GLU MOBILE INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included in Item 8, "Financial Statements and Supplementary Data" of this report. In addition to our historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results and the timing of certain events could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly in Item 1A, "Risk Factors."
Our Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, includes the following sections:
? An Overview that discusses at a high level our operating results and some of
the trends that affect our business;
Critical Accounting Policies and Estimates that we believe are important to
? understanding the assumptions and judgments underlying our financial
statements;
? Recent Accounting Pronouncements;
? Results of Operations, including a more detailed discussion of our revenue and
expenses; and
? Liquidity and Capital Resources, which discusses key aspects of our statements
of cash flows, changes in our balance sheets and our financial commitments.
This MD&A section generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 . Overview
This overview provides a high-level discussion of our operating results and some of the trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for 2019, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this report, including our consolidated financial statements and accompanying notes. Financial Results and Trends
Revenue for 2019 was$411.4 million , a 12.2% increase compared to 2018, in which we reported revenue of$366.6 million . The increase in total revenue was primarily related to a$44.4 million increase in our revenue from micro-transactions (in-app purchases) and a$607,000 increase in our revenue from advertisements and offers. The increase was primarily related to an increase in revenue from Design Home, Covet Fashion, and theTap Sports Baseball franchise and the worldwide launch of Diner DASH Adventures and WWE Universe during 2019. These increases were partially offset by declining revenue from catalog games such asKim Kardashian :Hollywood , Restaurant Dash withGordon Ramsay , Cooking Dash, Deer Hunter 2018 (originally launched as Deer Hunter 2016), Deer Hunter Classic, Kendall & Kylie and Racing Rivals. We have concentrated our product development efforts towards developing games for smartphone and tablet devices. We generate the majority of our revenue from Apple's iOS platform, which accounted for 60.8% and 63.1% of our total revenue for the years endedDecember 31, 2019 and 2018, respectively. The majority of this iOS-related revenue was generated through theApple App Store , which represented 54.4% and 54.7% of our total revenue for the years ended 44
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December 31, 2019 and 2018, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our iOS-related revenue from offers and advertisements in games distributed on theApple App Store . In addition, we generated approximately 39.1% and 36.6% of our total revenue for the years endedDecember 31, 2019 and 2018, respectively, from the Android platform. The majority of our Android-related revenue was generated through theGoogle Play Store , which represented 33.5% and 31.3% of our total revenue for the years endedDecember 31, 2019 and 2018, respectively, with the significant majority of such revenue derived from in-app purchases. We generated the balance of our Android-related revenue from other platforms that distribute apps that run the Android operating system (e.g., theAmazon App Store ) and through offers and advertisements in games distributed through theGoogle Play Store and other Android platforms. We currently publish titles primarily in four genres: lifestyle, casual, mid-core, and sports and outdoors. We believe these are genres in which we have already established a leadership position, are otherwise aligned with our strengths or are conducive to the establishment of a strong growth game. Across genres, we view our titles as either growth games or catalog games. Growth games are titles that we continue to update with additional content and features and which we expect to grow revenue year over year. We continue to update some of our catalog titles with additional content and features, whereas on others we expend little to no investment in terms of updates and enhancements. We established our leadership position in the lifestyle genre through our acquisition ofCrowdstar Inc. ("Crowdstar") inNovember 2016 and its successful Covet Fashion title, and extended our leadership with our global release of Design Home inNovember 2016 . We introduced key updates for Design Home in 2018 and 2019, including elite events for elder players, improved series challenges, language localization in German, French and Spanish, and meta game functionality, and are planning key further updates for this title, including the introduction of e-commerce functionality. The casual genre includes ourKim Kardashian :Hollywood title and our Cooking Dash and Diner DASH franchises, and our leadership position in this genre was bolstered by our worldwide launch of Diner DASH Adventures inJune 2019 . The mid-core genre will include our Disney Sorcerer's Arena title that is currently available in limited beta territories and which we expect to launch worldwide in the first quarter of 2020. Our leadership in the sports and outdoors category remains strong with our Tap Sports Baseball and Deer Hunter franchises, and we furthered our leadership with the launch of MLB Tap Sports Baseball 2019 inMarch 2019 , which includes licensed content from MajorLeague Baseball , or MLB, together with current and former MLB players pursuant to our continuing agreements with theMajor League Baseball Players Association , andMajor League Baseball Players Alumni Association . We will be releasing MLB Tap Sports Baseball 2020 inMarch 2019 in more than 100 additional countries (prior versions of theTap Sports Baseball franchise were only available inthe United States ,Canada ,United Kingdom ,Germany andAustralia ) with new features and content, including authentic major league stadiums, a home run derby mode and a new cover athlete. In 2020, we expect to add to our portfolio of sports and outdoor titles through the worldwide release of the next iteration of our Deer Hunter franchise in the second half of 2020 and potentially by globally launching a fishing game that is currently in beta testing. We believe that our games consistently have high production values, are visually appealing and have engaging core gameplay. These characteristics have typically helped to drive installs and awareness of our games and resulted in highly positive consumer reviews. The majority of our games have been featured on Apple andKim Kardashian :Hollywood title utilizes transmedia storytelling, leveragingMs. Kardashian West's built-in social media fan base to drive installs and awareness of the game, and then attempting to surprise and delight those fans with real-world events and other game content based on her life. Our goal is for the game content to become entwined withMs. Kardashian West's persona and social media presence, and to otherwise enhance interaction with her fans. We also leverage the strength of well-known brands and licensors to provide users with more realistic experiences, such as the case with MLB Tap Sports Baseball 2019 which features all MLB clubs and uniforms and current and former MLB players; we intend to further augment the game's authenticity by adding each of the 30 real MLB stadiums in MLB Tap Sports Baseball 2020. We also work to build and nurture social communities in and around the games themselves, creating a new vehicle for strong, personal engagement with the brand or celebrity's fan base. 45 Table of Contents For us to continue driving installs and awareness of our games and to improve monetization and retention of our players, we must ensure that each of our games has compelling gameplay and a deep meta game that motivates users to continue to play our games for months or even years. In addition, we must regularly update our games with compelling new content, deliver socio-competitive features like tournaments, contests, player-versus-player gameplay and live events, and build and nurture communities around our franchises both in-game and holistically via community features such as dedicated social channels. We have also made significant investments in our proprietary analytics