Zynga Inc (NASDAQ:ZNGA)
Q1 2014 Results Earnings Conference Call
April 23, 2014, 5:00 pm ET
Sara Stapleton - Associate General Counsel
Don Mattrick - Chief Executive Officer, Director
Clive Downie - Chief Operating Officer
Mark Vranesh - Ex-Chief Accounting Officer, Ex-Chief Financial Officer
David Lee - Chief Accounting Officer, Chief Financial Officer
Eric Sheridan - UBS
John Egbert - Morgan Stanley
Heath Terry - Goldman Sachs
James Cakmak - Telsey
Mike Olson - Piper Jaffray
Wan Kim - JPMorgan
Brian Fitzgerald - Jefferies
Chris Merwin - Barclays
Good day, ladies and gentlemen, and welcome to the Zynga first quarter 2014 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference is being recorded.
I would now like to introduce your host for today's conference, Sara Stapleton. Ma'am, please go ahead.
Thank you, Danielle. 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, Mark Vranesh and our newly appointed Chief Financial Officer, David Lee.
Before we begin, please note that we are targeting a one hour call. During the course of today's call, we will make forward-looking statements related to, among other things, strategy and expectations for future performance, future game launches, the operational impact our NaturalMotion acquisition and outlook for Q2 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-K and elsewhere in our SEC filings. These include the ability of key gains, including FarmVille 2: Country Escape to sustain or grow audience and bookings and our ability to launch successful new games and features in a timely manner, including launches from the NaturalMotion pipeline and the Q2 launches from our Words and Casino franchises.
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. Be sure to look at these reconciliations as the non-GAAP measures are not intended to be a substitute for our GAAP results.
Except where noted, the financial information discussed in the call includes the results of NaturalMotion, subsequent to the acquisition's close on February 11, 2014.
This conference call is being webcast on the Internet and is available through our Investor Relations website. An audio replay of the 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, our Chief Executive Officer.
Thank you, Sara. Good afternoon, everyone, and thank you for joining us. During our call we will be discussing our Q1 financial performance, our outlook for our outlook for Q2, as well as our progress against strategic frame of growing and sustaining our franchises, creating new hits and driving efficiencies.
In Q1, our teams delivered a strong start to the year generating financial results above the high-end of our previous outlook range with bookings of $161 million and adjusted EBITDA of $14 million. As I said in our last call, we expect 2014 to be a growth year for Zynga. I am pleased with our progress so far and believe that we are pacing well to deliver on the commitment of growth.
In particular, I would like to thank the FarmVille 2 web team for their hard work in Q1 to overdeliver for our consumers. Their performance, coupled with stronger execution in many parts of the business and more effective expense control, were key drivers for us overachieving relative to our previous guidance.
Based on our team's efforts, we grew bookings by approximately 10% relative to the prior quarter. We increased our adjusted EBITDA margin from 2% in Q4 to 9%, and grew our adjusted EBITDA from $3 million in Q4 to $14 million in Q1. This past quarter represents the first quarter in two years that we have delivered sequential growth across bookings, adjusted EBITDA, mobile bookings mix and audience.
Our teams have their sights set on driving audience growth and we are seeing the results. In Q1, we grew our mobile audience 10% and our daily audience by 7% quarter-over-quarter. On mobile, we increased our monthly mobile audience by 45% and our daily mobile audience by 23% quarter-over-quarter. More importantly, the core Zynga mobile audience, excluding the NaturalMotion acquisition, also saw double-digit growth in Q1 with monthly mobile audience up 11% and mobile audience up 10% quarter-over-quarter.
As we said, we expect 2014 will be the first time in Zynga's history where our mobile bookings will surpass our web bookings and account for more than 50% of our bookings base. In Q1, we made good progress on achieving this targeted diversification of business as our mobile bookings grew to 36% of total bookings.
Going a bit deeper into Q1 highlights. The investments we continue to make to grow and sustain our biggest franchises are bearing fruit, particularly in our Casino and Words With Friends franchises. The Casino franchise delivered another solid quarter and the team's focus on player feedback and delivering an authentic Casino experience is generating positive results in bookings and audience growth. Casino saw double-digit bookings growth for the first time in seven quarters, largely due to the improvements being made on Zynga Poker as well as the consumer heat around their Slots product, Hit It Rich and the new Riches of Olympus, which launched this past quarter.
In Q1, Zynga Poker, the world's largest poker game and our most enduring franchise, at seven years old delivered its first quarter-over-quarter bookings growth in seven quarters. The game also grow its mobile audience by 19% posting the strongest mobile audience growth in eight quarters.
In terms of Words With Friends, the franchise grew its monthly audience by 8% quarter-over-quarter, while Q1 bookings were met with a predictable seasonal advertising decline, while year-over-year were up 43%, an impressive milestones for game that turns five this year. The team is also getting helpful consumer insights and feedback from the new Words With Friends (inaudible) and we remain on track to launch worldwide by the end of Q2.
