Zynga Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.31.14 | About: Zynga (ZNGA)


Q4 2013 Earnings Call

January 30, 2014 6:00 pm ET


Darren Yip

Don A. Mattrick - Chief Executive Officer and Director

Clive Downie - Chief Operating Officer

Mark Vranesh - Chief Financial Officer and Chief Accounting Officer


James Cakmak - Telsey Advisory Group LLC

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Edward S. Williams - BMO Capital Markets U.S.

Brian J. Pitz - Jefferies LLC, Research Division

Christopher Merwin - Barclays Capital, Research Division

Michael J. Olson - Piper Jaffray Companies, Research Division

Eric James Sheridan - UBS Investment Bank, Research Division

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

Kenneth Sena - Evercore Partners Inc., Research Division

Benjamin A. Schachter - Macquarie Research


Good day, ladies and gentlemen, and welcome to the Zynga Fourth Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Darren Yip, Director of Finance and Investor Relations. Sir, you may begin.

Darren Yip

Thank you, Sam, and good afternoon. Welcome to all of you who are joining us today. On behalf of the Zynga management team, I would like to thank you for spending time with us this afternoon.

We have with us our Chief Executive Officer, Don Mattrick; Chief Operating Officer, Clive Downie; and Chief Financial Officer, Mark Vranesh. Before we begin, please note that we are targeting a 1-hour call. Please contact Zynga Investor Relations at investors@zynga.com for any follow-up questions.

During the course of today's call, we will make forward-looking statements related to, among other things, strategy and expectations for future performance, the acquisition of NaturalMotion and outlook for Q1 and 2014. Actual results may differ materially from the results predicted. Factors that could cause or contribute to such differences are detailed under the caption Risk Factors in our Form 10-Q and elsewhere in our SEC filings. These include the ability of key games to sustain or grow bookings, our ability to launch new games in a timely manner that is successful and delays or other challenges in our ability to close and implement the acquisition of NaturalMotion.

We will also discuss certain non-GAAP financial measures during the call. Reconciliations to the most directly comparable GAAP financial measures are provided 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.

Certain information provided on this call related to NaturalMotion's financial and operating results including, but not limited, to bookings and adjusted EBITDA, is based on unaudited estimated results provided by NaturalMotion and were originally reported on a net basis in accordance with U.K. GAAP. Accordingly, we have made adjustments to platform fees to reflect gross results for mobile online bookings for comparison purposes. In addition, any expectations in terms of our bookings growth and GAAP and non-GAAP EPS as a result of the proposed acquisition are based on these adjustments and assumptions, some or all of which may ultimately prove inaccurate.

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 turn the call over to Don Mattrick, Zynga's Chief Executive Officer.

Don A. Mattrick

Thank you, Darren. Good afternoon, everyone, and thank you for joining us on such short notice. We moved the timing of our earnings call in order to coincide with today's announcement that we've signed an agreement to acquire NaturalMotion. During our call, we'll be discussing our Q4 financial performance, outlook for Q1, outlook for 2014, as well as our content strategy going forward. We will also detail the cost-reduction plan we announced earlier today, and we'll close by highlighting the strategic value NaturalMotion brings to Zynga.

Before I detail out our results, I would like to share the 3 areas of focus that myself and our team have been applying energy against. The first area is how we grow and sustain hits that consumers have validated over multiple years. The second area is how we enhance our capabilities to create new hits. The third is how we do both of the above in a more efficient manner. These are the areas of focus that we've been applying to take our business into the future.

Looking at Q4, we had a strong finish to the year and generated great momentum going into 2014. We are stabilizing our core business and delivered solid financial results above the high end of our previous outlook range. In Q4, we generated bookings of $147 million and adjusted EBITDA of $3 million. In addition to our solid quarterly performance, we achieved our full year profitability goal on an adjusted EBITDA basis.

In terms of our core business, the investments that we are making to grow and sustain our biggest franchises are beginning to bear fruit, particularly in our Words with Friends and Casino franchises. The Words with Friends franchise grew bookings by 33% sequentially, delivering the biggest quarterly bookings in the game's 5-year history. This outperformance confirms the enduring appeal of this franchise and also highlights Zynga's ability to acquire and scale assets that engage and delight players.

In Q4, our Casino franchise achieved sequential quarterly growth in bookings for the first time in the past 18 months. We've stabilized our revenue in our flagship Poker product by taking decisive actions to combat fraud and create a more trusted, higher-quality consumer experience. This progress yielded an 8% sequential audience growth for Poker mobile.

At the end of the quarter, we brought a new mobile slots game, Hit it Rich to tablet. Hit it Rich is meeting our expectations and is currently #1 on the free iOS charts in the casino category. Slots is one of the fastest-growing segments in the casino category, and we are delivering more new games to meet the demand of this highly engaged community. I'm excited to announce that we plan to launch our latest mobile slots product, Riches of Olympus, to global audiences in the next 2 weeks. I'm proud of the team's progress across the Casino and Words with Friends franchises, which illustrates that with improved quality, sharper focus and better execution, we can achieve better results.

Another positive event that occurred in Q4 was the resolution of a patent lawsuit. We are pleased to report that the jury returned a unanimous victory of non-infringement in Zynga's favor. We achieved an unprecedented victory in this case, and we spent considerably less in legal expenses than we expected to achieve this win. We remain committed to doing the right thing by vigorously defending ourselves against lawsuits that we believe lack merit.

