Zynga Inc (ZNGA) CEO Discusses Q2 2013 Results - Earnings Call Transcript

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Zynga Inc (NASDAQ:ZNGA)

Q2 2013 Earnings Conference Call

July 25, 2013 05:00 pm ET

Executives

Krista Bessinger – Senior Director-Investor Relations

Mark J. Pincus – Chairman, Founder and Chief Product Officer

Don A. Mattrick – Chief Executive Officer

David Ko – Chief Operations Officer

Mark Vranesh – Chief Accounting Officer and Chief Financial Officer

Analysts

Douglas T. Anmuth – JPMorgan Securities LLC

Eric J. Sheridan – UBS Securities LLC

Arvind Bhatia – Sterne Agee

John A. Abraham – Morgan Stanley & Co. LLC

Heath P. Terry – Goldman Sachs & Co.

James M. Cakmak – Telsey Advisory Group LLC

Richard Greenfield – BTIG LLC

Doug L. Creutz – Cowen & Co. LLC

Brian J. Pitz – Jefferies

Operator

Good day, ladies and gentlemen, and welcome to the Zynga’s Second Quarter 2013 Results Conference Call. At this time all participants are in listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Krista Bessinger, Senior Director of Investor Relations. Ma'am, you may begin.

Krista Bessinger

Thank you, Sayid and good afternoon. Welcome to all of you who are joining us either by phone or webcast. On behalf of the entire Zynga management team, I would like to thank you for joining us this afternoon. We have with us, our new Chief Executive Officer, Don Mattrick; Mark Pincus, Founder, Chairman, and Chief Product Officer; David Ko, Chief Operations Officer; and Mark Vranesh, Chief Financial Officer.

Before we begin, please note that we’re targeting a 45 minute call today with approximately 25 minutes of prepared remarks followed by 20 minutes of Q&A. As a reminder, if you have questions, please contact Zynga investor relations at investors@zinga.com.

I would also like to remind you that during the course of today's call, we will make forward-looking statements related to among other things, our outlook for Q3 and 2013 and our operational plans and strategy. These forward-looking statements are typically preceded by word such as we expect, we believe, or similar statements. Actual results may differ materially from the results predicted. Factors that could cause or contribute to such differences include changes in our relationship with Facebook or the Facebook platform, the ability of key games to sustain or grow bookings, our ability to launch new games in a timely manner that are successful and possible changes in management or corporate strategy.

More information about factors that could affect our results is included under the caption, Risk Factors in our Form 10-Q and elsewhere in our SEC filings. Also I’d like to remind you that during the course of this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release and on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results.

This conference call is being webcast on the Internet and is available through Zynga’s Investor Relations website. An audio replay of this call will also be available on our website in a few hours.

With that, I would like to invite Mark Pincus, Zynga’s Founder, Chairman, and Chief Product Officer to open the call.

Mark J. Pincus

Thanks Krista. Thanks everyone for joining us today. I am excited to be on the call this afternoon to introduce our new CEO, Don Mattrick. We announced on July 1 that Don was joining our team. He has been in the job for little over two weeks. I want to quickly turn the call over to Don, but before I do that, I want to tell you briefly, why we believe it’s an incredible curve we are able to track down to our company and why I am confident he is the right person to lead Zynga into our next chapter.

His three capabilities that we needed in this job; first, we need a great game maker; second, a great CEO at scale; and third, a great entrepreneur. Here’s is what I mean by that. We need somebody who has a depth of experience and insight into game development and an understanding of what it really means to deliver a AAA game experience. To be CEO of Zynga, you have to come equipped with that, that’s not something you can learn on the job.

Second, we need experience managing of the scale. Zynga needs someone with the ability to direct large teams, while driving a focus perspective and a winning consumer product experience. Third, our industry moves fast. We need a CEO who has a depth of urgency and entrepreneurial commitment to winning.

Don has these three capabilities. He brings to Zynga a deep understanding of the level of commitment and dedication required to cultivate quality franchises that can convert our players into life-long customers. He turned Xbox LIVE into the worlds leading console gaming platform and he knows the value of long-term player networks. He has managed successively through dozens of platform transitions and he shares my vision and enthusiasm for the future of free to play and social gaming.