I am also pleased to share that on February 11, we closed the NaturalMotion acquisition. Our integration is progressing well and our teams are sharing valuable knowledge. We remain confident and excited in NaturalMotion's long-term future growth and impressive slate of proven hits, technology, tools and new games. We are working together to develop growth plans for NaturalMotion's racing and people franchises, both of which hit meaningful milestones since the close of our acquisition.
In racing, due to the hard work in the beginning of Q2, our franchise products became available to more consumers with the recent launch of CSR Classics on Google Play. The franchise is comprised of CSR Racing and CSR Classics hit a new milestone this past quarter, when it is surpassed 100 million downloads.
Moving to our people category, Clumsy Ninja, which has achieve more than 25 million downloads since its launch only five months ago, is expanding today with its launch on Google Play. We look forward to hearing from our Clumsy fans as we grow this franchise and offer more fun experiences for players.
To summarize our progress, we have established a strong base for 2014 and we believe we are pacing well for growth year-over-year. For the first time in two years, our teams delivered sequential growth across our key performance metrics including bookings, adjusted EBITDA, mobile bookings mix and audience. We believe these indicators demonstrate our strategy is working and the focus, rigor and discipline of our teams is showing up in our results.
I would now like to spend a few minutes discussing the progress we have made creating new hits and how we are differentiating our offerings relative to competitors to deliver distinct and unique consumer experiences. As we said, our goal from a content perspective is to create top hits that engage mainstream audiences. Our winning aspiration is to be the at scale leader by delivering more number one games in more categories than any other competitor.
Our top three franchises have reached nearly 1 billion people to-date and in Q1 we announced that we are delivering new mobile first franchise products with the new Zynga Poker, the new Words With Friends and the most iconic brand in social gaming, FarmVille. I am particularly proud of the FarmVille team's commitment to franchise growth, especially as it relates to last week's worldwide launch of FarmVille 2: Country Escape.
Six days ago, FarmVille 2: Country Escape went live to the world in 16 languages across iOS and Android platform. Since the launch, we have seen more than 4 million installs of the game and received great feedback from our players. Clive will go deeper on the details of the game's progress and I want to underscore that we are pleased with the team's execution and encouraged by the early indications we are seeing from our audience.
As many of you know, who have already played the game, FarmVille 2: Country Escape build on the charming fiction of the FarmVille 2 brand while offering unique and distinct features not available anywhere else in the market. Features like our connected economy allow players to link their mobile experiences to their FarmVille 2 web game. Our social control gives players more choices on how to connect with family and friends. Our off-line mode gives players the options to play without an Internet connection, a first for any farming game.
As we rewire the company around a consumer centric point of view, I have been encouraged by the new development principles being applied to this game. I am proud of the team's hard work, attention to detail and consumer driven decision making. It's early days for FarmVille 2: Country Escape, but we are optimistic about the game and we expect that will learn and iterate as we continue to receive valuable feedback from our players.
Turning to our Q2 outlook. We expect to build on the positive momentum our game teams generated this past quarter. We are on track to see continued quarter-over-quarter growth across our key performance metrics of bookings, adjusted EBITDA, mobile bookings mix and audience.
For Q2, we are establishing bookings guidance to be between $175 million to $195 million and our adjusted EBITDA to be in the range of $10 million to $20 million. Given the progress our teams made in Q1, we are also narrowing our guidance range for the full year to $770 million to $810 million and our adjusted EBITDA to be in the range of $70 million to $100 million.
In closing, we are at the forefront of an entertainment revolution and our industry's profit pools never been bigger. Rapid consumer adoption of smartphones and tablets will bring unprecedented opportunity and games are the number one time based use case for consumers. In the next few years, more than 1.3 billion people will be gaming on their mobile devices. By 2017, one-third the world's population will be using smartphones and the tablet installed base will cross 1 billion.
In that time, we expect the mobile gaming revenue opportunity to double from $12 billion to approximately $24 billion. We believe game experiences that deliver meaningful engagement across multiple devices create a better consumer experience and lead to higher levels of retention and word of mouth.
This is a bigger opportunity than simply connecting the same web and mobile games. We are seeing that unique and distinct features like FarmVille's connected economy actually improved both game experiences and give players more reasons to come back more often. We are applying this insight to our larger content strategy. With proven brands and capabilities in five evergreen contents categories like Farm, Words, Social Casino, Racing and People, we believe we have unique opportunity to create content that stands devices, is global and links consumers around the world to the brands they love.
I would now like to hand it over to our Chief Operating Officer, Clive Downie to go deeper on the performance of FarmVille 2: Country Escape and to provide an update on our content strategy.