I'm now going to speak to our performance outlook for Zynga, excluding NaturalMotion. As we look ahead to 2014, we expect that Q1 will be a solid foundation for a year of growth. For Q1, we expect bookings to be in the range of $130 million to $140 million and our adjusted EBITDA to be in the range of $5 million to $10 million. We anticipate that Q1 will be the bottom and that we will achieve sequential growth in each successive quarter throughout 2014. We expect substantial improvements for the remainder of the year across audience, bookings and adjusted EBITDA as we continue to further diversify our cross-platform revenue mix.

In relation to 2014 for Zynga, excluding NaturalMotion, we expect bookings to be in the range of $690 million to $730 million and adjusted EBITDA to be in the range of $50 million to $75 million. This represents potential adjusted EBITDA growth of 60% year-over-year and reflects our focus on growing and sustaining top franchises, creating new hits, reducing our costs and growing on mobile. Let me reiterate; this is the organic growth in our core business and excludes any contributions from NaturalMotion.

As you've heard us talk about previously, our growth on mobile is paramount. 2014 is expected to be a landmark year for us in terms of growth on mobile screens. Throughout the year, you'll see a major shift in our content pipeline as we apply more focus on achieving this goal.

In terms of our franchises, I'm pleased to announce that we plan to bring FarmVille to mobile in Q2 of this year. We pioneered farming for the mass market and have a rich history developing this brand with consumers. More than 400 million people around the globe played our FarmVille franchise on Facebook, and we are eager to tap into that audience and delight them with our upcoming launch.

In terms of our new product pipeline, 75% of all new games in development are mobile first, a significant milestone for our company as we move to meet the mobile consumer demand. And, in 2014, for the first time in the company's history, we expect to see our mobile booking surpass our Web bookings and account for more than 50% of our bookings base.

Before moving into the NaturalMotion acquisition, I would like to spend a few minutes discussing the progress we've made at Zynga. Over the last 7 months, our teams have been working with a greater sense of urgency. We're in the first chapter of our top line growth story for our core business. We are committed to delivering long-term operating leverage, healthier margins and positive free cash flow. We expect to see sequential growth in bookings and adjusted EBITDA, and we're now setting our sights on driving audience growth.

Our teams have sharpened their focus on running over 30 live services and, at the same time, we've allocated time and resources to create several new products. In the coming months, we'll provide more detail about these new starts, but I'm pleased with the rigor our teams have applied in terms of learning valuable customer insights and thinking about how we can differentiate our offerings relative to competitors.

Zynga is getting back to its roots of innovating and social, and we're committed to refining our skills in the art and science of creating new hits. Our goal, from a content perspective, is to create top hits that engage mainstream global audiences. Our winning aspiration is to be the industry leader by delivering more #1 games than any other competitor.

We believe that there are a number of new addressable content genres where we can build organizational muscle. In 2014, we expect to move aggressively into new genres that align with the timeless entertainment categories that consumers care about.

We know that across our industry, a top 20 hit on mobile and Web can generate between $100 million to $300 million in bookings per year. A game that is able to hit the top of the charts and sustain the #1 or #2 positions should be able to generate in excess of $1 billion per year. Our market is growing as measured by device, audience and dollars, and we have the privilege to compete in one of the fastest-growing parts of the entertainment industry.

As I mentioned, we have conviction in several new product starts inside of Zynga in addition to the promising creative pipeline from NaturalMotion. We are building more complete creative and technical teams, and our leaders are making smart product investments to execute on the highest priority consumer opportunities. We have an ambitious agenda, but we're moving quickly to add capabilities that are complementary and strategic to our core growth plans.

In the last 2 quarters, I've spent time interacting with our teams and reviewing with our leaders better ways to align our business in a more disciplined way. As you can see from today's workforce reduction of approximately 15%, which affected 314 people, we're rightsizing our team structure to align our resources with the best opportunities for growth. These are difficult but important actions that should help us drive improved results and create a new foundation for future growth.

On a personal note, it's always challenging when you have to redeploy and redirect across the business. We're saying goodbye to many good people, and I want to thank them for their contributions to Zynga. We wish our friends and colleagues well and know that they will have future successes.

Our work over the last few quarters has created tremendous foundation for organic growth, and our acquisition of NaturalMotion will allow us to significantly accelerate that trajectory. We believe that NaturalMotion is perfectly aligned with our core organic growth strategy, and that bringing Zynga and NaturalMotion together is a bold step in the right direction at the right time. By acquiring NaturalMotion, we can significantly expand our creative pipeline, accelerate our mobile growth and bring next-generation technology and tools to Zynga that we expect will fast-track our ability to deliver more hit games.

For those of you who've followed the game industry over the last 10 years, you may know NaturalMotion for their ability to wow consumers with their creativity and technology and create player experiences that previously seemed impossible. The company was founded in 2001 and is comprised of approximately 260 people in London, Brighton, Oxford and San Francisco.

Throughout our diligent process, I become even more impressed with the talented teams and game-making philosophies at NaturalMotion. They are a renowned group led by seasoned creative and technology leaders, including cofounder and CEO, Torsten Reil; and VP of Games, Barclay Deeming. Torsten, who will report to me, is an Oxford graduate who has a relentless commitment to quality and innovation.

Torsten and the NaturalMotion team have created a winning culture anchored by their passion for producing groundbreaking technology and high-quality entertainment that redefines the industry. Their expertise will be complementary to the focus and talent we have at Zynga.

