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Zynga, Inc. (NASDAQ:ZNGA)

2013 Morgan Stanley Technology, Media and Telecom Conference Call

March 3, 2014 3:45 pm ET

Executives

Don Mattrick - Chief Executive Officer

Analysts

Scott - Morgan Stanley

Scott - Morgan Stanley

Before we begin, I'm going to read disclosures before the introduction. Zynga would like to note that comments and answers to questions may contain forward-looking statements regarding Zynga's business strategy and expectations for future performance. The Company's actual results may differ materially from their predicted due to a number of risks and uncertainties. These risks are detailed in Zynga's public filings with the SEC. (inaudible) to the webcast, a replay of this session will be available on the Company's investor relations site in a few hours. Zynga routinely posts important information on its investor relations website located at investor.zynga.com. So we're very pleased to have Don Mattrick, CEO and Chairman of Zynga, in his first public appearance since taking over the role.

Don Mattrick

I just have to correct one thing. Mr. Pincus haven't given the news about the Chairman transfer, so I'm just sticking with CEO.

Scott - Morgan Stanley

Okay, that's our mistake, we promoted you. You're well-known in the industry, former President of Microsoft Interactive Entertainment Business where you're widely credited with turning around the Xbox division. Don has over 30 years of experience in the gaming industry in all, which also includes a 15-year career at Electronic Arts. So thanks again for joining.

Don Mattrick

Thank you for inviting me, Scott.

Scott - Morgan Stanley

Sure. Let's just dig in. We've got a little under 30 minutes, and I know there's a lot of interest in the Company and the new strategy. I think a good place to start always with newer executives is, why, why did you come, what excited you, what do you think you had when you decided to make the decision to come to Zynga?

Don Mattrick

As you shared with my background, I've spent over 30 years in three key career arts, participating in entertainment and leading a tech organization. So I started a studio called, Distinctive Software. I found a fledgeling company that was called Amazing Software that became Electronic Arts. We put our two companies together in the early 90s. That business went public and we were able to go from approximately less than 1.5% market share to more than 25% share of the market, and go through just a wonderful experience in terms of creating assets, creating a business and having a lot of fun into doing it.

I spent seven years at Microsoft getting a chance to participate driving the Xbox business at a time when that business wasn't performing relative to its potential, and this past summer I left Microsoft and had a chance to take a step back and say, 'hey, what would be fun, what would be really exciting, what's relevant to consumers, what's building on that trends that we're seeing inside of tech?', and the number one choice for me was Zynga. It's a company that has tremendous assets, is competing to bring excellence to content, to tools and tech, to a network distribution strategy, and it kind of felt like it was undervalued relative to the potential it could post in the future.

Scott - Morgan Stanley

Great. And I assume that the core products were something that you found interesting as well as the things that you could do with it.

Don Mattrick

Yes.

Scott - Morgan Stanley

So, talk a bit about what is it that you think you could do to sustain the growth of some of the legacy franchisees such as FarmVille, Poker and Words With Friends?

Don Mattrick

I mean Zynga has three products that I believe are evergreen in their nature that have touched hundreds of millions of consumers around the globe, FarmVille, our Poker social casino products, and Words With Friends. What we know is, consumers love those categories that someone is going to build the best experience and really nurture that relationship with consumers on multiple devices, mobile devices, on the web and driving against it.

So, since I've joined, we doubled down on the grow-and-sustain part of our business. Creating those products on mobile platforms is an obvious next step. We've just started to see the fruits of that and actually we announced today that all three of those products are going into geo-lock in the month of March somewhere in the world, and instead of me speaking about what's great, I created a little bit of a video because we're supposed to be the fun part. I know that having like an [HP] (ph) up can be riveting but we're the entertainment part of today's session. So why don't we roll the video, and Scott, I can show you a little bit of what one of these products looks like on an iPad.

'The franchise that ushered in a new era of free session gaming and reached more than 400 million players on the web is coming soon to mobile. Introducing FarmVille 2 Country Escape, a brand-new mobile experience that puts the world of FarmVille at your fingertips, anytime, anywhere and anyway you want. Set along a beautiful coastal town, this brand-new mobile experience builds on FarmVille 2's lovable characters, art and delightful fiction. FarmVille 2 web players will love the new Connected Rewards system which allows them to transfer valuable goods like water between their mobile and web farm. With FarmVille 2 Country Escape, Zynga has re-imagined the FarmVille social experience from the ground up offering social control options that lets players choose how they'd like to play on their own or with their friends. Zynga is also giving players choice in how they connect to their farm. For the first time in FarmVille history, players can play offline without an Internet connection. FarmVille 2 Country Escape is rolling out soon to players in select markets and will be available globally by the end of Q2.