And most importantly, Don and I can work well together as partners. Don already has shown his passion by engaging right away with our products, players and people. The fact that Don chose on his first day to set up his desk in the middle of our formal studio, say’s a lot about the way he is going to approach managing our company.

Regarding my role, my top priority is to onboard Don and completely transition the CEO role to him. As Chief Product Officer, I’m excited to begin a new chapter, engaging more directly with our product teams and spending more time and focus on our near-term and long-term product roadmaps which as always been my true passion. And of course, I’m here to support Don and the rest of the team in whatever way I can to help as they chart the future along with me for the future of Zynga.

With that, I’m happy to turn it over to Don.

Don A. Mattrick

Thanks, Mark. Before I get into why I’m excited to be here at Zynga, I want to take a minute to acknowledge the great work that you and the team has done to get us to this point. Mark and I first met about five years ago, when Zynga was fewer than a 100 people. It was a small start-up with the vision of bringing social games to everyone. In that period of time, Zynga got lightning in the bottle and achieved in only a few years, what most companies take a decade or more to do.

Zynga has reached over 1 billion consumers, surpassed $1 billion in revenues and has more than $1.5 billion in cash and investment. The Company has redefined entertainment and brought gaming into the main screen. Joining Zynga is a once in a lifetime opportunity to partner with a founder like Mark. He is someone with a bold vision, not just for the Company but for the future of social games and a passion for delivering great consumer experiences. It’s really a privilege to be here and to lead this company. And I want to thank Mark for the opportunity to unlock Zynga’s full potential.

I’ve admired Zynga’s free to play approach for years, by making games social and acceptable to everyone, the talented teams here have changed the way so many people play. I came to Zynga to lead this business and apply some of the experiences that I’ve had in the last 30 years to ensure the long-term success of this company has realized. The Zynga has incredible assets to take advantage of the market and I believe its biggest days are ahead.

So, that’s why I joined the company, now, I’d like to share some of my early observations. It’s clear that the market opportunity around is growing at an incredible cliff. It’s also clear that today, we’re missing out on the platform growth that Apple, Google, and Facebook are seeing. In short, we can do better.

Over the course of the next few months, I will be working with our leadership team to challenge previous assumptions and to focus on business fundamentals, which candidly we struggled with over the past year.

We anticipate two to four quarters of volatility as we work through resetting and developing our strategy for growing top line revenue and profit. I will be detailing more of this in coming calls and look forward to keeping you up to date on our progress. Getting a business back on track isn’t easy and isn’t quick. We have a lot of hard work in front of us, but I believe we can succeed as a team and Zynga can do this.

Later on the call, I will be sharing my priorities over the next 90 days, but first I would like to invite David Ko to speak about this past quarter.

David Ko

Thanks Don and good afternoon everyone. I am going to provide an update on our operational performance in Q2 and then Mark Vranesh will cover our financials.

But before I begin, I would like to acknowledge that our performance has been disappointing, we recognize that, and we are taking proactive steps to improve. We are taking actions to streamline our cost structure including the reduction in the work force completed in Q2.

We brought in new leadership in Don and we are realigning our team to leverage our ability to scale across the business. Don is a tremendous addition to the management team and has been very helpful. Even the short time, he has been here, he has provided a fresh perspective and helping us challenge existing assumptions.

I am working with Don and the team to focus Zynga on generating new hits, growing, and sustaining large franchises, and driving efficiencies. While I will share some details today, you will hear more on this in the future.

Before jumping into the product detail, I want to cover the growth of the overall market as compared with Zynga.

On the web, Facebook reported their Q2 payments and other revenue was up 11% year-over-year.

On mobile, Apple reported their payments to developers over the last 12 months were up roughly 120% from the prior comparable period, and Google reported in May that Google Play and that purchases were up 700% year-over-year. It’s clear that the market around us is growing at a tremendous case, and it is equally clear that we’re not capturing our fair share. In short, these results are unacceptable and as Don stated, we can do better.

Our goal as a team is to come up with a plan to grow at or above the market and overtime to grow profits faster than revenue, while the transition will take time. We know that we can leverage our assets to capitalize on the $9 billion opportunity in social gaming and delivered truly great consumer experiences.