NaturalMotion's creative assets make this a tremendous value for us and our consumers. They are leaders in 2 important entertainment categories: Racing with CSR and CSR Classics; and people simulation with Clumsy Ninja. CSR is a top mobile racing game, having achieved top of the charts status in more than 20 countries across paid and free Apple iOS charts. Clumsy Ninja achieved 10 million downloads during the first week of its launch in November and became the #1 free game in the Apple App Store. We believe in the future growth of racing and people, and will work with NaturalMotion to grow these games into global franchises.

Their content pipeline, which aligns perfectly with our content strategy, brings significant value to Zynga and our players. We will, in total, have 5 top brands and capabilities in farm, casino, words, racing and people. I'm excited about NaturalMotion's strong and growing new mobile pipeline, which reflects the fit, finish and polish that players have come to accept in hit experiences.

I also look forward to working with the NaturalMotion teams to leverage Zynga's expertise in social. In terms of our social insights, we know people love to create, share and express themselves, and I expect our teams to do great work together to further unlock this with consumers. I believe in their culture and expect the union of Zynga and NaturalMotion to be an accelerant for both businesses in bringing more mobile hits to players.

Finally, as I alluded to earlier, NaturalMotion's technology and tools pipeline are unmatched and represent a significant leap ahead in our ability to deliver next-generation entertainment. We believe their cutting edge technology called Euphoria will light up the future of our industry on mobile. Their proven simulation technologies have powered some of the biggest entertainment properties across gaming, showing up in titles such as Grand Theft Auto V, as well as the iconic movies like Lord of the Rings.

The company will continue to publish games under the NaturalMotion brand and will continue to license Euphoria to leading creative partners. Zynga owns the exclusive proprietary rights to develop this breakthrough technology and apply it to any of our existing and future mobile games.

At this point in time, when we look at the market growth and potential for NaturalMotion to create shareholder value, we believe the acquisition will offer an excellent rate of return. We will pay $391 million in cash and issue approximately 39.8 million shares to acquire all the shares of NaturalMotion. Approximately, 11.6 million of the 39.8 million shares will be subject to vesting conditions and targeted for employee retention. Using the closing share price on January 29, the total consideration is approximately $527 million. After completing our acquisition of NaturalMotion, we will have no debt and approximately $1.2 billion of cash and marketable securities.

We remain committed to executing a balanced capital allocation, knowing that the strength of our balance sheet is a fundamental value driver for our company. We evaluate all opportunities against our cost of capital, and we want to invest in the best opportunities, which may include mergers and acquisitions, organic growth or share buybacks.

NaturalMotion is a high-potential company that has its greatest growth days ahead of it. We believe that there are significant synergies between our 2 businesses that will create compelling value for all of our shareholders. We expect NaturalMotion to be immediately accretive to our 2014 non-GAAP EPS by $0.01 and further accretive in 2015.

I have already outlined our base case for growth in our core business, which would yield bookings in the range of $690 million to $730 million and adjusted EBITDA of $50 million to $75 million. At the high end of our outlook, this represents organic growth in bookings and 60% growth in adjusted EBITDA year-over-year.

Inclusive of NaturalMotion, we expect to achieve total bookings in 2014 of $760 million to $810 million and adjusted EBITDA of $65 million to $100 million. This means we expect to achieve total growth of 6% to 13% in bookings in 2014. And, at the top end of our outlook, adjusted EBITDA would more than double year-over-year.

Now, I'd like to turn the call over to our COO, Clive Downie, who will provide more detail on our content strategy and the NaturalMotion acquisition.

Clive Downie

Thank you, Don. Hello, everyone. This is my first time talking to you as Chief Operating Officer.

Firstly, I want to take the opportunity to describe our content strategy as it relates to current and future hits. Then, I will go deeper on today's efficiency announcement. And finally, I'll elaborate on the complementary strength that we see between Zynga and NaturalMotion.

As Don mentioned, our goal from a content perspective is to create top hits that engage mainstream global audiences. Our winning aspiration is to be the industry leader by delivering #1 games in the most popular consumer categories.

Today, we have 3 franchises all providing something fundamental and evergreen for players. People have an innate interest in growing and building, which is why our leadership in the farm category is important. People have the desire to take chances against others, which is our Casino franchise. And we know people have always been and will always be fascinated with language and smart wordplay, and that's our Words with Friends franchise.

We expect these franchises to grow and sustain audiences over time, and on a parallel path, we are creating new hits that will appeal to additional and adjacent broad consumer audiences. As we see it, we have an opportunity to create for the many ways people love to be entertained and play, be it nurturing, risk-taking, learning, competing or socializing. I'm really pleased with the progress we are making to focus our creative teams and deliver more new games for more people.

To that end, the NaturalMotion acquisition expands our leadership position in 2 more high-potential consumer categories, bolstering our opportunity to reach and delight more consumers. I'd like to highlight the global franchise potential we see for racing and people where we now have hit products in CSR Racing and Clumsy Ninja.

The console business is one directional indicator we are using to underscore the consumer heat around racing as well as the addressable market size in mobile. Both Don and I have spent considerable time working in this category and have led blockbuster franchises such as Test Drive and Need for Speed. We are big believers in the consumer potential of this market and view the racing category on mobile as under-indexed and rife with opportunity.