Zynga Poker, the world's largest online poker game, that's reached 350 million consumers around the world, is upping the ante with an entirely new mobile-first experience. Zynga is proud to introduce the new Zynga Poker, and only mobile poker game with immersive gameplay, sophisticated design and more personalization than ever before. The new Zynga Poker offers an entirely new level of personalized gameplay. Using breakthrough technology, the game responds and learns as players progress, automatically adapting to a player's skill level and placing them at a poker table right for their level and gameplay pattern. The game delivers new layers of social to players by letting them know where their friends are playing, making it easy for friends to join the same table and instantly connect. The new Zynga Poker is rolling out soon to players in select markets and will be available worldwide by the end of Q2.

Words With Friends, named by Apple as the App Store's number one free game of all-time, will celebrate its five-year anniversary this year. Zynga is proud to introduce a completely refreshed game with dynamic new features that players have been asking for. New Words With Friends offers a favorite gameplay beloved by millions each day, infused with a sleeker, smarter and an entirely more social experience. Players will seamlessly carry over their current game's components and entire game history as they dive into the immersive new features. Dictionary, the number one feature requested by players, provides a way to build your vocabulary including definitions, audio pronunciations, and showing how often a word is played. New leaderboards amplify the thrill of victory as players outscore and outmatch their friends for the ultimate climb to the top. Assess your complete and detailed wordy history with stats located in your new player profile, view your highest scorings and longest words, win/loss rate, best moves and more. New Words With Friends delivers a more immersive social experience with stunning animations, high-performance and new features that players want most. The game will launch in select markets over the coming weeks and to global audiences soon.'

Scott - Morgan Stanley

Great. So, some – unless you wanted to talk or speak specifically to the video…

Don Mattrick

No, I got to tell you, hey come on, let's give it up for the team, yes.

Scott - Morgan Stanley

Good. So those are legacy games that are coming back in a refreshed form, and I think it leads to the question of whether it relates to existing games or new games, like how you think about the platform in terms of mobile-first, mobile-only, connecting desktop and mobile, and social attributes as the Company goes into the future?

Don Mattrick

Let me share what we are trying to do. The purpose of our Company is to be the at-scale content leader in the top 20 categories in what I would describe as the northern market. So North America, EMEA, we think we can create experiences. We think when we've analyzed what consumers are doing, we can safely say the following. There's about 15 categories each year that consumers have interest that have been repeatable predictable, and we know that we should be building capabilities in categories that have those attributes and be paying a lot of attention to what consumers love and how our products stack up relative to competition.

So we have inside of Zynga, just here in San Francisco, those three products, they all have attached hundreds of millions of people and now we're completing the logical journey for those set of contents and experiences and having it not only live on Facebook, on the web, but on mobile devices. With the acquisition of a company that is headquartered in the U.K., NaturalMotion, we're able to build on their 12 years of building a very sophisticated tools and technology pipeline that has allowed them to create hit entertainment in multiple forms of media.

They powered the special effects of Lord of the Rings, the large crowd scenes where there's thousands of people in combat, they drove special effects in 300 A.D., and also were able to move from high-end rendering forms to the PC console space that drove products like GTA IV, Red Dead Redemption, GTA V, things that have open living worlds with people and cars and physics to make the interactions real. And most recently, they've been able to port that to mobile devices and been on a terror in terms of creating new hits. They created a hit in CSR two years ago and a hit this past holiday in Clumsy Ninja.

So, when I look at it, we've been declarative on having capabilities in five genres that we think have audience appeal around the globe. Our Company is sized at approximately 2,000 people. Obviously we believe that gives us the capability to maintain those five to create new hits and to drive and add scaled business that touches multiple devices that is having sophisticated go-to-market strategies in multiple languages. So we're trying to be the at-scale leader and these are some examples of evergreen products where we're growing and sustaining, but we have broader aspirations as we look in the future.

Scott - Morgan Stanley

So, development is key, good games obviously on the back of development are key, and then the third piece is the marketing piece, and so I would be interested in terms of how you think about marketing relative to the way that we have seen Zynga think about marketing in the past?

Don Mattrick

Again, I really think we're in the early stages of this market. Mobile devices are growing and everyone has seen the stats and can take whichever source, we know there's going to be a few billion people using smartphones and tablets in the near future, we know that the profit pools from the mobile space are going to be in the tens of billions, and really there's no one who's built an apt scaled leadership company inside of this space.

So, what's unique about these platforms is they're intimate, you can get in and out of these experiences rapidly, and it has to be a great experience at its core to really engage people and get them to come back. The people who do that in my opinion are going to see incredible value, because what we're observing right now is, the top 20 hits are staying in the top of the charts longer, and the second trend that we're seeing is there's a market opportunity in terms of time and monetization between the Northern markets and the Asian markets where if you look in Japan, Korea and China, people are spending 3x to 5x in terms of revenue and time interacting with entertainment, and games fortunately is the number one use case scenario on smartphones and tablets. I don't believe that trend will change. So, we've got great market dynamics.