Thanks, Don, and hello, everyone. First, I want to spend some time discussing the early results we are seeing from our newly released FarmVille 2: Country Escape mobile game. Then I will go deeper on our content strategy and how we are shaping our pipeline over the next 12 months. Finally, I will elaborate on how we are driving efficiencies across all areas of our business as we continue to focus on our strategic frame of growing and sustaining our franchises and creating new hits for consumers.
Over the last five years, Zynga's FarmVille franchise has turned more than 400 million consumers into virtual farmers giving people around the world an opportunity to nurture, grow and build a world all their own. Last week we delivered an entirely new experience to loyal fans and new players with the mobile first launch of FarmVille 2: Country Escape on iOS and Android allowing consumers to farm on the go anytime and anywhere.
At launch, the game received Apple App Store Editor's Choice featuring in 155 countries and Google Play top tier featuring in 71 countries. Only a handful of games have achieved this prominent recognition at launch, which is a testament to the power of the FarmVille brand as well as the game's finish and polish that was well recognized by our partners.
In addition to crossing 4 million installs, we are seeing a number of early signs that the game is resonating well with consumers. In the U.S., the game has achieve number one top free app and number one top free game on iPad. On iPhone, the game has achieved the top three position in the free app and free game charts. Across the Apple platform, we have reached the number one top free app position in 20 countries, the number one top free game in 40 countries and after six days in market, we have broken into the top 20 grossing chart on both the iPad and the iPhone in the U.S.
As our latest addition to the franchise FarmVille 2: Country Escape is already generating meaningful player feedback and valuable insights that are indicative of the game's potential and will allow us to tune and iterate the game over time. Specifically, we are seeing encouraging indicators around engagement, retention, organic power and connectedness with the FarmVille 2 web game. We are grateful to our loyal farm players both existing and new who have given us permission to be a growing part of their daily routine.
First I would like to spend a few minutes discussing how we think about engagement across our games. When we look at the overall performance of our products and how they are resonating with players, our primary focus is to always achieve category leading engagement and retention. FarmVille 2: Country Escape is already showing strong player engagement metrics compared to other Zynga games. The game gives consumers valuable depth of play through unique options to explore, engage, socialize and discover all of which are resonating in promising ways with players across platforms.
The amount of time people are playing indicates that we have created a rich entertainment experience that matters to the mobile play patterns consumers want. The connected rewards feature in FarmVille 2: Country Escape, which creates a connected economy from the players FarmVille 2 web game to their mobile game is also driving encouraging positive sentiment with our existing FarmVille 2 web audience.
As I mentioned earlier, hundreds of millions of consumers have played FarmVille on the web. While we are seeing strong engagement from these existing FarmVille web players, an encouraging number of new players are coming to the franchise for the first time because of Country Escape on mobile. As we focus on growing and sustaining our core franchises, this is an important milestone for us and demonstrates Zynga's ability to sustain its franchises over time and create mobile entertainment experiences that meaningfully engage and extend our games to new large-scale groups of consumers around the world.
We are extremely proud of the team and the high-quality delightful experience they are delivering to consumers with FarmVille 2: Country Escape. The team listened closely to player feedback to leverage market insights and create a completely new and innovative entertainment experience. The game honors the franchise that hundreds of millions of consumers have come to love yet delivers the fresh features, mobile game play and high-quality design they have been asking for. As we rewire the company around consumer centric decision-making, we are particularly pleased with the team's approach in making and marketing this game and are already layering in the best practices for product development and go to market strategies in the future.
Turning to our content strategy. As Don said, our goal is to create top hits that engage mainstream global audiences and our winning aspiration is to be the at scale industry leader by delivering more number one games in more categories than any other competitor. We have been executing on our grow and sustain strategy, achieving considerable progress over the last few quarters with our core franchises.
On a parallel path, we have also been investing heavily in create new to develop the next generation of Zynga games. We believe that there are a number of new addressable content categories where we can build organizational muscle and deliver top 20 hits at scale. We already have five top franchises and capabilities in the Farm, Casino, Words, Racing and People categories. And this year, we expect to move aggressively into new categories that align with the timeless entertainment that consumers care about.
A large percentage of our spend is dedicated to our future pipeline. Much of this is focused on mobile research and development. We believe this is in Zynga's best interest as we aggressively compete for a leadership position of the at scale leader. You should expect to hear about our new products when we enter the geoloc phase but not before. This announcement timeline best benefits our internal team's production schedule as well as our consumers around the world.
It is important to note that Q2 is a launch quarter for us as we deliver new mobile first experiences in our FarmVille, Words With Friends and Casino franchises. Because of that, we expect a degree of volatility as we introduce new products in the market. We continue to reserve the right to move titles around based on our development standards and player feedback. As we have conviction in a game, we will be investing in building our brand and increasing our mobile consumer base.
We expect to spend more money in marketing for titles that launch as we expand our mobile business. All our games must meet or exceed our quality expectations and all game decisions must be guided by deep consumer insights that will enable us to create distinct and unique experiences that will resonate with players.