While the racing category on console is a predictable and repeatable hit business, taking a dependable share of time and revenues, the mobile market is underdeveloped, with racing at a nascent stage as measured by the number of consumers we see participating. We believe that we're taking the right steps to build category leadership in racing so that we are best positioned to benefit from that future growth.

Using their cutting-edge technology, NaturalMotion pioneered a breakthrough racing experience with CSR in 2012 and showed us all what was possible on a mobile screen. We will continue innovating to create the most jaw-dropping visuals combined with engaging mobile-specific game design that maximizes the available moments of time consumers have on smartphones and tablets.

Moving to the people category, some of the largest gaming brands of our time demonstrate the power of people simulation to captivate large audiences. What we see in Clumsy Ninja represents a credible building block towards the future of what's possible in the people sim category on mobile. NaturalMotion has spent the last decade inventing, building, tuning and proving their Euphoria technology and unlocking it for the game and movie industry.

Let me paint a picture of how this technology actually changes the consumer experience. I'd like to preface it by saying that I've been in the games industry for more than 20 years and a touch first-time use and immersion in Clumsy Ninja, all powered by Euphoria technology, is one of the most delightful things I've ever seen.

Born out of the Oxford University academic community, NaturalMotion has been able to leverage their background to create the Euphoria tech. The technology mirrors the muscular system of the human body to plan a truly believable movement and central nervous system behaviors. At its core, the tech is delivering high-fidelity visuals, artificial intelligence, physics and biomechanics that respond to real-time engagements during the game.

What this means for consumers is that you see unique movements, not repeated animations, as a character adapts behavior, personalize the game play. All of this creates a richer emotional connection, more immersive experience and delightful, repeatable engagement. And, as Don mentioned, we own the exclusive proprietary rights for mobile to develop this breakthrough technology and apply it to any of our existing and future intellectual property.

To summarize, we have a clearly defined content strategy with a huge market opportunity and a plan to grow our audience. With the NaturalMotion acquisition, we now have 5 top brands and capabilities in farm, casino, words, racing and people categories. We are building our creative muscle to go after more new opportunities, and NaturalMotion provides an accelerant for us to deliver more breakthrough mobile experiences for more consumers.

Our leaders have been working hard and moving quickly to align our business around focus, quality and execution. We know we can do more with less and have been making the hard but necessary decisions to put ourselves in a stronger position. Today's 15% workforce reduction, while very difficult, reflects that belief.

Today's changes focus our product pipeline, reduce our central teams and streamline our infrastructure. First, we have assessed our product pipeline using our content strategy lens. This resulted in us removing and redeploying game-making teams in order to go after the existing and new product opportunities where we see the biggest potential for us and our consumers.

Secondly, we assessed how our game makers can best be supported and, as a result, made decisions to reduce the size of our central support teams. These changes remove layers and support more nimble production cycles and quicker testing.

Thirdly, we have increased efficiency by streamlining our data center footprint to meet the different demands that mobile games place on our infrastructure. These changes resulted in a 50% reduction of servers in use and smaller central teams required to manage these systems. We also have seen significant reductions in cost, power and equipment, while at the same time allowing us to serve our players with more responsive game experiences. We don't take these decisions lightly, but we believe that by focusing our product pipeline, reducing our central teams and streamlining our infrastructure, we can create a clearer, faster path to win.

Now, I want to spend a few minutes going deeper on the NaturalMotion acquisition and why we're excited to work together. NaturalMotion's strengths lie in the breakthrough technologies used to create delightful hit mobile games. Zynga's strengths are our ability to develop breakthrough social features while sustaining live games over time. Let me tell you what I mean by that.

Well, our experience has taught us that the social dynamics of a game will directly influence the engagement, retention and long-term sustainability of the audience. Our teams have spent years tuning this expertise and marrying it with richer levels of data and analytics in order to create a more sustainable game over time. Both CSR Racing and Clumsy Ninja are early days in their social development, and we look forward to working with the NaturalMotion team to leverage our unique skill set.

In addition to the social benefit, we are committed to nurturing and growing CSR Racing and Clumsy Ninja and believe we can create even stronger consumer traction by leveraging another of Zynga's greatest strengths; live game operations at scale. Our teams, more than any in our industry, have proven their ability to sustain hit games, not just for a few quarters but for years. Our anchor games in the FarmVille, Words with Friends and Casino franchises have all been sustaining brands for more than 5 years each. I look forward to applying this tremendous expertise of managing live games at scale to NaturalMotion's products.

Turning to the cultural synergy, we will also be looking at opportunities to leverage NaturalMotion's proven blueprint for driving creative success with smaller, highly efficient teams. Culturally, they make decisions quickly and maintain a high-quality bar, resulting in game-changing products for consumers that benefit from word-of-mouth and high organic appeal. This is a model we are embracing and look forward to learning from.

NaturalMotion brings together the best and brightest in creative and technical expertise across geographies. Their cultural awareness and European location is important to developing breakthrough experiences for consumers around the world, and I personally look forward to unlocking this for the rest of Zynga.

In closing, looking to 2014 and beyond, we are confident that we have the right strategy in place to win by delivering the #1 games in the most popular consumer categories. We are committed to achieving excellence in our ability to grow and sustain our franchises and develop new games to delight new players, and we are confident that we will build upon our market position and accelerate our path with complementary strengths between Zynga and NaturalMotion, which generate long-term value to our consumers, to our employees and to our shareholders.