and revenue technology infrastructure. With our enhanced analytics capabilities, we intend to devote resources towards segmenting and learning more about the players of each of our franchises and further monetizing our highest spending and most engaged players. We aim to connect our analytics and revenue technology infrastructure to multiple elements of our business - from marketing to merchandising - in order to improve player retention and monetization. We also plan to continue monitoring the successful aspects of our games to drive downloads and enhance monetization and retention as part of our product strategy, whether by optimizing advertising revenue within each title, securing additional compelling licensing arrangements, building enhanced and more complex core gameplay, adding deep meta game features and additional social features, tournaments and events, offering subscriptions for in game virtual items or otherwise. Optimizing advertising revenue within our games requires us to continue taking advantage of positive trends in the mobile advertising space, particularly as brands continue to migrate budgets from web to mobile. Continuing to drive installs and awareness of our games through licensing efforts requires that we continue to partner with brands, celebrities and social influencers that resonate with potential players of our games. Partnering with desirable licensing partners and renewing our existing licenses with our most successful partners requires that we continue to develop successful games based on licensed content and are able to compete with other mobile gaming companies on financial and other terms in signing such partners. We also plan to continue introducing third-party licensed brands, properties and personalities into our games as additional licensed content, for cameo appearances or for limited time events in order to drive awareness and monetization. Across the globe, our industry is evidencing that hit titles generally remain higher in the top grossing charts for longer. We believe this is due to the continued specialization and investment of teams and companies in their hit titles, and the live, social nature of certain games. Our strategy and the measures we have implemented to support our business positions us to take advantage of these trends, as evidenced by the continued strength and year over year growth of Design Home, Covet Fashion, and the Tap Sports Baseball franchise. We plan to continue to regularly update and otherwise support our growth games in order to ensure that those games monetize and retain users for even longer periods of time. In addition, we plan to continue to invest in our creative leaders and the creative environments in which they and their teams work to increase our likelihood of creating significant hit growth games. Our net income in the year endedDecember 31, 2019 was$8.9 million versus a net loss of$13.2 million in the year endedDecember 31, 2018 . This change was primarily due to an increase in revenue of$44.8 million , a decrease in general and administrative expense of$8.5 million and an increase in interest/other income of$2.3 million . These changes were partially offset by an increase in sales and marketing expense of$26.4 million and an increase in cost of sales of$7.2 million . Our operating results were also affected by fluctuations in foreign currency exchange rates of the currencies in which we incurred meaningful operating expenses (principally the Canadian Dollar, and Indian Rupee), and our customers' reporting currencies. Our ability to sustain and increase profitability depends not only on our ability to grow our revenue, but also on our ability to manage our operating expenses. We significantly increased our sales and marketing expenditures during 2019 compared to 2018, which was primarily related to higher marketing spend for our growth games and higher user acquisition expenditures related to the global launches of Diner DASH Adventures and WWE Universe partially offset by lower marketing expense for some of our catalog titles. We expect our sales and marketing expenses to increase in 2020 primarily due to higher user acquisition expenditures, including related to the launch of our new titles, including Disney Sorcerer's Arena, Originals: Interactive Story Series and the next iteration of our Deer Hunter franchise. Additionally, the largest component of our recurring expenses is personnel costs, which consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation. In 2020, we intend to continue to focus on reducing our operating costs where appropriate to be more efficient. These efforts may be partially offset by our plans to continue hiring additional development personnel in theSan Francisco Bay Area and inHyderabad, India . 46 Table of Contents
Cash and cash equivalents at
Key Operating Metrics
We manage our business by tracking various non-financial operating metrics that give us insight into user behavior in our games. The three metrics that we use most frequently are Daily Active Users (DAU), Monthly Active Users (MAU), and Average Revenue Per Daily Active User (ARPDAU). Our methodology for calculating DAU, MAU, and ARPDAU may differ from the methodology used by other companies to calculate similar metrics.
DAU is the number of individuals who played a particular smartphone game on a particular day. An individual who plays two different games on the same day is counted as two active users for that day when we aggregate DAU across games. In addition, an individual who plays the same game on two different devices during the same day (e.g., an iPhone and an iPad) is also counted as two active users for each such day when we average or aggregate DAU over time. Average DAU for a particular period is the average of the DAUs for each day during that period. We use DAU as a measure of player engagement with the titles that our players
have downloaded.
MAU is the number of individuals who played a particular smartphone game in the month for which we are calculating the metric. An individual who plays two different games in the same month is counted as two active users for that month when we aggregate MAU across games. In addition, an individual who plays the same game on two different devices during the same month (e.g., an iPhone and an iPad) is also counted as two active users for each such month when we average or aggregate MAU over time. Average MAU for a particular period is the average of the MAUs for each month during that period. We use the ratio between DAU and MAU as a measure of player retention. ARPDAU is total free-to-play smartphone revenue - consisting of micro-transactions, advertisements and offers - for the measurement period divided by the number of days in the measurement period divided by the DAU for the measurement period. ARPDAU reflects game monetization. Under our revenue recognition policy, we recognize this revenue over the estimated average playing period of a user, but our methodology for calculating our DAU does not align with our revenue recognition policy for micro-transactions and offers, under which we defer revenue. For example, if a title is introduced in the last month of a quarter, we defer a substantial portion of the micro-transaction and offer revenue to future months, but the entire DAU for the newly released title is included in the month of launch. We calculate DAU, MAU and ARPDAU for only our primary distribution platforms,Apple's App Store , theGoogle Play Store and Amazon's Appstore, as well as from Facebook for certain titles; we are not able to calculate these metrics across all of our distribution channels. In addition, the platforms that we include for purposes of this calculation have changed over time, and we expect that they will continue to change as our business evolves, but we do not expect that we will adjust prior metrics to take any such additions or deletions of distribution platforms into account. We believe that calculating these metrics for only our primary distribution platforms at a given period is generally representative of the metrics for all of our distribution platforms. Moreover, we rely on the data analytics software that we incorporate into our games to calculate and report the DAU, MAU and ARPDAU of our games, and we make certain adjustments to the analytics data to address inconsistencies between the information as reported and our DAU and MAU calculation methodology.