Turning to efficiencies. As we continue to align our business around focus, quality and execution, we expect to deliver both breakthrough consumer experiences and profitability. To do that we remain focused on doing more with less and achieving more operating leverage across the organization. Last quarter, we made changes to further prioritize our product pipeline. We reduced our central teams and we streamlined our infrastructure.
Additionally, in Q1, we reduced our technology spend by 15%, driven by restructuring and discontinuing one of our data centers. All of these changes have put Zynga in a stronger position to deliver growth in 2014 and beyond.
In closing, we are confident that we have the right strategy in place to win. We are making smart product investments and executing against the highest priority opportunities we see in the categories consumers care about most. As evidenced by the early feedback from FarmVille 2: Country Escape, it's clear that the consumer centric approach our teams are taking is driving promising results and we are already taking our learning from that game and applying best practices to new games in our pipeline.
As consumers continue to move to mobile, we are more confident than ever that the mobile first approach we are taking to our games will enable us to achieve better results and deliver consumers a truly consequential entertainment experience anytime, anywhere.
With that, I will turn it over to Mark Vranesh, and Chief Financial Officer, David Lee to go deeper on the financial detail.
Thank you, Clive. I would like to take just a moment to share what an honor and privilege it has been to lead the Zynga finance organization over the last six years. I feel fortunate to be able to leave the company at a time when we are seen early signs of growth in our outlook and strength in our financial condition. As this is my last call with Zynga, I want to express what a pleasure it has been to work with all of you both in this room and listening over the phone.
And now, I would like to introduce my successor, David Lee. We hired David after extensive search spanning several months and over 30 candidates, and I can tell you that he is the right leader to take this company to the next level.
With that, here is David Lee, who will lead the financial discussion.
Thank you, Mark, and good afternoon, everyone. Before I begin, I want to share why I am so proud to be joining Zynga during such a transformative time n the company's history.
I came to Zynga because I believe in the future of social mobile games. Zynga has impressive assets to take advantage of the market opportunity and with the right execution, I believe we can drive sustained financial success, produce more predictability across our business and nurture a culture of creativity and innovation.
Coming from a consumer packaged goods background, I believe Zynga's consumer centric approach will help to differentiate us from the competition. I look forward to partnering with Don and the leadership team to write the next chapter of growth for Zynga. I also want to thank Mark Vranesh for helping me through the transition and more importantly, leaving the company's financial infrastructure in great shape.
As you heard, audience, bookings and adjusted EBITDA all grew sequentially a quarter earlier than the team had initially anticipated. I will take you through the details, but before I begin, please note that many financial measures herein are expressed on a non-GAAP basis and include the results of NaturalMotion, subsequent to the close of the transaction, which took place, as Don mentioned, on February 11, 2014.
On the bookings front. Total bookings were $161 million, up 10% quarter-over-quarter driven by 15% sequential growth in mobile bookings. Inclusive of partner fees, all three of our core franchises, Casino, Farm and Words With Friends exceeded expectations with our FarmVille franchise driving the majority of the overachievement versus our outlook. Advertising continued to be strong in Q1 as ad bookings per DAU were up 57% year-over-year, excluding licensing payments.
During the quarter, we renewed and grew our partnerships with blue-chip advertisers, like 20th Century Fox, Procter & Gamble and Honda. In terms of platform mix, mobile bookings grew from 34% of the total in Q4 to 36% in Q1, despite seasonally strong Q4 advertising bookings from Words With Friends. Facebook related bookings were 52% of the total in Q1.
Turning to operating expenses. People related spend was up 9% quarter-over-quarter in Q1 due to the addition of NaturalMotion and higher employee benefit program expenses partially offset by the restructuring in Q1. Operationally we continued to drive efficiencies, reducing headcount to 1,991 at the end of Q1, down 43 quarter-over-quarter and including 257 people from our NaturalMotion acquisition.
We are pleased to report that with our focus on driving efficiency, we were able to restructure and discontinue the use of one our data centers in the first quarter, a full quarter ahead of plan, and as a result, we expect to see lower technology related spend earlier than anticipated. As Clive mentioned, we saw 15% technology savings in Q1 quarter-over-quarter and we expect to see another 22% in savings from infrastructure efficiencies in Q2.
The data center closure resulted in a pull-forward of $17 million of incremental restructuring expense on top of the $13 million of restructuring, we highlighted on our January call, bringing total restructuring to $30 million. Overall, our cash OpEx spend in Q1 came in about flat quarter-on-quarter, despite the consolidation of NaturalMotion's expenses, subsequent to the close of that acquisition.
Better than expected bookings from stronger execution in many parts of the business and more effective expense control drove the EBITDA outperformance with adjusted EBITDA of $14 million in Q1 or a 9% adjusted EBITDA to bookings margin for the quarter, up from 2% in Q4. Factoring in depreciation and amortization, interest and other income and tax, results in a non-GAAP loss per share of $0.01.