With that, I will turn it over to our Chief Financial Officer, Mark Vranesh, to go deeper on the financial detail.

Mark Vranesh

Thank you, Clive. Good afternoon, everyone. We really appreciate you joining on such short notice. I'll take you through the financial details of Q4, as well as our acquisition of NaturalMotion and our plan to drive efficiencies, which are included in our outlook for 2014.

As you heard, our Q4 bookings and adjusted EBITDA came in above our outlook range. We reported adjusted EBITDA profit of $3 million, which significantly outperformed our previous outlook for a loss of $25 million to $15 million, meeting the high end of our outlook by $18 million. For the last 20 quarters, Zynga has been profitable on an adjusted EBITDA basis, and with our outlook for Q1 and 2014, we intend to maintain that track record. Perhaps more importantly, as Don mentioned, we expect the first quarter to be an excellent foundation for sequential bookings and adjusted EBITDA growth throughout the remainder of the year.

Before I begin, please note that many financial measures herein are expressed on a non-GAAP basis. Be sure to look at our earnings material issued earlier today and available on our website for a reconciliation of non-GAAP measures to the comparable GAAP metrics and for further details about today's announcements and outlook.

First, with respect to audience, despite lower daily active users, or DAUs, average bookings per DAU was up 19% year-over-year in Q4, driven by the strong performance of our advertising business, which came in ahead of plan at $24 million. Q4 benefited from holiday seasonality and ad bookings per DAU being up 62% year-over-year. During the quarter, we increased our advertiser base across a variety of categories by signing new partnerships with companies like J. C. Penney, Clorox and Amazon, as well as renewed partnerships with Fox, Disney and others.

Moving on to bookings, Words with Friends and the Casino franchise exceeded plan, which helped to drive Q4 bookings of $147 million, which was above the high end of our outlook range of $130 million to $140 million. Mobile bookings were down 7% year-over-year, but up 10% quarter-over-quarter to $51 million. Web bookings were down 54% year-over-year and 9% quarter-over-quarter at $96 million. Words with Friends generated record-high bookings in the quarter and was up 33% quarter-over-quarter and 35% year-over-year, benefiting from the ad optimization noted earlier.

As you have heard, we have reignited growth in our Casino franchise. Zynga Poker on mobile grew DAUs and bookings quarter-over-quarter, and we have also continued to see better-than-expected results in Zynga Poker on the Web. We have also seen early signs of success with Hit it Rich slots, which is off to a great start.

FarmVille franchise bookings were down year-over-year as FarmVille 1 and FarmVille 2 faced tough comparisons with Q4 of last year, which included FarmVille 2's first full quarter after launch. FarmVille 1, however, was ahead of plan due to feature performance and ad revenue in December. Overall, we expect the FarmVille franchise to benefit and grow in the second half of 2014 as we bring FarmVille to mobile next quarter.

In terms of platform mix, mobile bookings grew from 30% of total in Q3 to 34% in Q4. Facebook-related bookings were 61% of the total in Q4.

Now, let's talk about operating expenses. People-related spend was down 8% quarter-over-quarter in Q4 due to lower headcount, which declined by 172 to 2,034, and we saw meaningful savings in facilities and outside services spend. Our efforts to drive efficiencies helped keep cash costs and operating expenses flat quarter-over-quarter, despite an incremental $8 million of higher marketing and legal spend. However, compared to plan, legal spend was lower than expected in Q4 as our patent lawsuit trial ended sooner than anticipated with a favorable outcome.

For the full year of 2013, cash costs and operating expenses were down by over $250 million year-over-year, excluding restructuring charges. We reduced labor expenses by 23%, lowered technology spend by over 40% and cut outside services by nearly 1/3.

All of this has resulted in continued overall profitability for the company, with an adjusted EBITDA of $3 million in Q4 or a 2% adjusted EBITDA-to-bookings margin for the quarter. On a full year basis, adjusted EBITDA came in at $47 million or 6.5% adjusted EBITDA-to-bookings margin.

Now, factor in depreciation and amortization, interest and tax results in a non-GAAP net loss of $21 million or a $0.03 loss per share in Q4 and for 2013, Zynga recognized a non-GAAP net loss of $34 million or a $0.04 loss per share.

Turning to our proposed acquisition of NaturalMotion, today, we signed the purchase agreement and expect the transaction to close in the next couple of weeks. We believe that NaturalMotion's exceptional assets, which include unique talent, technology and tools, will significantly accelerate our mobile strategy.

Preliminarily, the deal consideration will consist of $391 million in cash, and we will issue approximately 39.8 million Class A Zynga shares, which includes 11.6 million shares that are subject to vesting. In 2013, NaturalMotion recorded unaudited estimated bookings of approximately $62 million and adjusted EBITDA of $9 million.

For 2014, we expect to see NaturalMotion bookings grow approximately 33% year-over-year and the business to generate adjusted EBITDA of $15 million to $25 million in 2014 and grow further in 2015. The deal is expected to be $0.01 accretive to 2014 non-GAAP EPS.

Now, turning to our balance sheet; after payment of the cash purchase consideration for the NaturalMotion deal, the company will continue to have one of the strongest balance sheets amongst our gaming and social media peers, with no debt and $1.2 billion in cash and marketable securities. We are committed to being disciplined with our cash and continue to evaluate its best uses to build long-term shareholder value.