We have estimated the DAU and MAU for certain older titles because the analytics tools incorporated into those titles are incompatible with newer device operating systems (e.g., iOS 13), preventing us from collecting complete data. For these titles, we estimate DAU and MAU by extrapolating from each affected title's historical data using a fixed decay rate in light of the behavior of similar titles for which we had complete data.
As ofJanuary 1, 2019 , we began calculating DAU and MAU using the average of each month during the period rather than our historical practice of calculating these metrics based on the last month of the period. For example, DAU for the three months endedDecember 31, 2019 is calculated as an average of aggregate daily DAU for the months ofOctober 2019 ,November 2019 andDecember 2019 calculated for all active smartphone free-to-play titles during those 47
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months across the distribution platforms for which we calculate the metric. We
adopted this new methodology because we believe that it provides a more accurate
representation of overall DAU and MAU for the applicable period and more closely
aligns with the methodology used by other companies in the gaming industry to
calculate similar metrics.
Metrics calculated using the new methodology
Three Months Ended,
2019 2018
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
Aggregate DAU 2,903 3,288 3,230 3,150 3,179 3,630 3,716 3,659
Aggregate MAU 15,599 18,675 19,065 19,118 19,618 22,048 23,166 25,181
Aggregate ARPDAU $ 0.42 $ 0.35 $ 0.33 $ 0.34 $ 0.33 $ 0.30 $ 0.27 $ 0.25
Metrics calculated using the old methodology
Three Months Ended,
2019 2018
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
Aggregate DAU 2,857 3,112 3,267 3,016 3,214 3,408 3,627 3,585
Aggregate MAU 15,686 16,373 19,819 18,620 21,113 19,415 22,817 24,787
Aggregate ARPDAU $ 0.43 $ 0.37 $ 0.32 $ 0.35 $ 0.32 $ 0.32 $ 0.27 $ 0.25 The decrease in aggregate DAU and MAU for the three months ended
Our aggregate ARPDAU increased for the three months endedDecember 31, 2019 as compared to the same period of the prior year, as we improved monetization on certain titles, particularly through increased content updates and use of social features in those games. Future increases in our aggregate DAU, MAU and ARPDAU will depend on our ability to retain current players, attract new paying players, launch new games and expand into new markets and distribution platforms. We rely on a very small portion of our total users for nearly all of our revenue derived from in-app purchases. Since the launch of our first free-to-play titles in the fourth quarter of 2010, the percentage of unique paying users for our largest revenue-generating free-to-play games has typically been less than 5%, when measured as the number of unique paying users on a given day divided by the number of unique users on that day, though this percentage fluctuates, and it may be higher than 5% for certain of our games during specific, relatively short time periods, such as immediately following worldwide launch or the week following content updates, marketing campaigns or certain other events. Significant Transactions Divestiture ofMoscow Studio OnDecember 31, 2017 , we entered into the following agreements related to the divestiture of ourMoscow -based game development studio (the "Moscow Studio ") through the sale of our wholly-ownedUK subsidiaryGlu Mobile (Russia) Limited ("GMRL"):
? Share Purchase Agreement (the "SPA") between Glu and Saber Interactive
("Saber");
? Transitional Services Agreement (the "TSA") among Glu, Saber and MGL. My.com
(
? Asset Purchase and License Agreement (the "APLA") between Glu and MGL.
Pursuant to the SPA, Saber purchased all the issued and outstanding share
capital of GMRL. Saber also assumed all obligations under the office lease for
the
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Under the TSA , Saber agreed to transition certain legacy titles from the Moscow
Studio to our Hyderabad studio. Upon successful completion of the transition (i)
Saber paid the employees of the Moscow Studio and GMRL bonus payments of
$500,000 in the aggregate and reduced the cash consideration by the amount of
the bonus, and (ii) certain employees of the Moscow Studio and GMRL had the
vesting of an aggregate of approximately 147,000 shares subject to equity awards
accelerated.
Pursuant to the APLA, we sold four mobile games (and related intellectual
property and other rights) developed by the Moscow Studio : (i) Last Day Alive,
(ii) Heroes of Destiny, (iii) a game that was in development featuring a male
celebrity, and (iv) Furiosa. We transferred all of our rights and obligations
under certain contracts related to the game featuring a male celebrity,
including, but not limited to, the obligation to pay the remaining approximately
$1.5 million in minimum guarantee and other payments under these contracts. We
also agreed to provide MGL with a non-exclusive, perpetual, worldwide,
irrevocable, non-transferrable, royalty-free license to certain development
tools and technology necessary to use, develop, publish, exploit and sell the
purchased games and that MGL and/or its affiliates may use for the development
of other of its products.
The total cash consideration under the SPA and APLA was $3.2 million , of which
we received $1.7 million in January 2018 . The remaining $1.5 million , net of a
transition bonus payment of $500,000 , was received in April 2018 upon completion
of the transition of the legacy titles from the Moscow Studio to our Hyderabad
studio.
In connection with the divestiture, we recorded a loss of $6.5 million in the
year ended December 31, 2017 , which is included in other expense on the
consolidated statement of operations. This was primarily comprised of a $10.0
million charge related to the assignment of one of the contracts related to the
male celebrity, a $1.2 million charge related to the write-off of goodwill
associated with the Moscow Studio and a $0.5 million charge related to the
write-off of net assets associated with the Moscow Studio . These charges were
partially offset by $3.2 million in cash paid by Saber and MGL, $1.5 million
related to the assumption of obligations by MGL under the contract related to
the male celebrity, and $0.5 million related to the transition services provided
by Saber.
In connection with the activities related to the transition under the TSA that
occurred in 2018, we recorded the following expenses in the year ended December
31, 2018 :
?
Studio and GMRL;
?
by certain employees of the
?
capitalized as part of the transaction consideration.