Moving to the operational performance, we’re not happy with the performance of our second largest franchise Zynga Poker. In Q2, while we still hold our leadership position in poker on both web and mobile, our competitors are closing the gap. In response, we’re deploying top talent to get this franchise back on track, and we’ll do more in the coming months to improve the experience for our players as well as the performance of the game. It’s important to understand however that this won’t happen overnight.

One of the primary reasons, bookings on Zynga Poker declined in Q2, was because of ongoing illegitimate credit card activity on the web. Performance is also being impacted by declines in web poker as user shift more quickly to mobile, and more casual, social casino games such as Slots.

The upside is that the mobile poker market overall is growing and we see growth opportunities at more casual land on the social casino spectrum on both web and mobile.

Now, I want to spend a minute talking about our approach to the social casino category and the change in strategy related to real money gaming. As we said throughout today’s call, Zynga is in a transition and we must stay focused and prioritize against the biggest opportunities that leverage our DNA in social and free to play.

While we continue to evaluate our RMG products in our UK tests, we are making the focus choice not to pursue a license for real money gaming in the United States. Our commitment to free to play, social casino is the reason that we acquired Spooky Cool in Q2, a developer of free to play social slots games. We like the team, their assets, their capabilities, and the synergies we believe they can unlock in our social casino business. We will continue to evaluate all of our priorities against the growing market opportunity in free social gaming including the social casino offerings.

Turning to Invest & Express category, we continue to grow our largest franchise, FarmVille. On a combined basis, FarmVille 1 and FarmVille 2 grew bookings year-over-year for the second quarter in a row, increasing by 29% in the second quarter of the same period last year. We also launched six new games in the second quarter including Hidden Shadows, casual object game on the web coming soon for tablet and five games on mobile spanning, Midcore and Casual.

We made a big portion to Midcore on mobile this quarter with three titles launched War of the Fallen, Battlestone and Solstice‬ Arena. We found that Midcore titles have a different growth profile, telling to build audience and bookings more slowly over long periods of time.

Last week, we launched Dojo Mojo to global audiences on the web, and coming soon to tablet. Dojo Mojo is our latest Midcore launch and takes a new twist on the action strategy category.

We also launched two Casual mobile titles this quarter including Running with Friends and Draw Something 2. While Draw Something 2 has been a disappointment, Running with Friends performed well. We’ve seen 64% of installs come from new to network players meaning this is the first with friends game they play, demonstrating the power of how a high quality game and a (inaudible) can grow our network of players.

Turning to the network, we’ve made progress in Q2 as we continue to build and launch new features including network logins with more than 6 million MAUs in the quarter, up from 2 million MAUs in Q1. Our goal with the network is to provide an instant world wide community of players centered on games for which they have a shared passion.

As we’ve said previously, there is not doubt that the transition to multi-platform represents a large opportunity for Zynga. But we are yet to fully deliver, so we are singularly focused on improving our execution and performance.

We believe we’re taking the right steps as we reduce costs and retool our teams and processes. 2013 as we said before is the year of transition. By that we mean it’s a time to reassess and reset as we continue to invest in better player experiences and push the boundaries of how and where games are played. We know there are challenges ahead, but we expect to exit the year in a better position to be the leader in social gaming across platforms.

With that, I’ll turn it over to Mark Vranesh.

Mark Vranesh

Thanks, David. Good afternoon, everyone. First off, I wanted to express how encouraged I am to have Don here with us in joining the team. He brings a tremendous amount of experience to Zynga, and I look forward to working with him.

With regards to the quarter, audience and bookings continue to decline, and we’re losing share on both web and mobile. And although we made progress with controlling costs in Q2, we recognized that cost control is not a replacement for top line growth.

In the long term, the best way to drive profitability is to grow the top line. Transitions do take time and as Don mentioned, we expect to see more volatility, than we would like over the next two to four quarters. That said, we’re confident we can do better and that we’re making the right decisions for the long run.