With regards to cash flow, cash from operations in Q4 was $8 million and free cash flow was $7 million. This brings Zynga's full year 2013 operating cash flow to $29 million and free cash flow to $10 million.

Now, let's turn to our outlook. Please note that although we are separately discussing certain NaturalMotion financials today, going forward, we will report results and issue our outlook on a consolidated basis once the transaction is closed.

Included in our outlook, today Zynga announced plans to drive tighter alignment behind growth initiatives and rightsize the organization to compete in mobile. The actions we are taking are expected to generate pretax savings for 2014 in the range of $33 million to $35 million, excluding an estimated $15 million to $17 million pretax restructuring charge in Q1.

We are moving towards a model of smaller, decentralized, revenue-generating teams to address the mobile market. As part of the plan, Zynga expects to complete a reduction in force of approximately 314 employees or 15% of current workforce. The plan also calls for migrating some of our older Web games from high-cost locations to low-cost locations in an effort to enhance margins and redeploy resources towards high-growth opportunities.

As far as infrastructure, we will also consolidate our data centers over the next few months, reducing megawatt capacity by 45% and driving down spend in cost of sales.

Collectively, these efforts will drive savings that will allow us to increase investment in branding, marketing and distribution, as well as new game starts that we believe will drive growth for 2015. Specifically, in Q1, we expect bookings to be between $138 million and $148 million, including approximately $8 million from NaturalMotion based on an assumed mid-February closing date. We expect adjusted EBITDA between $5 million and $10 million, including a break-even forecast for NaturalMotion. We expect non-GAAP loss per share of $0.01 based on a share count of approximately 860 million shares.

On a GAAP basis, we expect revenue to be between $155 million and $165 million; net loss between $56 million and $49 million; and GAAP loss per share between $0.07 and $0.06 based on the same share count noted earlier and including restructuring and transaction costs of approximately $15 million to $17 million and $7 million, respectively.

On a full year basis, we expect bookings to be between $760 million and $810 million and adjusted EBITDA to be between $65 million to $100 million. At the high end of our outlook, we expect margins will double year-over-year in 2014. We expect non-GAAP EPS between $0.01 and $0.03 based on a share count of approximately 985 million shares. This full year outlook includes our expectations for NaturalMotion to achieve $70 million to $80 million in bookings and $15 million to $25 million in adjusted EBITDA, again, based on an assumed mid-February closing date.

A few other notes; stock-based expense and capital expenditures for 2014 are expected to be approximately $110 million and $30 million, respectively. Given our accumulated tax attributes, which include net operating losses and R&D tax credits, we do not expect to pay cash taxes in 2014.

In summary, I'm encouraged by the steps we have taken in 2013 to position the company to win over the long term. We enter 2014 with a continued focus on execution, and I'm excited about the opportunities that our new family at NaturalMotion brings to the business.

With our plans and initiatives announced today, we have chartered a course for growth in 2014 and beyond. We expect the year to be a transformational one, with investment and momentum that will accelerate us into an even stronger growth year for 2015.

With that, Sam, we would like to open the call up for questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from James Cakmak of Telsey Advisory Group.

James Cakmak - Telsey Advisory Group LLC

I just wanted to drill a little bit more into NaturalMotion. Is there any metrics you can provide on the users, the monetization, knowing you look at it compared to Zynga stand-alone? And then secondly, you mentioned Euphoria is a technology that's licensed out. Any clarity you can provide on what the revenue mix looks like in gaming versus licenses and any -- with their respective growth profiles? And then, I guess one quick one for Clive, you've been on board for several months. If you could provide any of your initial impressions of Zynga, that would be great.

Don A. Mattrick

Great. I'll start with the first part. This is Don. We're not going to be going into more detail about the user base of NaturalMotion than what we've disclosed on today's call. We are obviously excited about the legacy that the company's created to date. They've participated in this space for 12 years. They've got a great tools and tech pipeline, expertise in procedural, physics and animation. And what we know from observing consumers is when they see their products, they love it and it's generated a lot of heat inside of our market. But again, we're not in a position to share specific data today. And, Clive?

Clive Downie

Well, James, yes, I've been here now for close to 3 months and I'm loving it. I've been in gaming for 20 years, the last 5 years in mobile, and I see tremendous opportunity here at Zynga. I've been impressed by our employees' desire to make great games and delight people. And as we continue to drive efficiencies, we'll strengthen those opportunities. I'm very excited about what we have to build on, both in the core franchises where we're showing great, growing, sustained momentum and then also getting to new with some of the new products that we have.


Our next question comes from Heath Terry of Goldman Sachs.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Curious if you could give us a sense of how you see NaturalMotion's technology, particularly on the console side, being leveraged by Zynga going forward. Are there existing Zynga franchises that could benefit from the technology? Are there categories outside of racing and people that you see this being leveraged into that were sort of in the pipeline? And then, to the extent that you can sort of give us any indication of what the pipeline for '14, either from a number standpoint or a category or title standpoint, to the extent that you can, that would be extremely helpful.