Turning to our balance sheet and cash flow. We continue to have a strong balance sheet with more than $1.1 billion in cash and marketable securities after the NaturalMotion acquisition. During the quarter, cash flow use in operations was $24 million inclusive of restructuring and acquisition related payments. After factoring in capital expenditures of $1 million, free cash flow was negative $25 million. The strength of our balance sheet is a fundamental value driver and we will continue to be thoughtful about the uses of capital.
Now let's turn to our outlook. In Q2, we expect bookings to be between $175 million and $195 million and adjusted EBITDA to be between $10 million and $20 million, driven by the continuing strengthening of our core franchises, partially offset by higher marketing investments around new launches. We expect non-GAAP earnings per share between breakeven and $0.01, based on a fully diluted share count of approximately 878 million, if we reported non-GAAP loss or approximately 930 million shares if we report a non-GAAP profit.
On a GAAP basis, we expect revenue to be between $140 million and $160 million. Net loss between $75 million and $65 million and GAAP loss per share between $0.08 and $0.07 based on a basic share count of approximately 878 million shares.
On a full year basis, we are raising the low end of our outlook for bookings by $10 million to establish a narrowed range of $770 million to $810 million. We are also raising the low end of our previously announced adjusted EBITDA outlook by $5 million and establishing a narrowed outlook range of $70 million to $100 million based on the outperformance in Q1. These ranges take into our expectations for growth in the franchises and the introduction of IP in new categories later in the year.
We expect our non-GAAP EPS between $0.01 and $0.03 based on a fully diluted share count of approximately 930 million shares. Stock-based expense and capital expenditures for 2014 are expected to be approximately $130 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 the U.S. in 2014.
In summary, I believe the company has set a strong foundation for growth. Everything I discovered at Zynga from the culture to the leadership talents to the opportunity with consumers makes me confident that we can deliver long-term sustained growth to our shareholders.
I look forward to meeting all of you over the next few quarters, and with that I would like to turn the call back over to Don.
Thank you, David. I would like to close today's call by providing some additional detail outside of our financial performance about how our teams are evolving inside of Zynga. We are continuing to build out the capabilities of our executive, creative and technical bench and have a number of new updates to share.
First I want to thank Mark Vranesh for his six-year contribution to Zynga and for being actively involved in the search process to recruit our new Chief Financial Officer. I have appreciated Mark's leadership and want to thank him for working so closely with David to ensure a seamless transition of responsibilities. Mark, we appreciate the dedication you have shown this company and we wish you the very best in your future endeavors.
Next I want to take this opportunity to welcome David to the team as our Chief Financial Officer. He is only eight days into his role, but I can already tell that his leadership style and experience will be a valuable asset for our financial organization and our future growth. I expect it will all get the chance to meet with him and get to know him over the next few quarters.
On the creative and technical front, today we announced that we have hired Alex Garden as President of Zynga Studios, reporting directly to me. Alex brings with him 25 years of gaming experience and a history of architecting consumer entertainment experiences across free to play and console gaming.
Alex comes to us from Microsoft, having served in a number of leadership roles including General Manager of Xbox Live and Xbox Music. In these roles, he helped Xbox scale to 41 countries and tens of millions of subscribers with a world-class content library from partners like HBO, Netflix and ESPN. Prior to that, Alex was at Nexon, where he served as CEO of Nexon Publishing North America.
Before joining Nexon, Alex founded Vancouver-based game developer Relic Entertainment where, under his leadership, the company launched nearly a dozen games including Homeworld, which was named Game of the Year by CNN and PC Gamer.
On a personal note, I have known Alex for 25 years, when he began his career working as a game tester for Distinctive Software, which I founded in 1982. He is an exciting hire for us as we focus on growing and sustaining our franchises, creating new hits and developing more creative leadership across Zynga. Going forward, all the Zynga Studios will report to Alex as we continue to scale our game operations and execute against a year of continued growth.
On the creative side, I am also pleased to announce that we hired Henry LaBounta, Zynga's first Chief Visual Officer. Henry is an Academy award nominated visual effects leader with nearly 30 years of experience spanning games, blockbuster films, feature animation and television. As we work to create more motive realistic entertainment experiences, a craft of visual effects is a critical one to deliver high-quality products to mobile consumers.
Henry has held a number of visual effects roles in the games and entertainment industry at Electronic Arts, DreamWorks and Microsoft Studios. He is known for making the impossible possible through breathtaking visuals that create wow moments for consumers. Henry will report to Alex and help coach our creative teams to deliver jaw-dropping, visually appealing games for people around the globe.