Our divestiture of theMoscow studio was part of our efforts to consolidate our studio locations, focusing on a new scaled creative center inSan Francisco and a low cost, repeatable location inHyderabad, India . This divestiture was not presented as discontinued operations in the consolidated statements of operations, because it did not represent a strategic shift in our business and is not expected to have a significant effect on our operations or financial results, as we continued operating similar businesses after the divestiture.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withUnited States generally accepted accounting principles, or GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of the consolidated financial statements, the disclosure of contingencies as of the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented. Although we believe that our estimates and judgments are reasonable under the circumstances existing at the time these estimates and judgments are made, actual results may differ from those estimates, which could affect our consolidated financial statements. We believe the following to be critical accounting policies because they are important to the portrayal of our financial condition or results of operations and they require critical management estimates and judgments about matters
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that are uncertain:
? revenue recognition;
? prepaid or guaranteed licensor royalties; and
? stock-based compensation.
Revenue Recognition
We generate revenue through in-application purchases ("in-app purchases") within
our games on smartphones and tablet devices, such as Apple's iPhone and iPad,
and mobile devices utilizing Google's Android operating system. Users can
download our free-to-play games through Digital Storefronts. We also have
relationships with certain advertising service providers for advertisements
within smartphone games and revenue from these advertising providers is
generated through impressions, clickthroughs, banner ads and offers.
We adopted Accounting Standard Codification 606, Revenue from Contracts with
Customers, ("ASC 606") and its related amendments effective January 1, 2018
using a modified retrospective method. The reported results for the year ended
December 31, 2018 reflect the application of ASC 606 guidance while the reported
results for the year ended December 31, 2017 were prepared under the guidance of
ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as
"legacy GAAP" or the "previous guidance". The adoption of ASC 606 represents a
change in accounting principle that will more closely align revenue recognition
with the delivery of our services and will provide financial statement readers
with enhanced disclosures.
In accordance with ASC 606, revenue is recognized when a customer obtains
control of promised services. The amount of revenue recognized reflects the
consideration we expect to receive in exchange for these services. A contract
with a customer exists when (i) we enter into an enforceable contract with a
customer that defines each party's rights regarding the services to be
transferred and identifies the payment terms related to these services, (ii) the
contract has commercial substance and, (iii) we determine that collection of
substantially all consideration for services that are transferred is probable
based on the customer's intent and ability to pay the promised consideration. We
apply judgment in determining the customer's ability and intention to pay, which
is based on a variety of factors including the customer's historical payment
experience or, in the case of a new customer, published credit and financial
information pertaining to the customer.
In-App Purchases
Users can download our free-to-play games within the Digital Storefronts and pay
to acquire virtual currency, which can be redeemed in the game for virtual
goods, or virtual goods directly (together, defined as "virtual items") to
enhance their game-playing experience. We sell both consumable and durable
virtual items and receive reports from the Digital Storefronts, which breakdown
the various purchases made from our games over a given time period. We review
these reports and determine on a per-item basis whether the purchase was a
consumable virtual item or a durable virtual item. Consumable virtual items are
items that are consumed at a predetermined time or otherwise have limitations on
repeated use. Durable virtual items are items, such as furniture, clothes, etc.
that are accessible to the player over an extended period of time and that
remain in the game for as long as the player continues to play.
The initial download of the mobile game from the Digital Storefront does not
create a contract under ASC 606 because of the lack of commercial substance;
however, the separate election by the player to make an in-application purchase
satisfies the criteria thus creating a contract under ASC 606. We have
identified the following performance obligations in these contracts:
Ongoing game related services such as hosting of game play, storage of
(1) customer content, when and if available content updates, maintaining the
virtual currency management engine, tracking gameplay statistics, matchmaking
as it relates to multiple player gameplay, etc.
(2) Obligation to the paying player to continue displaying and providing access
to the virtual items within the game.
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Neither of these obligations are considered distinct since the actual mobile
game and the related ongoing services are both required to purchase and benefit
from the related virtual items. As such, our performance obligations represent a
single combined performance obligation which is to make the game and the ongoing
game related services available to the players. The transaction price, which is
the amount paid for the virtual items by the player, is allocated entirely to
the single combined performance obligation. We recognize revenue for durable
virtual items over the estimated average playing period of paying users on a per
title basis. Our revenue from consumable virtual items has been insignificant.
Based on our analysis, the estimated weighted average useful life of a paying
user ranges from four to eight months.
Advertisements and Offers
We have relationships with certain advertising service providers for
advertisements within our mobile games. Revenue from these advertising service
providers is generated through impressions, clickthroughs, offers and banner
ads. Offers are the type of advertisements where the players are rewarded with
virtual currency for completing specified actions, such as downloading another
application, watching a short video, subscribing to a service or completing a
survey. We have determined the advertising buyer to be our customer and
displaying the advertisements within the mobile games is identified as the
single performance obligation. Revenue from advertisements and offers are
recognized at the point-in-time the advertisements are displayed in the game or
the offer has been completed by the user as the customer simultaneously receives
and consumes the benefits provided from these services.
Other Estimates and Judgments
We compute our estimated average playing period of paying users at least twice each year. We have examined the playing patterns of paying users across a representative sample of our games across various genres.
We use the "survival analysis" model to estimate the average playing period for
paying users. This model provides for a singular approach to estimating the
average playing period of paying users on a title by title basis for our diverse
portfolio of games. It is a statistical model that analyzes time duration until
one or more events happens and is commonly used in various industries for
estimating lifespans. We believe this is an appropriate model to estimate the
average playing period of paying users for our titles as this model
statistically estimates the average playing period of each title by analyzing
the historical behavior patterns of paying users.
This model requires the stratification of user data into active and inactive
paying users on a per title basis. Active users are those who are active in the
game for the past 30 days as of the evaluation date. The remaining users are
considered inactive and deemed to have churned from the game. These users are
treated mathematically differently in the model than those who are still active.
A distribution curve is then fit to the user data to estimate the average
playing period of paying users on a per title basis.
We have selected a threshold of 120 days from the commercial launch of a title
as the minimum number of days of data required for this model. This threshold
was deemed to be appropriate as we tested the model using lower thresholds which
resulted in inconsistencies in the estimate of the average playing period of
paying users. For new titles with less than 120 days of data that share similar
attributes with an existing title and/or prequel titles, the average playing
period is determined based on the average playing period of that existing title
or prequel title, as applicable. For all other titles with less than 120 days of
data, the average playing period is determined based on the average playing
period of all other remaining existing titles.