Now, let me take you through the detail. I’ll begin by covering Q2 results and conclude by providing our outlook for Q3 and the full-year. Note that many financial measures herein are expressed on a non-GAAP basis. Be sure to look at our earnings release issued earlier today and available on our website for a reconciliation of non-GAAP measures to the comparable GAAP metrics. On audience, as indicated in our press release, metrics were down meaningfully from quarter-over-quarter and year-over-year, while our monetization ARPU was up both quarter-over-quarter and year-over-year.

Turning to bookings, Q2 bookings were $188 million and at the high-end of our original outlook range and $3 million above our updated outlook provided on June 3. Web bookings were down 44% year-over-year and 22% quarter-over-quarter driven primarily by lower web user pay, but the largest declines year-over-year and quarter-over-quarter, coming from older bill games and Zynga Poker.

Mobile bookings were up 1% quarter-over-quarter, that’s down 12% year-over-year as new mobile game launches did not generate enough bookings to offset aging live games. And in particular, job something was a difficult year-over-year comparable. Mobile bookings represented 19% of bookings a year-ago and 27% of bookings in the second quarter of this year. Facebook related bookings were 68% of total.

Moving onto revenues, GAAP revenue in the second quarter was $231 million, down 31% year-over-year and from a geographic perspective, 60% of revenues came from the U.S. Our top revenue generating games for the second quarter were Zynga Poker, FarmVille and FarmVille 2, which comprise 20%, 16%, and 15% of our online game revenue respectively. No other game contributed more than 10% to the quarter.

Now let me walk you through operating expenses. Cash operating expenses were down $22 million quarter-over-quarter, primarily driven by lower labor, outside services and technology spend. In addition to the progress we made, we remained focused on cost controls and continue to see incremental opportunities to drive further savings in 2013. Note that the amounts I'm about to mention excludes stock-based expense of $26 million and restructuring costs of $25 million.

In Q2, cost of revenue was $62 million, down 33% year-over-year driven primarily by lower tax, amortization from acquisitions and outside services spend. R&D expense in Q2 was $89 million, down 16% year-over-year largely due to lower labor costs. The results above drove a better than expected adjusted EBITDA of $8 million in Q2 and this resulted in a 4% adjusted EBITDA to bookings margin.

In Q2 we reported a non-GAAP benefit of $70 million, the benefit was driven by non-recurring change in our estimated jurisdictional mix of earnings. This resulted in a non-GAAP net loss of $6 million or $0.01 loss per share. Our non-GAAP diluted weighted average share count was 794 million shares in Q2.

Turning to our balance sheet, we ended Q2 in a strong position with cash and marketable securities of approximately $1.5 billion, down $138 million from Q1. In Q2, we made a treasury decision to retire all $100 million of our outstanding debt as the interest expense was higher than what our cash was earning. Additionally, we used $19 million in cash for restructuring and acquired Spooky Cool Labs, which was a net use of cash equal to $18 million.

With regard to our authorized share repurchase plan, no shares were repurchased in the quarter. However, we continue to evaluate the best uses of our cash to fund the growth in the long-term enterprise value of our Company.

Looking at cash flow, cash flow from operations was negative $1 million. CapEx was $1 million in Q2 and $6 million for the first six months of 2013, which compares to $78 million for the first six months of 2012 excluding the purchase of our building. Overall, we ended the quarter with negative free cash flow of $14 million.

Headcount was 2,360 at the end of Q2, down 628 quarter-over-quarter, primarily due to the previously announced reduction in force.

Let me now turn to our outlook. For Q3 2013, we expect bookings between $125 million and $150 million, down sequentially from Q2, reflecting the decay of older existing games and slow traction with newer mobile game launches. We see Q3 adjusted EBITDA between negative $30 million and breakeven and non-GAAP loss per share between $0.05 and $0.09 based on a share count of approximately 803 million shares to 813 million shares.

On a GAAP basis, we expect revenue between $175 million and $200 million, net loss between negative $43 million and negative $14 million and GAAP loss per share between $0.02 and $0.05 based on the same share count of approximately 803 million to 813 million shares.

For the full year 2013, we’re targeting adjusted EBITDA margins in the range of 0% to 5%, reduced from the previous range of 0% to 10% primarily to reflect lower bookings.

A few other notes; stock-based expense for Q3 is expected to be approximately $32 million and CapEx for 2013 is expected to be $25 million, down from our previous guidance of $35 million.