We're going to do a better job of going to market. I've recruited a person who I worked with, named Clive Downie, who spent 15 years working with me at Electronic Arts. The last six years Clive spent at ngmoco and DeNA. He's grown up on the traditional marketing side and he really understands that what we have to do is have very clear messages and at the end of the day overdeliver value to consumers. And if people look at our message and say words like, Zynga's content is better or unique relative to competition, we'll win. So that's what we're focusing in on, getting close to consumers, understanding our position, being disciplined about our go-to-market strategy and really building long-term sustainable assets.

Scott - Morgan Stanley

And how should – we're in 2014, your guidance for 2014 bookings seem to imply strong growth in the back half of this year. So as investors are looking for indications that the strategy that you're putting in place is starting to work, can you kind of walk through 2014, and 2014 and 2015, in terms of if that's possible in terms of how you think about title launches and how the roadmap begins to rebuild again for the Company?

Don Mattrick

The headline for 2014 is just going to be, 'Year of growth for Zynga', and what I shared on the earnings call was people can see the biggest game in terms of our EBITDA line over the course of the year and we will have the advantages of these products plus other products as they come online over the year driving our P&L. So, our guidance for 2014 is there. I invite people to take a look at it. Lots of good news in terms of growth on the bottom line and sequential growth quarter-over-quarter, that's what we are aspiring to create.

In terms of new products that we bring to market, the principles we're going to be using to disclose and share what we are doing are going to be centered around consumer and our game teams. So, what do I mean by that? We want to make people aware of what we're creating at a time where they can get access to it, a pretty common sense idea from a consumer perspective. And the second thing is, our game teams are spending a lot of time on executing things that are proven but also things that are innovative. So we're going to want the things that are innovative to be as fresh and impactful on consumers as they can be. So we aren't going to be giving competitors the opportunity to dissect our work in advance of it touching consumers.

That's going to make your jobs harder, sorry about that, because you won't be able to get great sightlines into everything that's in our portfolio. All I can share is, we have 2,000 people that gives us the ability to drive the products that we spoke about and do new things in a market that has what I think are very favorable tailwinds.

Scott - Morgan Stanley

Great, and I do want to leave some time for questions, I had a couple of more. On that same topic, I mean could you speak to the percentage of resources from a development standpoint that are being dedicated to the existing set of products versus future initiatives, how that's evolving?

Don Mattrick

Yes, we haven't given detailed guidance on the exact breakout. Again, I think you can extrapolate a lot from studying competitors. So, Supercell has been able to generate a pretty amazing business with 121 people, Stefan and Riccardo at King have done a fabulous job with 665. We have 2,000 and we're aspiring to win in this category to lead and build a great business that delivers results that I think everyone in this room will be excited about. We're early in that journey but we know where we want to end up and we have a point of view on how we're going to get there.

Scott - Morgan Stanley

Okay. One more for me and then, if you have a question, raise your hand, the microphone will come to you, the last one for me is around the culture of the Company. The Company has gone through a period of hyper growth, had some challenges and now you've come in and seem to have changed the culture, both from a talent acquisition standpoint, how easy is it for you to get people, and how easy is it for you to keep people at home now within the 2,000 that you have versus them going elsewhere?

Don Mattrick

So first off, it's a privilege to be able to lead a company like Zynga and it's really fun to be able to create entertainment. I mean there isn't a time where I go out on the weekend and interact with people where they don't have a point of view on one of our products or something new that we should do, and that's because it's the number one thing people are doing around the globe. So I carry that energy to work every day.

The second part of the question is, culture, what do we want to have? We want to be the best in the world. So, what does that mean? It means we need incredibly bright, incredibly aggressive competitive people who are passionate about their art form, who show up every day and know that their work can make a difference. We are going through a period of change and transition inside our Company where our Company isn't appropriate for everyone who joined in the past. So Zynga at its peak got to 3,400 people, today we're at about approximately 2,000 people. Of those 2,000 people, 260 have been shepherded by the team at Oxford where they have gone from five people to 260 over 12 years. Zynga went through a different journey.

So, we've cleaned up parts of our business, we've taken a couple of layers out of our management team, we've built more purpose-led, dedicated discrete teams, and we've talked about what it means to win and why it's an exciting time. And not everyone's going to want to work that hard or train that hard or learn new skills that go with it, those people will applaud for what they have contributed and we will bring new people in who are more energized about the challenge at hand.