While we believe our estimates to be reasonable based on available game player
information, we may revise such estimates in the future if a titles' user
characteristics change. Any adjustments arising from changes in the estimates of
the average playing period for paying users would be applied to the current
quarter and prospectively on the basis that such changes are caused by new
information that indicates a change in user behavior patterns compared to
historical titles. Any changes in our estimates of the useful life of virtual
items in a certain title may result in revenue being recognized on a basis
different from prior periods' and may cause our operating results to fluctuate.
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Principal Agent Considerations
We evaluated our Digital Storefront and advertising service provider agreements under ASC 606 in order to determine if we are acting as the principal or as an agent when selling virtual items or advertisements within our games. We primarily use Digital Storefronts for distributing our smartphone games and for enabling players to purchase virtual items and advertising service providers to serve advertisements within our games. We evaluated the following factors to assess whether we control each specified good or service before that good or service is transferred to the customer:
? the party responsible for the fulfillment of the virtual items, game related
services, or serving of advertisements;
? the party having the discretion to set pricing with the end-users; and
? the party having inventory risk before the specified good or service have been
transferred to a customer.
Based on the evaluation of the above indicators, we determined that we have control of the services before they are transferred to the end-user. Thus, we are generally acting as a principal and are the primary obligor to end-users for games distributed through Digital Storefronts and advertisements served through our advertising service providers. Therefore, we recognize revenue related to these arrangements on a gross basis, when the necessary information about the gross amounts or platform fees charged, before any adjustments, are made available by the Digital Storefronts and advertising service providers. In situations where the price paid by the end-user of the advertising service provider is not known, we account for these transactions on a net basis.
Deferred Platform Commissions and Royalties
Digital Storefronts retain platform commissions and fees on each purchase made by the paying players through the Digital Storefront. We are also obligated to pay ongoing licensing fees in the form of royalties related to the games developed based on or significantly incorporating licensed brands, properties or other content, and our plans to incorporate additional licensed content in some of its own originally branded games. As revenue from sales to paying players through Digital Storefronts are deferred, the related direct and incremental platform commissions and fees as well as third-party royalties are also deferred on the consolidated balance sheets. The deferred platform commissions and royalties are recognized in the consolidated statements of operations in "Cost of revenue" in the period in which the related sales are recognized as revenue.
Prepaid or Guaranteed Licensor Royalties
Our royalty expenses consist of fees that we pay to content owners for the use
of their brands, properties and other licensed content, including trademarks and
copyrights, in the development of our games. Royalty-based obligations are
either paid in advance and capitalized on the balance sheet as prepaid royalties
or accrued as incurred and subsequently paid. These royalty-based obligations
are expensed to cost of revenue at the greater of the revenue derived from the
relevant game multiplied by the applicable contractual rate or an effective
royalty rate based on expected net product sales.
Our contracts with certain licensors include minimum guaranteed royalty
payments, which are payable regardless of the ultimate volume of sales to end
users, in accordance with ASC 440-10, Commitments, or ASC 440. When no
significant performance remains with the licensor, we initially record each of
these guarantees as an asset and as a liability at the contractual amount. We
believe that the contractual amount represents the fair value of the liability.
When significant performance remains with the licensor, we record royalty
payments as an asset when actually paid and as a liability when incurred, rather
than upon execution of the contract. The classification of minimum royalty
payment obligations between long-term and short-term is determined based on the
expected timing of recoupment of earned royalties calculated on projected
revenue for the games that include content licensed from third parties.
Each quarter, we evaluate the realization of our prepaid and guaranteed
royalties as well as any unrecognized guarantees not yet paid to determine
amounts that we deem unlikely to be realized through product sales. We use
estimates of undiscounted revenue and net margins to evaluate the future
realization of prepaid royalties, license fees, and guarantees. This evaluation
is performed at the title level and considers multiple factors, such as, the
term of the agreement, forecasted demand, game life cycle status, game
development plans, level of social media activity, and current
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and anticipated sales levels, as well as other qualitative factors such as the
success of similar games and similar genres on mobile devices published by us
and our competitors and/or other game platforms (e.g., consoles and personal
computers) utilizing the intellectual property. To the extent that this
evaluation indicates that the remaining prepaid and guaranteed royalty payments
are not recoverable, we record an impairment charge to cost of revenue in the
period that impairment is indicated.
Stock-Based Compensation
We apply 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 stock-based payments including
stock options, restricted stock units ("RSUs"), performance-based stock units
("PSUs"), and performance-based stock options ("PSOs"). The number of PSUs and
PSOs earned and eligible to vest will be determined based on achievement of
specified financial performance measures. ASC 718 requires companies to estimate
the fair value of stock-option awards on the grant date using an option pricing
model. The fair value of stock options and PSOs and stock purchase rights
granted pursuant to our equity incentive plans and 2007 Employee Stock Purchase
Plan ("ESPP"), respectively, is determined using the Black-Scholes valuation
model. The determination of fair value is affected by the stock price, as well
as assumptions regarding subjective variables such as expected employee exercise
behavior and expected stock price volatility over the expected term of the
award. Generally, these assumptions are based on historical information and
judgment is required to determine if historical trends may be indicators of
future outcomes.
Effective January 1, 2017 we no longer estimate forfeitures but account for them
as and when they occur. Changes to the assumptions used in the Black-Scholes
option valuation calculation, as well as future equity granted or assumed
through acquisitions could significantly impact the compensation expense we
recognize. The cost of RSUs and PSUs is determined using the fair value of the
common stock based on the quoted closing price of our common stock on the date
of grant. Compensation cost for stock options and RSUs is amortized ratably over
the requisite service period. For performance-based awards that have multiple
vesting dates, the compensation cost is recognized ratably over the requisite
service period for each tranche, whereby each vesting tranche is treated as a
separate award for determining the requisite service period. The compensation
cost for performance-based awards may be adjusted over the vesting period based
on interim estimates of performance against the pre-set financial performance
measures.