With respect to taxes, we expect to pay foreign and state cash taxes of $3 million to $5 million in 2013, but otherwise we do not expect to be a cash tax payer. We expect to begin paying federal cash taxes in the U.S. within the next three years after we deplete our stock-based compensation deduction. And we expect our long-term normal operating tax rate to be approximately 25%.

For the full year, we expect equity grants to employees net of forfeitures will result in 6% to 8% increase in diluted share count from the end of 2012. Over the long-term, our aspiration is for 4% dilution or less as in prior years.

In summary, while we have made progress in bringing down the Company’s cost structure, we have yet to offset the bookings declines from many of our older games. We’re not happy with our results and we are focused on reinvigorating the Company and getting back to top-line growth in a meaningful, predictable and sustainable way.

And with that, I’d like to turn the call back over to Don.

Don A. Mattrick

Thanks, Mark. There is no denying we’re not where we want to be. We’ve not met our investors’ expectations, we’ve not met our own expectations and most importantly, we’ve not met our players’ expectations. But there is also no denying we have what it takes to get back to winning. I know we can do better. We need to get back to basics, that means taking a longer term view on our products and business, developing more efficient processes and tightening up execution all across our leadership team and company. And as we reset, we expect to see more volatility in our business than we would like over the next two to four quarters.

So here’s what I’m focused on in the next 90 days. Getting under the hood to evaluate every aspect of our business, conducting top to bottom business reviews and working with our leaders to calibrate against the market opportunity and giggle after it with a real sense of urgency. Spending time heads down with our teams and focusing on improving our product quality. Looking at how we’re deploying people at all levels of the company and also I’m going to use next 90 days to assess and recess our product pipeline.

I see the potential in all parts of our business from regaining share on Facebook to leveraging our IT, our network and our knowledge for mobile. And because of what the company has already achieved, I believe we have the same power to successfully navigate our transition and create connected experiences that span multiple devices and multiple operating systems.

Zynga is still a young company, and we have the ability to break some bad habits and get back to good fundamentals. And while my approach in the first few weeks is to listen and learn, when it becomes clear, we’ll change it necessary or move quickly and decisively to do what’s in the best long term interest of our players, employees and our shareholders.

The next few years will be a time of phenomenal growth in our space. This is a relatively new market that has proven that a hit franchise can generate more than $1 billion in bookings. From box office to music, to console to TV few things in the history of entertainment have grown as quickly, while creating such incredible value. As our market grows the hits are only going to get bigger. Zynga has incredible assets, to take advantage of that growth and I believe its biggest opportunities are ahead. They were good wins at our back and my job is to get our sales up and Zynga pointed in the right direction.

And with that, operator, we're happy to open up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Douglas Anmuth from JPMorgan.

Douglas T. Anmuth – JPMorgan Securities LLC

Great. Thanks for taking the question. Don, just, I know it's still pretty early days, but I'm wondering if you could just talk about some of your initial observations around the allocation of R&D resources and how you sort of think about going forward allocating resources between existing franchises and newer ones? Thanks.

Don A. Mattrick

Thank you, Doug. It's a great question and something that I'm actively engaged with the team right now. What we're really trying to do is get our products to realize the full potential. We've got great people on our teams candidly a little bit more focused, a little bit more polish is what we need to realize our full potential to compete and to lead in this market. So we're using those filters, applying it to our product teams and I am personally really encouraged with what I've discovered so far and look forward to getting more time with our teams in the coming weeks to go further.

Krista Bessinger

Operator, next question please?

Operator

Thank you. Our next question comes from Eric Sheridan from UBS.

Eric J. Sheridan – UBS Securities LLC

Yes, hi. So, Don, just a quick question about how you think about the assets that fits inside the company today, thinking about the roadmap for developing games internally as well as looking outside Zynga for development challenge and to our product and how you sort of think longer term about the entire ecosystem around the Zynga brands and where you would like to take that back? Thanks.

Don A. Mattrick

Sure. The first thing that I am trying to put a lot of focus on is just making sure that we are effectively using all of the talent that we have here onsite. So a real commitment to maximize against the potential of our internal talent, our hit products, driving product quality, migrating our business to mobile and really placing best that I believe will lead to new hits in the future.