Explicitly in terms of recruiting new executives, it hasn't been a problem. There's been a lot of people interested who are seeing the same trends that I'm speaking about, who believe that someone will create the at-scale leader in the markets that I spoke about, and that Zynga has a great collection of assets. So we have layered in probably 25-ish senior people in multiple disciplines who I've directly worked with in the past, who I'm starting to see make a difference on our work, and that showed up in Words With Friends, with Poker, with FarmVille, and it will be showing up in new things in the future. So, I think we'll navigate the culture change. It's a very competitive market here in San Francisco, and what people want, results.

Scott - Morgan Stanley

Thank you. And with that, we'll transition to questions. Right here upfront.

Question-and-Answer Session

Unidentified Participant

A question on advertising, maybe you could talk a little bit about your plans there, you guys obviously have a lot of data you can work with, your games are becoming more immersive, they're getting smarter as you go, maybe talk about that as a revenue stream and kind of how you're thinking about conversations with advertisers, et cetera?

Don Mattrick

Sure. Again, there are multiple revenue streams with our products and experiences. Advertising is one of them. We're bullish on the long-term trends in the advertising space. We think absolute audience size, number of devices, minutes and CPMs will rise in the market. There's lots of data points for all of you to benchmark against that, so you really don't need me to wax on beyond that. We are going to spend time integrating our ads in a way that feels rewarding to consumers.

At its core, we know we've got to overdeliver value and we've got to give people things that they really love. The most important thing is getting that consumer surprise and delight and giving them rewards that exceed expectation. Advertising is one way, the free-to-play virtual goods model is another, and as I think into the future, sponsorships, subscription and rewards and affinity, those are all things that I can imagine our industry participating with, and even some form of premium. So people, when they find something they love, spend a lot of time. It can become their entertainment, their hobby, and I think our industry is in its early stages of monetizing against all of the items that I spoke about.

Unidentified Participant

A couple of questions on competition. Just wondering, what would you say if someone in terms of your competitive mode, if you look at a game like Flappy Bird with very low – you know, guys in apartments making the game in two nights, I guess…

Don Mattrick

What's your Flappy Bird count, how many?

Unidentified Participant

What's my high score? 99 I think, I mean I'm not very good.

Don Mattrick

So lot of Red Bull and a trance to get to 99?

Unidentified Participant

Just fluke, absolutely. I guess what would you say in response to that in terms of how Zynga would look at their competitive mode versus kind of all these guys making small games?

Don Mattrick

I think it's awesome that Flappy Bird exists, that someone can create something that posts that kind of results and usage. Again, it isn't dissimilar to what I observed inside of my past, there was a game called Tetris that people may have remember shipping approximately two decades ago. So people would come to me all the time and say, why didn't you create Tetris, why did you do things like Need for Speed, the Sims and Madden and other things, and there's always going to be room for amazing innovation.

If you analyze the charts, it's usually five or less titles that would have those kinds of attributes and 15 are predictable evergreen categories. I'm trying to help the Company to go where sustainable and repeatable first, so we're going to focus on the 15 genres. So people, cars, farming, social, casino poker, Words With Friends are great examples and we'll probably go for number six in the repeatable category versus just having a team trying to make a harder version of Flappy Birds. And I'm really jealous of your score.

Scott - Morgan Stanley

Last question.

Unidentified Participant

I noticed in your feature of games, you brought up Zynga Poker, and since online is imminent, meaning online gambling is imminent and poker will be the game, I'm sort of confused as to what your objectives are. Is your objective basically just to have a non-gambling recreational game where you'll be training all the people who will then go on and engage in the activity in a more realistic sense, because if you look in the past that you were backing off in that area, so I'm just trying to understand what your strategy is and what we should…?

Don Mattrick

So thank you for flagging that. Early on when I joined, I asked the team, tell me the size of the market and poker on Facebook, on mobile devices, tell me our share, tell me what's happening in the competitive landscape, why are we not investing more in this rapidly growing global business that has lots of profit, lots of consumers out in front of us. So, the first thing that we're doing is really focusing in on our core expertise and capability and getting to effective execution against that.

In relation to real money gaming and other ways to engage consumers, we have shared that we will be doing pilots in different geos in the world, we're not at a stage where we're announcing anything. When we're announcing, I'm trying to announce it with the intent to win and to make it global and to make it meaningful to our P&L. So, things that we've stopped doing were things that felt to me like they had limited runway and we're distracting people. I read a lot of analyst reports at that point in time and I didn't feel people were giving as much attention to the core opportunity, and sometimes execution is about the things that you don't do as much as it is the things that you do.

Scott - Morgan Stanley

Don, thanks for coming out and spending time with us. We appreciate it. Thank you.

Don Mattrick

Thank you, Scott.

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