Results of Operations
The following sections discuss and analyze the changes in the significant line items in our statements of operations for the comparison periods identified.
Comparison of the Years Ended
Revenue
Year Ended December 31,
2019 2018
Revenue by Type (In thousands)
In-App Purchases $ 360,598 $ 316,157
Advertisements and Offers 50,728 50,121
Other 55 283
Total revenue $ 411,381 $ 366,561 Our revenue increased$44.8 million , or 12.2%, from$366.6 million for the year endedDecember 31, 2018 to$411.4 million for the year endedDecember 31, 2019 , which was primarily related to a$44.4 million increase in our revenue from in-app purchases (micro-transactions) and a$607,000 increase in our revenues from advertisements and offers. The increase in revenue was primarily related to our three growth games, Design Home, the Tap Sports Baseball franchise and Covet Fashion, as well as the launch of new titles Diner DASH Adventures and WWE Universe in 2019. Revenue from our three growth games increased by$58.4 million during the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . Revenue from the new titles launched in 2019 was$23.8 million during the year endedDecember 31, 2019 . These increases were partially offset by a$37.4 million aggregate decline in revenue from 53
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catalog titles such asKim Kardashian :Hollywood , Restaurant Dash withGordon Ramsay , Cooking Dash, Racing Rivals, Deer Hunter 2018 (originally launched as Deer Hunter 2016), Deer Hunter Classic, and Kendall & Kylie, etc. In 2019, Design Home, the Tap Sports Baseball franchise and Covet Fashion were our top three revenue-generating games and comprised 42.2%, 21.0% and 15.2%, respectively, of our revenue for the period. In 2018, Design Home, the Tap Sports Baseball franchise, and Covet Fashion were our top three revenue-generating games and comprised 39.7%, 18.9% and 13.4%, respectively, of our revenue for the period. No other game generated more than 10% of revenue during either period. International revenue (defined as revenue generated from distributors and advertising service providers whose principal operations are located outsidethe United States or, in the case of the Digital Storefronts, the revenue generated from end-user purchases made outside ofthe United States ) increased by$4.7 million , from$86.3 million in the year endedDecember 31, 2018 to$91.0 million in the year endedDecember 31, 2019 . This was primarily related to a$4.1 million increase in our EMEA revenue, and a$3.3 million increase in our revenue fromAmericas , excludingthe United States , partially offset by a$2.7 million decrease in our APAC revenue. These increases were primarily related to increased revenue from our growth games. Cost of Revenue Year EndedDecember 31, 2019 2018 (In thousands) Cost of revenue:
Platform commissions, royalties and other$ 140,655 $
128,445
Impairment of prepaid royalties and minimum guarantees 457
711
Amortization and impairment of intangible assets 4,387
9,119
Total cost of revenue $ 145,499 $ 138,275
Revenue $ 411,381 $ 366,561
Gross margin 64.6 % 62.3 %
Our cost of revenue increased by$7.2 million , or 5.2%, from$138.3 million in the year endedDecember 31, 2018 to$145.5 million in the year endedDecember 31, 2019 . This increase was primarily due to a$12.8 million increase in platform commission fees due to a higher volume of revenue transactions through the Digital Storefronts and a$511,000 increase in hosting costs. These increases were partially offset by a$5.0 million decrease in amortization and impairment of intangible assets and prepaid royalties and a$1.0 million decrease in expense related to warrants issued to certain celebrities. The royalties we paid to licensors decreased by less than$100,000 , or 0.1%, from$25.4 million in the year endedDecember 31, 2018 to$25.3 million in the year endedDecember 31, 2019 . This slight decrease was due to a larger percentage of our revenue being attributable to original intellectual property titles that are not royalty burdened, such as Design Home and Covet Fashion. We expect our cost of revenue to increase in 2020 primarily due to higher royalty payments and hosting fees.
Research and Development Expenses
Year Ended December 31,
2019 2018
(In thousands)
Research and development expenses
23.1 % 25.9 %
Our research and development expenses increased $193,000 , or 0.2%, from $94.9
million in the year ended December 31, 2018 to $95.1 million in the year ended
December 31, 2019 . This was primarily attributable to a $3.5 million increase in
payroll related costs mainly due to increase in headcount, salary bonuses, and
certain employee benefit costs and a $3.3 million increase in allocated charges
for equipment, facilities and depreciation. These increases were partially
offset by a $3.3 million decrease in outside services primarily related to lower
external development costs, a $2.3
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million decrease in stock compensation expense mainly related to the decrease in vesting probability of certain performance-based equity awards, and a$947,000 decrease in tax expense due to a tax credit related to one of the foreign jurisdictions in which we do business. As a percentage of revenue, research and development expenses decreased from 25.9% in the year endedDecember 31, 2018 to 23.1% in the year endedDecember 31, 2019 . We expect our research and development expenditures to increase in absolute dollars in 2020 primarily
due
to an increase in headcount.
Sales and Marketing Expenses
Year Ended December 31,
2019 2018
(In thousands)
Sales and marketing expenses $ 140,298 $ 113,860
Percentage of revenue 34.1 % 31.1 %
Our sales and marketing expenses increased $26.4 million , or 23.2%, from $113.9
million in the year ended December 31, 2018 to $140.3 million in the year ended
December 31, 2019 . This was primarily attributable to an increase of $22.9
million in user acquisition and other marketing expenditures primarily related
to a significant investment in user acquisition for our three growth games and
Diner DASH Adventures following its global launch in June 2019 , partially offset
by a decrease in user acquisition expenditures on our catalog titles, a $1.7
million increase in professional costs due to increased use of consultants for
customer care activities, a $1.4 million increase in payroll related costs
mainly due to the increase in headcount and related employee benefit costs, and
a $768,000 increase in allocated charges for equipment, facilities and
depreciation. These increases were partially offset by a decrease in stock
compensation expense of $1.1 million mainly related to the decrease in vesting
probability of certain performance-based equity awards. As a percentage of
revenue, sales and marketing expenses increased from 31.1% in the year ended
December 31, 2018 to 34.1% in the year ended December 31, 2019 . We expect our
sales and marketing expenses to increase in absolute dollars in 2020 primarily
due to higher user acquisition expenditures related to expected launch of new
titles such as Disney Sorcerer's Arena, MLB Tap Sports Baseball 2020 and the
next iteration of Deer Hunter during 2020.