As we continue to take a more consumer centric approach through all areas of our business, I am also pleased to share that we recently brought on Jennifer Nuckles as our Chief Marketing Officer, reporting to Clive. Jennifer is a proven consumer marketer with more than 18 years of experience, having advised some of the world's largest consumer brands including the Clorox Company. She most recently served as Chief Marketing Officer of Plum District, an e-commerce platform exclusively for women. Jennifer's skills will be particularly valuable as we more effectively position our products to consumers and differentiate our content relative to the competition. As we grow our culture of innovation, I am confident these leaders will strengthen our creative and technical capabilities as well as nurture and mentor our existing teams.
Finally, today we announced that founder Mark Pincus has decided to move on from his operational role as Chief Product Officer at Zynga to focus on serving as Chairman of the Board of Directors. I would like to thank Mark for his dedicated service to Zynga players, employees and shareholders since the company's founding in 2007. Since that time, Mark has built Zynga into an entertainment leader, turning brands like FarmVille, Words With Friends and Zynga Poker into household names and daily habits for hundreds of millions of consumers.
It's truly a privilege to lead Zynga and I was honored when Mark asked me to join as CEO and guide the company into its next chapter of growth. Mark's mission to connect the world through games and his unwavering passion for social was a big reason why I joined Zynga. Over the last 10 months, I found his partnership to be intellectually rewarding and I am deeply grateful for the opportunity to continue building out his vision. I am thankful for the trust that Mark has instilled in me and the rest of Zynga's leadership team. Going forward, with Mark in his role as Chairman of the Board, we will continue to be close partners and work together to achieve our winning aspiration to be the at scale industry leader by delivering more number one games in more categories than any other competitor.
With that, operator, we are ready to open up for questions.
(Operator Instructions). Our first question comes from Eric Sheridan from UBS. Please go ahead.
Eric Sheridan - UBS
Thanks so much for taking the questions. One question, maybe I don't know if we can get any more color about what you think about the pipeline of games as we look forward through the end of the year in terms of either number of games or categories or things you are focused on in terms of giving us a little more color about how that unfolds?
Then second on the cost side of the equation, just wanted to ask you now that you highlighted that the workforce reduction and closure of the data center facilities are behind us. So is the Q1 cost structure of the business going forward is the new run rate we should use thinking forward as we move through the year? Thanks.
Thanks, Eric. It's Don. I will take the first part of the question and then I will have David speak to the expense side of your question. So as we have shared, we are focused on executing on a portfolio of products. We have five products that have charted globally, and we continue to invest in and we also have a broad portfolio of new products ongoing, both at Zynga and NaturalMotion. The principle that we are using on rolling those products out is as we move into geoloc we know that it's the best time to share in relation to consumers and also it benefits our teams by not previewing the things that we are doing are moving into. So I am not going to be able to give you more detail other than to say we have substantial investments, substantial aspirations and we are creating new, both inside of Zynga and NaturalMotion, but we will roll things out as they rollout to consumers.
With regard to the second question, Zynga has always been focused on driving efficiencies and we will continue to operate under that philosophy. We believe by the cost savings we generated and will generate help fund our future growth and we have noted in our guidance that we intend to invest in marketing in future periods. We are very comfortable with the outlook we have provided.
Thank you. Our next question comes from John Egbert from Morgan Stanley. Please go ahead.
John Egbert - Morgan Stanley
Hi. Clive, you mentioned that you are pleased with how you are marketing FarmVille 2: Country Escape. Can you talk a little bit about your approach to marketing the game across various marketing channels and how that might differ from how Zynga went to market with some its games in the past? And maybe contrast web for mobile and the kind of strategies that work on both? Thanks.
Will do. Hi, John. Thanks for the question. Well, we are pleased with the response from key partners. And as I mentioned in the call, on FarmVille 2: Country Escape, the finish and polish of the product really excited Apple and Google and they saw it fit to give us global Editor's Choice promotions and that's helped us. To-date, we haven't spent a substantial amount of marketing on the product. The product is driving fast organically. We are seeing exciting organic potential and potency from the product. That combined with our Apple and Google partnerships is really spearheading the first part of the growth trajectory of that product.
As we move forward into the latter stages and the latter life of the product, we are taking a twofold approach to marketing the game. The first one is around performance marketing, making sure that we effectively target the kind of consumers that we know resonate with the product. We tested, obviously in geoloc in Canada and New Zealand and we were able to define our target markets in a very narrow band which was key and crucial for our efficiency to spend later.
Aligned with that, we continue to leverage the FarmVille audience on web and Facebook. We believe that that's a large advantage for us as an upscale entertainment provider. Already we have 400 million consumers around the world who understand what FarmVille is and so we are talking to those consumers with a variety of tactics that are continuing to ramp up and lastly we have, for Zynga, a very sophisticated consumer marketing campaign that will continue to layer FarmVille into people's lives and into consumer's lives over the course of the next quarter and beyond through their daily life.
We are now ready for the next question.
