Q&A: Glu Mobile CEO De Masi on Acquisitions, Third-Quarter Forecast

After Glu Mobile’s earnings call on Tuesday, we talked with the company’s chief executive Niccolo de Masi the following day about the two recent acquisitions it made and how he expects the mobile gaming landscape to change on Android and iOS in the third quarter.

This interview happened before we knew the company had restructured and laid off several executives. (This apparently happened the same day we interviewed De Masi and the company later only provided a canned statement on the matter).

Still, some of this information may be helpful in understanding how the company thinks about its revenue prospects this fall. And yes, we do cover Glu a lot here, but that’s because it’s one of the very few publicly-traded mobile gaming companies around. So its earnings can be a way of benchmarking how other privately-held companies with similar revenue models like Pocket Gems and Storm8 are doing.

Glu’s smartphone revenue rose 58 percent year-over-year to $9.42 million in the quarter ending in June. During that time, it saw 999,000 in-app purchases, up from 755,000 in the first quarter. The average revenue per in-app purchase was $4.07, up from $2.31 the previous quarter, because of higher price points for virtual goods.

Q: Why do you expect net losses to rise to between $7.4 and $8.2 million this quarter?

A: If you want to dive in — in a nutshell, the reasons why we’re taking losses is because we’ve taken on approximately 200 new employees. They won’t be generating new revenue until 2012. So it’s really about investment in R&D, plus our feature phone business declines every quarter.

Also, there’s a loss in CPI advertising or a significant degradation which means there are two hills for us to climb. To keep us flat, we have to keep growing smartphone revenues.

Q: You also said that it looked like alternatives were replacing 25 to 50 percent of CPI revenue, down from the 50 to 75 percent you said you expected in May. Why is that the case?

A: We talked about this yesterday. When we get good inventory — that’s premium, high-CPM video advertising –we’re able to replace 75 percent of offer wall revenue. When we don’t have high-quality CPM inventory, we get a number lower than that.

The lower replacement is happening because we are burning through all of the high-quality inventory very quickly. On the Pandora earnings call, they mentioned this too. There’s not that many high-quality high CPM ads, so the bigger players are burning through it.

We hope that the overall video industry is going to learn more about mobile generally and that brands are going to spend more. Two years ago, there was really very little video advertising for mobile. I’m still a long-term bull for advertising in general, however.

Q: What seems to be most effective for replacing CPI in terms of user acquisition?

A: We’re always trying new techniques and channels. I haven’t found anything that’s effective as CPI either for making money or for acquiring users. We’re more diversified now though and we’re continuing to be on the look out.

Q: Are there any new providers that are really working for you right now? 

A: We’re working with all the same people — Tapjoy and Flurry and so on. We’re staying close to the companies that have been able to deliver in the past.

Q: How is in-app billing working out on Android after a quarter since launch?

A: What’s helping Android a lot is carrier billing. More and more carriers are signing up and that’s their biggest mechanism for reducing friction. I think they’ve made great strides. Look at where Android was nine months ago.

In the long-run, we see Android overtaking iOS for overall market size. So the exciting thing for Glu on that front is that we have a great Android relationship. We’ve been on the platform since the start. We had some of the first games out there and started to follow along with all of their new initiatives. As Android takes off, developers will have to deal with language and storefront fragmentation. There will be Amazon and the carrier stores. We have an advantage because we’re global, we have 600 employees and we know how to handle that fragmentation efficiently.