So, that’s an obvious place for us to starting focus. As we build that out and as we succeed, well we continue to look at the external world and find effective ways to partner to engage with other creators, yes, we will. But in the early days, I am heads down focused on our internal business.

Krista Bessinger

Great. Operator, next question please.

Operator

Thank you. Our next question comes from Arvind Bhatia from Sterne Agee.

Arvind Bhatia – Sterne Agee

Thanks for taking the question. A couple of quick ones; one, just going back to the real-money gaming opportunity that was talked about in the past and that you are no longer pursuing. Can you maybe just talk about, is it a resource issue, bandwidth issue, why not keep it on a consideration over the coming quarters and then tested out in the U.S.? That’s the first question.

And then, in terms of the guidance, this is of Mark, your guidance for bookings is 125 to 150 for the third quarter whereas your EBITDA spread is more than that $25 million spread, that’s one. And then within that, I am wondering are you implying that 150 is your new breakeven level and can we kind of think about that and extrapolate it? Thank you.

Don A. Mattrick

I will direct the questions. I will let David take the first part on RMG and Mark if you want to talk about the financial question.

David Ko

Thanks Arvind. I’ll handle the RMG as Don just mentioned. So, decision we made around RMG, really centered around focus. And so as we looked at the social gaming, free to play opportunity which continues to grow. We’re not executing against that. And so, we really just centered around focus.

Mark Vranesh

Yeah, hi, Arvind, its Mark Vranesh. On the guidance spread, we did call out in the body of our remarks that we were looking at more volatility over the next two to four quarters. So that’s what’s happening there and $150 million isn’t necessarily the new breakeven lever, but it’s obviously in that range.

Krista Bessinger

Great. Operator, next question please.

Operator

Thank you. And our next question comes from Scott Devitt from Morgan Stanley.

John A. Abraham – Morgan Stanley & Co. LLC

Hi, this is John Abraham for Scott. Just on FarmVille 2, there was a talk about mobile and tablet version, potentially coming out and since that seems to be the best performing franchise and we’ve seen enough success from competitor games like Hay Day, shouldn’t that be a top priority?

And second part, I was just wondering, you’ve got a couple of Editor’s Choice Awards from Apple. What you’d say the biggest challenge in mobile today, is it distribution more so than the actual game development? And if people are playing, are they interacting with the game well and it’s really just not getting a big enough audience for these games? Thanks.

Don A. Mattrick

David, go ahead.

David Ko

Sure, thanks John. So, Don mentioned, I’ll handle the first one around FarmVille. As we look at the entire slate, we are right now extremely focused as I said before on three activities and that is generating new heads, growing and sustaining large franchises and driving efficiencies. FarmVille 2 as I talked about earlier with FarmVille 1 grew in the last quarter, and absolutely we need to think about moving to mobile and thinking about multi platform. So I would say, stay tuned there, and we understand that opportunity continues to grow.

In terms of the bigger challenges that we see in mobile today, it really centers around the user experience, so we spend a lot of time focused on building great experiences that our players love to play on the web. As we move to think about how those experiences translate to mobile and to tablets, we recognize that we have to think differently, we have to think from a mobile first experience. So that’s some of the mindsets that we have been having to change and work on as a company.

Krista Bessinger

Thank you. Operator, next question, please.

Operator

Thank you. Our next question comes from Heath Terry from Goldman Sachs.

Heath P. Terry – Goldman Sachs & Co.

Great. Don, curious, your opinion as you joined Zynga on the product pipeline and your immediate reaction in terms of areas from a product perspective that you wanted to make incremental investment either from genre or platform perspective?

Don A. Mattrick

Great. Thanks Heath for the question. So I know that there is investors listening and is potentially competitors, so I am going to skim this, what I think is the right level to address the questioners and investors, but not to give a roadmap to others who want to be competing with us.

First thing I have discovered from being here is, there is a great talent base, both in the engineering side in running live services. We do have a pipeline. We are going through a review against it. I think it has a lot of potential when you look at it in the context of hit products connecting through social spanning, multiple devices and multiple operating systems. Candidly, I don’t think we have delivered fully against that vision, and that’s the first place that we are going to start with focusing in on our core hits, dialing up product quality and navigating the transition to mobile.