General and Administrative Expenses
Year Ended December 31,
2019 2018
(In thousands)
General and administrative expenses
5.6 % 8.6 %
Our general and administrative expenses decreased$8.5 million , or 26.7%, from$31.7 million in the year endedDecember 31, 2018 to$23.2 million in the year endedDecember 31, 2019 . This was primarily attributable to a$3.8 million decrease in stock-based compensation expense mainly related to the decrease in vesting probability of certain performance-based equity awards, a$2.7 million decrease in professional fees mainly due to lower accounting and consulting costs, a$2.6 million decrease in allocated charges for equipment, facilities and depreciation, a$741,000 decrease in indirect tax related expenses, and a$710,000 decrease in legal expenses due to the settlement of the lawsuit filed against us related to our acquisition ofCrowdstar . These decreases were partially offset by an increase of$1.4 million in payroll related costs and a$544,000 increase in other operating expenses. As a percentage of revenue, general and administrative expenses decreased from 8.6% in the year endedDecember 31, 2018 to 5.6% in the year endedDecember 31, 2019 . We expect our general and administrative expenses to increase slightly in absolute dollars in 2020 as compared to 2019 primarily due to increase in headcount. Restructuring Charges
During the year ended
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Interest and Other Income/(Expense), Net
Interest and other income/(expense), net, changed from a net expense of$235,000 in the year endedDecember 31, 2018 to a net income of$2.1 million in the year endedDecember 31, 2019 . Interest and other income, net during the year endedDecember 31, 2019 was primarily attributable to$2.3 million in interest income on money market funds and other investments, partially offset by$159,000 in foreign translation losses. In the year endedDecember 31, 2018 , interest and other expense, net was attributable to$581,000 of currency losses for the revaluation of certain account balances,$160,000 related to certain transition expenses, offset by$505,000 of interest income from our money market investment accounts. Income Tax Provision
Our income tax expense decreased from$549,000 in 2018 to$471,000 in 2019. The income tax expense in 2019 was mainly attributable to changes in pre-tax income inthe United States and certain foreign entities reduced by a benefit as a result of releasing the tax reserves in relation to closing a foreign subsidiary. The provision for income taxes differs from the amount computed by applying the statutoryU.S. federal rate principally due to the effect of our non-U.S. operations, non-deductible stock-based compensation expense, and change in foreign withholding taxes. Our effective income tax rates for future periods will depend on a variety of factors, including changes in the deferred tax valuation allowance, as well as changes in our business such as intercompany transactions, any acquisitions, any changes in our international structure, any changes in the geographic location of our business functions or assets, changes in the geographic mix of our income, any changes in or termination of our agreements with tax authorities, changes in applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in our annual pre-tax income or loss. We incur certain tax expenses that do not decline proportionately with declines in our pre-tax consolidated income or loss. As a result, in absolute dollar terms, our tax expense will have a greater influence on our effective tax rate at lower levels of pre-tax income or loss than at higher levels. In addition, at lower levels of pre-tax income or loss, our effective tax rate will be more volatile.
Liquidity and Capital Resources
Year Ended December 31,
2019 2018
(In thousands)
Consolidated Statement of Cash Flows Data:
Cash flows generated from operating activities 35,18132,286
Cash flows used in investing activities (5,438) (636) Cash flows (used in) / generated from financing activities (443)
2,181
Since our inception, we have generally incurred recurring losses and negative
annual cash flows from operating activities. We recorded a net income of $8.9
million in the year ended December 31, 2019 . As of December 31, 2019 , we had an
accumulated deficit of $431.6 million .
Operating Activities
In 2019, net cash generated from operating activities was $35.2 million , which
was primarily due to an increase in deferred revenue of $11.9 million mainly
attributable to an increase in revenue from titles with longer useful lives, net
income of $8.9 million , an increase in accounts payable and accrued liabilities
of $3.1 million mainly due to the timing of payments to our vendors, and other
assets and adjustments for non-cash items including stock based compensation
expense of $17.4 million , amortization and impairment of intangible assets of
$4.4 million , depreciation of $4.2 million and non-cash lease expense of $3.3
million . These changes were partially offset by a $6.6 million decrease in
accrued compensation due to lower variable compensation expense, a $3.4 million
increase in deferred platform commission fees attributable to higher bookings, a
decrease of $3.0 million in lease liability, a $2.0 million increase in accounts
receivable due to the timing of payments from our customers, and a $2.0 million
increase in other prepaid expenses.
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In 2018, net cash generated from operating activities was $32.3 million , which
was primarily due to an increase in deferred revenue of $17.9 million mainly
attributable to an increase in revenue from titles with longer useful lives, a
$7.0 million decrease in accounts receivable due to the timing of payments from
our customers, a $1.3 million decrease in other prepaid expenses, and
adjustments for non-cash items including stock based compensation expense of
$24.6 million , amortization and impairment of intangible assets of $9.1 million ,
depreciation of $3.9 million and warrant expense of $1.0 million . These changes
were partially offset by $13.2 million of net loss, a $10.2 million decrease in
accounts payable and other accrued liabilities mainly due to the timing of
payments to our vendors, a $5.4 million increase in deferred platform commission
fees attributable to higher bookings, a $2.7 million decrease in accrued
compensation, a $1.8 million increase in prepaid and deferred royalties and a
$947,000 decrease in accrued royalties.
Investing Activities
Our primary investing activities have consisted of acquisition/divestiture of mobile gaming companies and purchases of property and equipment and leasehold improvements for our offices.
In 2019, we used
In 2018, we used a net cash of
Financing Activities In 2019, net cash used from financing activities was$443,000 which was primarily due to$8.4 million of taxes paid related to net share settlement of RSUs. These cash outflows were partially offset by$8.0 million in proceeds received from option exercises and purchases under our employee stock purchase plan. In 2018, net cash generated from financing activities was$2.2 million which was primarily due to$9.3 million in proceeds received from option exercises and purchases under our employee stock purchase plan. These cash inflows were partially offset by$7.1 million of taxes paid related to net share settlement of RSUs.