Don A. Mattrick

Sure, Heath. This is Don. So I'll kind of talk about the first time that I personally experienced their pipeline, making the transition from the console to the mobile space, and that was with the launch of CSR in 2012. And when I was at Microsoft, I had one of the studio heads come to me and say, "You've got to take a look at this. This is a first console-like product that we've seen on a tablet device." And it really excelled in terms of generating a great feel, a great user experience, beautiful animations and something that felt like it had not been able to be achieved in the past had been achieved by them at that point in time. Again, the same sort of wow factor occurred with the launch of Clumsy Ninja. As we shared at launch, Clumsy Ninja generated approximately 10 million downloads according to Apple in its first week. And this, again, was driven by the Euphoria pipeline. So I can imagine how as mobile devices continue to improve their performance envelope, how we'll be able to create new experiences that are even richer than those 2, and that is an exciting opportunity for us. We know consumers love racing. We know people love people, and we can imagine how we can create new products in both of those categories and move into products that before, you couldn't get to without those types of capabilities.


Our next question comes from Edward Williams of BMO.

Edward S. Williams - BMO Capital Markets U.S.

A couple of questions. First of all, looking at your fourth quarter bookings, can you give us a sense as to how much of it came out of casinos versus words versus farm?

Mark Vranesh

Yes. Hey, Ed. It's Mark Vranesh. What we'll typically disclose, in this case as well, is the revenue concentration. And the farm franchise contributed 15% for FarmVille 1, 26% for FarmVille 2 and Casino was 21%. So for the top 3 games, that was 62% of our revenue in Q4.

Edward S. Williams - BMO Capital Markets U.S.

Okay, great. And then looking at NaturalMotion, do they have much exposure at this point on Android, or is most of it on iOS?

Don A. Mattrick

The majority of their exposure is on iOS, and we see Android as a potential opportunity in the future.


Our next question comes from Brian Pitz of Jefferies.

Brian J. Pitz - Jefferies LLC, Research Division

Great. Curious if the NaturalMotion acquisition broadly signals a shift towards core games and away from casual. And then 2 quick questions on the deal; was it a competitive bid process? And more broadly, given your history with M&A, we're just wondering what gives you the confidence, the success of NaturalMotion longer term.

Don A. Mattrick

I've known the team at NaturalMotion for the work that they've done for over a decade. I think that Torsten was being very disciplined, very diligent about thinking about the best place, the best home to continue to grow NaturalMotion. And when we started engaging, it became clear to both of us that we had an opportunity to be an accelerant for each of our businesses. Zynga has excelled in social, and we can imagine how taking some of those social mechanics will drive better engagement, better retention. And, in the case of NaturalMotion, they've been focused on bringing experiences like CSR and Clumsy Ninja, as well as scaling a number of teams and really doing things that I think are very, very complementary. In terms of parsing by genre, we see casual and core as 2 complementary opportunities, and I'll let Clive spend a bit more time on that.

Clive Downie

I would add, we look at NaturalMotion's strength and it is in creating mobile-first products. And what that demonstrates to me with my experience is they are adept at making delightful entertainment experiences that can be played in the right moments on mobile in the 5- to 10-minute sessions that consumers around the world have throughout their day on their mobile devices. And what you see is companies that are adept at that, such as the game makers at NaturalMotion, they get to scalable, large-scale opportunities and large-scale impact with consumer groups. And so I don't see it as casual or hard-core. I just see it as designing for mobile. And if you do it well, you can reach a large audience, which is what NaturalMotion have been able to do with both CSR Racing and Clumsy Ninja.


Our next question comes from Chris Merwin of Barclays.

Christopher Merwin - Barclays Capital, Research Division

So, in terms of your guidance, you guided about $710 million at the midpoint in bookings for the core business. I think that's about flat year-on-year. So audience metrics were still in decline as of 4Q. So can you just talk a little bit about what you have in the pipeline that's going to help drive the stabilization in the core business over the course of the year? And then, in the mobile category, obviously, it's very fragmented. There's a lot of, I'm sure, interesting assets out there still. So should we expect some more M&A in the future, particularly as it relates to mobile?

Mark Vranesh

Yes, sure. Hi, it's Mark Vranesh, and let me address the audience question first. So we do expect to grow off of our Q1 foundation throughout the remainder of 2014. We expect franchises to grow and sustain, which will contribute to that growth, and also anticipate launching new hits that'll appeal to additional adjacent audiences and broad consumer audiences. And while we're reserving the right to change the way we launch our games and the exact timing of how we launch the games, we're also very excited about the intellectual property and game launches we have through the Newton [ph] acquisition as well.

Don A. Mattrick

And this is Don, just building on Mark's comments. We aren't going to give specific guidance about titles that we haven't made a public disclosure on because we don't want to handicap our teams and our efforts. So we've got a pipeline and products both in Zynga and NaturalMotion that we think has potential for future growth. And again, we'll disclose each of those at the stage of launch just for obvious reasons of not wanting to disadvantage our teams relative to competitors.

Mark Vranesh

And just the final part about capital allocation; I think both Don and I mentioned it in the prepared remarks. But after the NaturalMotion acquisition, we'll have no debt and $1.2 billion of cash and which we believe sets us up to be one of the strongest players, strongest balance sheets amongst our peers.


Our next question comes from Mike Olson of Piper Jaffray.

Michael J. Olson - Piper Jaffray Companies, Research Division

Could you give us an idea of NaturalMotion's revenue concentration? Is it mostly CSR Racing and Clumsy Ninja? And then you made some mention of this, but can you talk about how you think about your ability to grow bookings as headcount goes down? So, in other words, is it a focus on fewer titles or some other efficiency strategies that kind of enable you to get more bookings from fewer resources in 2014 and beyond?