Thank you. Our next question comes from Heath Terry from Goldman Sachs. Please go ahead.
Heath Terry - Goldman Sachs
Great. Thank you. I guess one place to just clarify on the comment that you are seeing four million downloads on FarmVille 2 already. Can you give us a sense of what you are seeing in terms of how much of those or what you are able to tell how much of those are existing FarmVille users, whether on desktop or one of the previous iterations of FarmVille on mobile?
And then, Don, curious with the resizing that you have done around the development organization there, I know there is not a lot you want to talk about in terms of pipeline, but when you look, if there is a way to talk about it in terms of capacity of what the organization that you have got now is capable of from a game development standpoint or if maybe there is another way you are going to be thinking about how the organization is best optimized?
Hi, Heath, this is Clive. Let me address the first part of the question. We are very encouraged by two things. Number one, the number of consumers participating in the game every day who are FarmVille 2 web consumers who are continuing to invest their valuable time in the franchise and now additionally on mobile and we also very encouraged, as I mentioned in the call, by the number of new consumers who are coming in.
We are not going to break that down and disclose numbers, but the initial signs in the first six days are that we have a very encouraging share of new consumers and increasingly engaged FarmVille 2 web consumers.
And hi, Heath, it's Don. So I will kind of speak to the linkage between capacity and the content that we are creating. So again, I am sure in the past, we were focused on creating a portfolio of products. We feel blessed that we have five proven hits as a starting point inside our company and we have approximately 2,000 people. You can basically understand that not all of those 2,000 people are required to execute on the five products that we have new being created both in Zynga and NaturalMotion and it's a substantial amount of our capacity and spend but we are not breaking out the detail other than we see the opportunity and we think that it's very efficient, very effective for us to be nurturing those teams creating new and getting these products market in 2014, 2015 when we see audience growth and profit opportunities ahead that are really quite substantial.
We are now ready for the next question.
Our next question comes from James Cakmak from Telsey. Please go ahead.
James Cakmak - Telsey
Hi, thanks. It's great to see the success of FarmVille to mobile. I was just hoping you could comment a little bit, you have NaturalMotion a couple months ago and so with the Euphoria technology there, just your thoughts on how you can leverage that technology and just how you are thinking about it, now that it has been in the fold for a couple months?
And then on the marketing side, Clive, you talked a little bit about it, just with a new CMO in place and everything and your competitor are starting TV type of ads, how expansive of a marketing initiatives could we possibly see?
And then I just want to say, Mark, it has been a pleasure working with you. David, congratulations on the new role. I know it has only been about 10 days since you have been there. Just any initial impressions being actually part of the team now? Thanks.
Well, hi James, thanks for that five-for-one question. I will take the first part which is, thanks for the callout on our mobile performance. I really think that the progress we have made over the past 10 months in terms of addressing in Zynga participate can we create something that consumers love, can it chart. It is just personally encouraging to see the great work that our teams has done. It's fun for me around my household and with friends and family members playing FarmVille on their mobile devices to see them participating in our universe with something that they really love.
So it seems off to a great start and we are continuing to press on that. I can't remember the other four parts of your question. So I am going to invite someone else on the team to dive in.
Hi James, it's Clive. Let me talk to you about your marketing question. We are very clear that we are participating in product categories that can target mainstream global audiences at scale and so you should expect us when appropriate and when we can do it cost-effectively to participate in mainstream global marketing channels as well to reach consumers and to continue broadening the footprint of our franchises that way. Jennifer, our new Chief Marketing Officer, she has a classical marketing background that we were very impressed with and we believe is a fit for what we need to start codifying into our working processes here at Zynga, working closely with game teams and taking our marketing teams to the next level to ensure that our mainstream global franchises are positioned effectively through those markets and our go to market strategies continues to be best in class.
James, let me take the last question. In terms of my initial impressions, I have to tell you that I am extremely encouraged by the consumer opportunity here but more importantly, the culture and leadership is quite compelling and many thanks, of course to Mark Vranesh who established just a great financial infrastructure for me to inherit. So the net is extremely positive start.
Hi James, I have had someone just Google [ph] up NaturalMotion and Euphoria on the Board for me. So let me speak to that. I am really encouraged by the start of the interactions with Torsten, Barclay and the team at Oxford. They are really world-class creators on multiple fronts. They are very purposeful about what they see as the market opportunity, the culture that they have built. It's just has really been a wonderful experience to work with them and we are getting tremendous feedback and excitement from partners and consumers just on what it can mean marrying Zynga with NaturalMotion. Our ability to run live services ,their ability to create just amazing experiences centered on differentiated tact, differentiated tools and I think it is safe to say that we are off to a really strong start and there is a lot of energy and excitement for the future.
We are now ready for the next question.
Our next question comes from Mike Olson from Piper Jaffray. Please go ahead.