Sufficiency of Current Cash and Cash Equivalents
Our cash and cash equivalents were$127.1 million as ofDecember 31, 2019 . Cash and cash equivalents held outside of theU.S. in various foreign subsidiaries were$2.5 million as ofDecember 31, 2019 , most of which were held by our Canadian and Indian subsidiaries. Under current tax laws and regulations, if cash and cash equivalents held outside theU.S. are distributed to theU.S. in the form of dividends or otherwise, we may be subject to additionalU.S. income taxes and foreign withholding taxes. We have not provided deferred taxes on unremitted earnings attributable to foreign subsidiaries, because their earnings are intended to be reinvested indefinitely. However, if any such balances were to be repatriated, additionalU.S. federal income tax payments could result. Computation of the potential deferred tax liabilities associated with unremitted earnings deemed to be indefinitely reinvested is not practicable. We expect to fund our operations, grow our business and satisfy our contractual obligations during the next 12 months primarily through our cash and cash equivalents and cash generated by our operations. We believe our cash and cash equivalents and cash generated by our operations will be sufficient to meet our anticipated cash needs for at least the next 12 months from the date of this report; however, our cash requirements for the next 12 months may be greater than we anticipate due to, among other reasons, revenue that is lower than we currently anticipate, greater than expected operating expenses, particularly with respect to our research and development and sales and marketing initiatives, use of cash to pay minimum guaranteed royalties, use of cash to fund our foreign operations and the impact of foreign currency rate changes, unanticipated limitations or timing restrictions on our ability to access funds that are held in our non-U.S. subsidiaries or any investments or acquisitions that we may decide to pursue. We expect to continue to use cash to fund minimum guaranteed royalty payments during 2020 as milestone payments become due on games we publish and/or develop that incorporate licensed property, as well as to fund the purchase price of any acquisitions. If the games we develop based on such licensing arrangements fail to perform in accordance with our expectations, we may not fully recoup these minimum guaranteed royalty payments. 57 Table of Contents If our cash sources are insufficient to satisfy our cash requirements, we may seek to raise additional capital. However, we may be unable to do so on terms that are favorable to us or at all. Contractual Obligations The following table is a summary of our contractual obligations as ofDecember 31, 2019 : Payments Due by Period from December 31, 2019 Total Less than 1-3 years 3-5 years More than 1 year 5 years (In thousands)
Operating lease obligations (1), (2)
40,150 11,540 22,460 6,150 -
Total contractual obligations $ 93,207 $ 16,040 $
36,386
(1) We have entered into a sub-lease agreement for one of our
future obligation amounts are net of the sub-lease payments.
The amount of tenant improvement allowance expected to be received in the (2) first quarter of 2020 for one of our office leases is netted off against the
future obligations amount.
We have entered into license and publishing agreements with variouscelebrities and other owners of brands, properties and other content to (3) develop and publish games and other software applications for mobile devices.
These agreements typically require us to make non-refundable, but recoupable
payments of minimum guaranteed royalties or license fees as up-front payments
or over the term of the agreement.
Off-Balance Sheet Arrangements
At
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we might not be able to fully offset these higher costs through price increases. Our inability or failure to do so could harm our business, operating results and financial condition.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
InFebruary 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases. InJuly 2018 , the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2018-10, Codification Improvements to Topic 842, Leases. ASU 2016-02 and the subsequent modifications are identified as "ASC 842". ASC 842 requires lessees to recognize most leases as assets and liabilities on the balance sheet. We adopted ASC 842 and its related amendments effective onJanuary 1, 2019 using the modified retrospective transition approach. See Note 9 "Leases" for the required disclosures related to the impact of adopting this standard and a discussion of our updated policies related to leases. InJanuary 2017 , the FASB issued ASU No. 2017-01, Business Combinations (Topic 805), which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for fiscal years beginning afterDecember 15, 2018 , including interim periods within those fiscal years. We adopted this new standard onJanuary 1, 2019 . The adoption of this standard did not have a material impact on our consolidated financial statements. 58 Table of Contents
InFebruary 2018 , the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard provides financial statement preparers with an option to reclassify stranded tax effects within Accumulated Other Comprehensive Loss to retained earnings in each period in which the effect of the change in theU.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The guidance is effective for us beginning in fiscal 2019, including interim periods within that fiscal year. We adopted this new standard onJanuary 1, 2019 . The adoption of this standard did not have a material impact on our consolidated financial statements. InJune 2018 , the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The guidance simplifies the accounting for share-based payments made to non-employees so the accounting for such payments is substantially the same as those made to employees. The guidance is effective for fiscal years beginning afterDecember 15, 2018 , including interim periods within those fiscal years. We adopted this new standard onJanuary 1, 2019 . The adoption of this standard did not have a material impact on our consolidated financial statements. InJuly 2018 , the FASB issued ASU 2018-09, Codification Improvements. This amendment makes changes to a variety of topics to clarify, correct errors in, or make minor improvements to the Accounting Standards Codification ("ASC"). The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and are effective upon issuance of the guidance. However, many of the amendments do have transition guidance with effective dates for annual periods beginning afterDecember 15, 2018 . We adopted this new standard onJanuary 1, 2019 . The adoption of this standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
InJanuary 2017 , the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This new accounting standard update simplifies the measurement of goodwill by eliminating the Step 2 impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The new guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new guidance becomes effective for goodwill impairment tests in fiscal years beginning afterDecember 15, 2019 , though early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. InAugust 2018 , the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This guidance adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement. This guidance is effective for fiscal years beginning afterDecember 15, 2019 , including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. InAugust 2018 , the FASB issued ASU 2018-15, Intangibles -Goodwill and Other -Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This guidance clarifies the accounting treatment for implementation costs for cloud computing arrangements (hosting arrangements) that are service contracts. This guidance is effective for fiscal years beginning afterDecember 15, 2019 , including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. InDecember 2019 , the FASB issued ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated 59 Table of Contents
group. This guidance is effective for fiscal years beginning afterDecember 15, 2020 , including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
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