In relation to new products, we've got new products in various stages, things all the way from preproduction and concept, things being prototyped at a simple game mechanic level, products that are further in their development cycle moving through gates, and we're going to continue to nurture and work that pipeline, pay attention to it pick winners, polish them up, and hopefully create new hits in the future.

Heath P. Terry – Goldman Sachs & Co.

Great.

Krista Bessinger

Thank you. Operator, the next question please?

Operator

Thank you. Our next question comes from James Cakmak from Telsey Advisory Group.

James M. Cakmak – Telsey Advisory Group LLC

Thanks for taking the questions. Don, congratulations on your appointment. And, I guess you have some time to think about Zynga prior to joining the team and evaluate it from the outside. I guess can you just talk about what are the areas that gave you confidence that Zynga that it was all the competitive challenges that the company has been facing for about the last year or so now. What are the areas that give you confidence that this company does have the potential indeed to turn around and prosper?

And then secondly, you guys outlined the strategy at the beginning of the year focusing on the four verticals as well as putting the mobile first. It seems that just given the recent trend, is there anything that has changed in your view of the market from when you articulated your strategy from the beginning of the year to where we are today? Thank you.

Don A. Mattrick

Well, I take the first part of the question, which is what gives me confidence inside of Zynga. For myself, personally I've been involved in dozens of platform transitions, and when companies have great assets, when they have hits, when they have great people, when they're viewing and expanding growth market.

It frequently just takes a little bit of extra attention to detail, a little bit of extra focus, a little bit of extra discipline to unlock the potential of that emerging market. I think that’s what we’re going through right now.

When I think about Zynga and what made me excited to come here, the free-to-play model is great, advertising is great. The opportunity to give people instant access to the experiences and services that we create right around the globe in a market that’s growing dramatically, that’s pretty exciting stuff. It’s hard to get to scale in any business. Zynga has gotten to scale and now we need to find ways to use that scale for its full advantage. So, having 2,300 people inside the Company, that’s a great asset being based in downtown San Francisco, which is a very creative, very technically competent area of the world. That’s exciting, and just the energy that exists inside the Company. The management team is plugged in, the Board is plugged in and I just found it incredibly fun to be here over the past two weeks.

In relation to prior guidance, I’ll let David take that.

David Ko

Sure. In terms of the [market] I’ve used in the beginning of the year, if anything we are continuing to become even more bullish on the mobile market opportunity. We’ve seen the mobile market and third-party research show us that it continues to grow both from phones and tablets. I think in our view it’s that we haven’t been executing against this market opportunity and this is why we continue to reiterate focus. Thank you.

Krista Bessinger

Operator, next question?

Operator

Thank you. And our next question comes from Richard Greenfield from BTIG.

Richard Greenfield – BTIG LLC

Hi. Few questions. First, Don, when you look at the mobile gaming space and what you see in games that you may have played, what makes it great mobile game, and what do you think are the characteristics that need to be part of that? That’s question one.

On the second one, I think you just mentioned that you currently have 2,300 employees and from what has been reported, company King.com has about 400 employees. And so, I’m wondering given that they’re keen to be making more money now than Zynga, why is one of the first moves not to cut the Company in half or in a quarter, gaining a substantially greater contraction of the employee base than what’s been previously announced?

And then just last question, I think Poker on your numbers, went from $50 million to $40 million sequentially. I think you’ve touched on some of the reasons behind that, but if that math is right, could you give us a sense of, is that hitting the bottom or do you think that that number based on the changes that you are seeing still has further to go? Thanks.

Don A. Mattrick

All right. So, hey, Rich thanks for the three-part question. Let me take the first part. So what makes a great mobile game? Obvious answer, it’s just incredibly fun, and people love to play. People love to share with their friends and it’s easy to get in and out of over the course of the day. That’s part of the benefit that a mobile [always] brings with you. It’s just quick access in and out of experience, experiences that you love, the ability to share with friends, with family, I think, are kind of core to that.

In relation to what Kings accomplished, I think they’ve done an incredible job. I think they’ve built a great hit. I’ll fess up. I am a Candy Crush player and I’ve enjoyed it, evangelized it and it’s lived up to those attributes that I spoke about in the first place.