Mike Olson - Piper Jaffray
Good afternoon. You mentioned the four million installs of FarmVille 2. Is it fair to say that the early monetization of the game is relatively strong versus historical game launches, just given the rapid trajectory to top 20 grossing game in the last several days here?
And then second, you mentioned a few times that you would be more aggressive with marketing new games. Does that imply that on a per game basis, you will be spending more on marketing? Or is it just a different approach on marketing for each game, but not necessarily an increase in average marketing spend per game or maybe it is a combination of both? Thanks.
Hi Mike, it's Clive. So on the will monetization for FarmVille 2: Country Escape, we are seeing positive signs across all of the metrics within the product monetization, engagement and retention. We are really focused on the long-term success of the game. We are excited about what it is proving out in Zynga that we can do a large-scale multilanguage launch globally across multiplatform web, iOS and Android. And of course, we are happy with the fact that it's moving up the top 20 grossing charts as we speak.
In terms of the marketing and more spending per game, a common tree in the core signals that we will spend on marketing when appropriate and we will spend to create sustainable user bases against products that can provide us with a long-term advantage in the categories that we are aspiring to be number one in.
We are now ready for the next question.
Our next question comes from Doug Anmuth from JPMorgan. Please go ahead.
Wan Kim - JPMorgan
Hi, this is Wan Kim, in for Doug. Thanks for taking the question. As you guys move more in to mobile, do you guys see different operating natural profiles in terms of keeping bookings and how long the tail is from the games that have been around for a while and how are you guys thinking about it in terms of as you move to mobile? Thank you.
Hi, Wan Kim. Thanks for the question. So we are keeping an eye on our metrics on mobile with FarmVille 2: Country Escape and it clearly being in the market six days. We are focused on the long-term success of the product. We are seeing a comparable metrics in some areas and in other areas we see mobile specific metrics. More around the engagement aspect of the product, just because of the mobile play patterns and the session timings versus web.
We are now ready for the next question.
Our next question comes from Brian Fitzgerald from Jefferies. Please go ahead.
Brian Fitzgerald - Jefferies
Great, thanks. Don, as we look at the gaming landscape, we see companies like Amazon introducing new hardware, Fire TV. It is bringing mobile amidst your games to the living room TV. How do you think about the opportunity to bring Zynga out-of-pocket and into the living room? What's your appetite to pursue some of these new platforms?
It's a great question and I will just start with, it's a super exciting time to be a consumer and see the performance games occurring with smartphones and tablets. There is really an acceleration that is occurring at a chip level where these devices are capable of pushing a lot of pixels just as a standalone device and when you think about that being streamed to hi-def TVs and interacting with other devices, there is just a rich landscape to innovate and grow in the future. So in relation to Amazon and what others are doing, it's just part of the positive secular trend that we see out in front of us. We know people love being entertained, that they love having fun and that the majority of time being spent on these devices is centered around gaming. So we look at it as an opportunity and that's part of the reason why we are building the benching capabilities that I talked about in relation to people.
Henry, coming from a visual effects, being able to critique products, think about rules for selecting color pallets, bringing things to life is a great add and plays into that trend. Alex is also a great add and there is literally 100 plus people who I can think about who understand how to drive and create the world's best experiences in our category.
So it's encouraging. We will selectively evaluate and participate. And I do think that we are going to see consumers be the real long-term beneficiary of all of the advances that are being made and its our aspiration to lead with great content and services against that.
We have time for one more question.
Thank you. Due to time constraints, we have time for one more question. Our final question comes from Chris Merwin from Barclays. Please go ahead.
Chris Merwin - Barclays
Great. Thank you. Clive, You mentioned that FarmVille 2 is currently the number three app, I think, on iPhone, but it's a bit lower on Android. Can you just help us understand the discrepancy between the two platforms? Is it all related to how you have been allocating your marketing spend? Or is that more just driven by the different audience on the platforms there?
And then also for the second consecutive quarter, we have seen a lot of strength in ad bookings. I think you said they were up more than 50% year-on-year. So can you maybe talk a little bit about how you have been able to create more opportunities for having your games getting new marketers on the platform and as you extend into some other genres, is that something we can expect to continue? Thanks.
Hi Chris. So the Android algorithm which powers the charts operates on a far longer time period than the Apple algorithm. So what you are seeing is the result of just the algorithm catching up with the performance on Android. I can tell you that we are excited and encouraged by the performance on Android. So when the algorithm catches up, I think you will see that reflected in the chart position.
In terms of ad bookings, we talked about this in the call and I will just reflect that. Advertising continues to be a key part about monetization matrix when it's appropriate to the consumer and the game experience. We continue to look for ways to integrate smart advertising decisions into products when appropriate. And we are encouraged by our increased and repeated relationships with blue-chip marketers who keep returning to Zynga as a location for running brand advertising.
I will turn it over to you, Danielle to conclude the call. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.
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