Don A. Mattrick

So I'll take the first part of the question, which is the majority of the revenue is distributed between CSR, CSR Classics, Clumsy Ninja and some license revenue from their tools and technology pipeline. They've made investments in creating future game teams that we were able to see as part of our diligence stage. We thought they were high-quality teams with positive work and positive milestones that we were able to engage with. So that's sort of the current state of NaturalMotion and how their revenue is. And your second question was...

Mark Vranesh

Second -- well, why don't I take the second question, Don? That was about driving efficiencies and how to drive more bookings with fewer heads. And really, what we're saying with some of the actions we took today and the way we're planning for 2014 is to get our scale to workforce in 2014. And we think that it's actually an accelerant to our business to have smaller, more nimble teams that allow us to have more starts.


Our next question comes from Eric Sheridan of UBS.

Eric James Sheridan - UBS Investment Bank, Research Division

I guess smaller part of the business, but now that the platform's broadening out with the acquisition, sort of understanding how you think about the advertising business longer term and the opportunity to sort of do targeted advertising against even broader base of users and game players?

Clive Downie

Well, we saw very strong advertising opportunities in our latest quarter, driving our Words with Friends growth for its largest quarter in its history. And we will continue to create relationships with brand advertisers, create strong network advertising system and drive growth in that area where we can. It's -- as we grow audience through 2014 through our increased launch of product and growing and sustaining our core franchises, there's the opportunity for us to continue to drive our advertising opportunity as well as our audience scale.


Our next question comes from Colin Sebastian of Robert Baird.

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

A couple of follow-ups, I guess, here. Looking at the guidance for 2014, core business, excluding NaturalMotion, should be roughly flat in bookings. I wonder if you're expecting a similar stabilization in the number of paying users for Zynga titles. And then secondly, just wondering in terms of how you're approaching new app installs in the coming year, whether it's a bit of an arms race in spending on customer acquisition. Is this an area where your liquidity and balance sheet can come handy? And how do you plan to approach this, perhaps by outspending the competition?

Mark Vranesh

Yes, thanks for the question, Colin. So, with paying users, we do expect that -- that's been relatively stable over the last several quarters, and we do expect that to scale with our audience base. So that's kind of the way we're thinking about it and modeling it. We did see an improvement in ABPU and also payer conversion this quarter that we think will -- we'll be able to carry that forward into 2014 as well. And with respect to customer acquisition, certainly, our balance sheet is an asset, but I'll let Clive sort of fill you in on the details.

Clive Downie

I think our balance sheet is -- Mark mentioned, is an asset when we require it to drive installs. However, before driving installs, our preference is always to make hit product which have high word of mouth and drive strong organic ratios. And that's a focus for us. I've seen a correlation between that and the number of downloads driven in my 6 years in the mobile business, and we're targeting that here at Zynga as we move forward.


Our next question comes from Ken Sena of Evercore.

Kenneth Sena - Evercore Partners Inc., Research Division

We're seeing a lot of pricing increasing just within social, and the price of discovery on mobile continues to be high. As you look forward, what are your thoughts just on how do you get discovered? Is most of it just on an organic basis, or are there things that you could do maybe to drive increased efficiency there?

Clive Downie

Hi, Ken, I think I'd mentioned most of this in the last answer, but our focus is on driving high organic appeal through making hit products that we know, through research and market data, consumers want. We feel that with something like FarmVille coming to mobile in Q2, we have an opportunity there to address close to 400 million consumers around the world who've already experienced FarmVille. And we believe that we can hit those consumers well with a hit product and drive organics. And then, if you'd look forward to the lessons from NaturalMotion's pipeline, things like CSR Racing and Clumsy Ninja, again, have scored highly in the charts because of their innate, organic appeal. So, for us, it comes down to making products that consumers want, and we're confident we can do that. And when we do that, we receive strong download volumes.


Our final question comes from Ben Schachter of Macquarie.

Benjamin A. Schachter - Macquarie Research

With expectations that Google, Amazon and Apple are probably going to have new devices that drive more content to television screens, can you talk about how Zynga can benefit from that? And then separately, on the data centers, you talked about moving to lower cost and consolidating. What is with the definition of trying to figure out or the calculation of trying to figure out how to do that yourselves or potentially outsource that to an Amazon or a Microsoft, et cetera?

Don A. Mattrick

I'll take the first part of your question, Ben, which is -- it's an interesting thought to think about as mobile devices increase in capabilities, can they transfer and shift into some form of streaming inside of your living room onto larger displays. The short answer is yes. And again, I think that as we see the growth rates just of smartphones and tablets, knowing that entertainment is the #1 usage scenario and people around the world are embracing these devices and using them on the go and at home, we see that as a tremendous opportunity. And your second part...

Mark Vranesh

The second part had to do with data centers, and our outlook there, the way we're thinking about data centers in general is it's a classic ROI equation that we're trying to get at. And we're also looking at the portion of our costs that become fixed versus variable in this business, because sometimes, you want to have flexibility to burst rapidly versus building data centers yourselves. So I would just tell you that it's really a build-versus-buy decision that we focus on internally to make those decisions.

Darren Yip

I think we're out of time but we want to thank everyone for joining us today, and we look forward to talking to you -- actually, Don has some final remarks.

Don A. Mattrick

Yes, I just want to thank everyone for making time to engage with our team on short notice. We know today was a busy day, and we're really excited to be able to share the news of NaturalMotion and our outlook for 2014 with everyone. So thank you, on behalf of our team, for making time to speak with us today.


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

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