Imagine if we can start getting the leverage out of our 2,300 people that Kings is getting out of their 400 people. Would we be driving better financial results? I believe we would, and I think it’s an opportunity for us to look at the challenge of what are we creating, how we’re effectively using the scale that we built as a company, because this market is going to expand. It is going to get more competitive and people are going to be measured about where they position themselves in charts to quality of the teams and the long-term sustainability. So while we got a lot of work to do, I see a lot of opportunity in having the collection of people that we've assembled. And in relation to the Poker part, I'm going to hand that over to David.

David Ko

Sure. Rich in relation to poker, as I stated earlier we are not happy with the performance of Zynga Poker, but we do recognize and we're putting top talent against this franchise for having some things that have been attributed to why that group continues to underperform, but here's the thing. We love the category. We see that mobile market is growing overall. We are taking steps to rectify that and you’ll hear more from us soon.

Krista Bessinger

Operator, next question please?

Operator

Thank you. Our next question comes from Doug Creutz from Cowen & Company.

Doug L. Creutz – Cowen & Co. LLC

Yeah, thanks. This is a question for Don. If I think about the mobile market and I think about kind of the top games, let's say 12 months ago there was a lot of turnover in that top 20, did a couple of games like Angry Birds. They were consistent, but it was sort of in the list from month than out. Now we're seeing a lot more consistency from month to month for the top games and they're getting bigger and bigger and bigger.

You're talking about a transition period of two to four quarters. And I just wonder are you concerned that two to four quarters from now the winners in the mobile space have can get to another big step forward that the potential sort of getting back into the game could be difficult. Thanks.

Don A. Mattrick

Actually Doug, I feel it's the exact opposite. I see there is opportunity. I love the fact that the top 10 positions are stabilizing. I know that we have the capabilities to create future hits to own some, aspirationally all of those top 10 chart positions and as the market grows, and we find an effective way to put our 2,300 people to work, I think we can build a pretty great business.

So, it’s exciting to me. Well it’ll take some time to get it perfected to put everyone into the right place to have the focus and discipline that I’m going to want to see from Zynga. It’s going to take two to four quarters and that’s why I said that expectation, I think it’s the right expectation for our investors and our staff and I’m personally energized and excited about what we’re going to be accomplishing in that time period.

Krista Bessinger

Operator, I think we have time for just one last question, please.

Operator

Thank you. And our final question comes from Brian Pitz from Jefferies.

Brian J. Pitz – Jefferies

Thanks, two quick questions. Looking at the mobile business, how do you differentiate the opportunities an IOS versus Android particularly in Asia where Android is obviously gaining more share? And then Don, in the console world we’ve seen the major publishers focus, it’s not really on fewer, bigger and better, so less titles. How should we think about the number of titles that you’d tend to really release going forward? Are we going to see a consolidation here, let’s get your take on that? Thanks so much.

Don A. Mattrick

Sure, well, I think we’re seeing substantial growth both in IOS and Android. As smartphones and tablets move around the globe, I think you’ll see the monetization levels rise for both formats. I know that traditionally there has been a bit of discrepancy between the rates that are occurring on IOS and Android. But we see that as growth and opportunity as we look into the future.

And look, what are we trying to get to? We’re trying to get to hits. So, there is multiple strategies that people can take, people can focus. If you’ve got a small number of people, you might be able to affectively drive one or two products in the market. We have a larger collection of people, so we’re going to be trying to get top hits and we are going to be trying to get more than one or two of them in the coming two to four quarters.

We have hit franchises already inside of the company, products like FarmVille, products like Poker, the investment that we’re making in social casino and things like Words With Friends, all have tremendous potential. So we’re not starting with an empty cover and we have new products that we are going to be creating and nurturing and taking to market in the future and I hope that that’s going to net us out more than one or two spots on the Top 10 charts.

David Ko

In relation to number of titles, I think my ideal aspiration is 10 out of 10 in the top of the charts. It’s going to take us probably longer than four quarters to get to that, but that’s the long-term vision that I think the company should measure itself against.

Krista Bessinger

Great. Thank you all for your time today. We look forward to speaking with you next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.

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