs related to the acquisition and integration of PlayFirst and Cie Games into Glu’s operations. Glu recorded these non-recurring acquisition and transitional costs as operating expenses when they were incurred. Glu believes that these acquisition and transitional costs affect comparability from period to period and that investors benefit from a supplemental non-GAAP financial measure that excludes these expenses.

Release of tax liabilities and valuation allowance. In the third and fourth quarters of 2014 Glu adjusted a portion of its deferred tax asset valuation allowance as a result of the deferred tax liabilities recorded in connection with the Cie Games acquisition. Glu believes that these non-recurring, one-time tax adjustments do not reflect its ongoing operations and that investors benefit from a supplemental non-GAAP financial measure that excludes these adjustments.

Foreign currency exchange gains and losses. Foreign currency exchange gains and losses represent the net gain or loss that Glu has recorded for the impact of currency exchange rate movements on cash and other assets and liabilities denominated in foreign currencies related to the revaluation of assets and liabilities. Accordingly, foreign currency exchange gains and losses are generally unpredictable and can cause Glu’s reported results to vary significantly. Due to the unusual magnitude of these gains and losses, and the fact that Glu has not engaged in hedging or taken other actions to reduce the likelihood of incurring a sizeable net gain or loss in future periods, Glu excludes foreign exchange gains and losses for comparability purposes. Glu believes that these gains and losses do not reflect its ongoing operations and that investors benefit from a supplemental non-GAAP financial measure that excludes these items, enabling investors to compare Glu’s core operating results in different periods without this variability. Foreign exchange losses recognized during 2014 and 2015 were as follows (in thousands):

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