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Zynga, Inc (NASDAQ:ZNGA)

Q2 2014 Earnings Conference Call

August 7, 2014 17:00 ET

Executives

Darren Yip - Director, Finance & IR

Don Mattrick - CEO

Clive Downie - COO

David Lee - CFO

Analysts

Eric Sheridan - UBS

Mike Olson - Piper Jaffray

James Cakmak - Telsey Advisory

Andrew Conner - JPMorgan

Brian Pitz - Jefferies

Chris Merwin - Barclays

Justin Post - Bank of America Merrill Lynch

James Lee - CLSA

Richard Greenfield - BTIG

Mike Hickey - Benchmark Company

Edward Williams - BMO Capital Markets

Ben Schachter - Macquarie Research

Tony Wible - Janney Capital Markets

Operator

Welcome to the Zynga’s Second Quarter 2014 Results Conference Call. (Operator Instructions). 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, David Lee. Before we begin, please note that we are targeting a 1-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, our creative pipeline and future game launches and outlook for Q3 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 games including our franchise games to sustain or grow audience and bookings, and our ability to launch successful new games and features in a timely manner.

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.

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 Mattrick

Thank you John. Welcome to everyone joining us on our Q2 conference call. Today we will be discussing our quarterly performance and our financial guidance as well as providing an update on our strategy. Looking at our quarterly financial performance, in Q2 we reported bookings and adjusted EBITDA within the lower end of our guidance range. We generated a $175 million in bookings up 9% sequentially and adjusted EBITDA of $14 million driven by the performance of our core franchises and the recent mobile launch of Farmville 2 Country Escape. While our quarterly financial results were in-line with our guidance range, we aspire to do better and improve execution across our business.

We’re in the midst of a multi-year transformation and we’re building Zynga and NaturalMotion against the growing market opportunity. Our industry is growing at a fast clip in relation to iOS and Android. Our industry continues to have a large addressable web audience and market opportunity on Facebook. For Zynga and NaturalMotion to realize our true potential we need to grow in mobile and continue to build great products on the web.

Our intention is to build games that fits the way consumers are playing across various platforms. That means we will offer games that are mobile only, web only and connected between web and mobile platforms based on consumer play patterns. One of the key insights that we have taken away from our recently Farmville Mobile Launch is that when consumers love our product we need to offer that experience on all platform. In the case of Farmville 2 Country Escape that meant developing a connected experience across web and mobile to enable our existing Facebook web players to spend more time with the Farmville franchise.

We posted some encouraging results and chart achievement from our mobile launch concluding some important learning’s on a cross platform technical capabilities. Going forward we will continue to invest in our Farmville franchise across web and mobile with full beats and new products for the remainder of the year and into 2015.

Inside Zynga we recognize that our products have the potential to live for multiple years and with nurturing refinement and investment they can grow in scale. Entertainment blends the emotion of the consumer with science of execution and that takes time to perfect. We’re purposely competing and while we would like to be further along we believe that we’re making the right decision to grow our business and unlock long term shareholder value.

Over the last year we have deployed talent against our most important priorities and recently recruited new leaders who have been recalibrating the rhythm of our business.

Collectively these leaders are working with our team to raise the bar on product quality and to build new capabilities. This past quarter our leadership team developed a set of product principles to drive our live service and new game development.

These principles are, create the most appealing content, drive the most connected experience and develop the most personalized game play. All summed up they create a new lens to shape our content strategy to determine our game play priorities and help our teams create more differentiated products.

We believe that by focusing our development on the most appealing, the most connected and the most personalized we will deliver mainstream hit with high social engagement and sophisticated game design.

As we grow and sustain our franchise create new heads, we’re finding the right balance between unlocking long term value for customers and shareholders. We’re incubating our games with longer development cycles in order to nurture our products and deliver high quality experiences to consumers. Our teams are focused on delivering product quality as we move through internal test, geo-locks and measure our experiences against player feedback.

In Q2, we made a decision to hold back the global launches of new Zynga Poker and the new Words with Friends which were originally slated to launch in the quarter. We made these decisions during our geo-lock and testing phases after we identified specific areas where additional development time could improve product quality and customer experience.

Beyond Zynga’s core business we were also encouraged by the new games from NaturalMotion and we’re seeing positive signs from our integration of our live operations expertise into their product pipeline. We continue the tremendous opportunity from their future experiences and because we want to nurture their high quality games we made a deliberate decision to move out a number of their titles.

We expect several new NaturalMotion titles to launch in geo-lock in the back half of this year and globally in 2015. As a result we have shifted the planned revenue associated with these products from 2014 to 2015.

Based on our decision to delay a number of games and features across Zynga’s core business and at NaturalMotion we’re adjusting our previously announced full year guidance. We expect annual bookings for the year to be in the range of $695 million and $725 million and adjusted EBITDA to be in the range of 40 million to 60 million.

For Q3, we expect bookings to be in the range of a $165 million to a $175 million and adjusted EBITDA to be in the range of $0 million to $5 million. David will provide further details on our outlook later in the call.

While I’m disappointed to have to lower our outlook I believe that this is a prudent decision as we expect remainder of 2014 to be an investment year leading up to an active launch of cadence in 2015.

We know that there is an interest in having more color and detail on a go forward slate and product pipeline. And as we said our preference is to discuss to games when they are in geo-lock phase giving consumer and competitive considerations. However we believe that it's beneficial to provide as much visibility as possible into how we’re executing against their content strategy and what new games we’re building. On that front today we have a number of new announcements to share.

First, for our new product development we continue to make significant investments in the highest potential areas of our future pipeline. By Q4 of this year approximately 50% of our game related research and development will be allocated to creating new and recently launched experience. This represents a 45% increase year-over-year. In terms of our mobile execution over the last year we reprioritized our game slate and reset our new product pipeline to focus on mobile. As a result we have achieved the majority of revenue coming from our mobile business in this past quarter.

Mobile bookings surpassed web bookings for the first time in Zynga's history. Moving to the new games that we’re building, our goal is to create top hits that engage mainstream global audiences.

Today we have capabilities and brands in five content genres with farm, words, casino, racing and people. We’re diversifying our product portfolio in order to reach more consumers and widen our demographic across more entertainment genres. Today we’re announcing that we’re expanding our game development efforts into two additional genres, sports and runner. First, I’m pleased to share that we’re entering the sports category, a first for Zynga. We believe that sports represents one of the largest evergreen categories in entertainment and as a first step in this genre we’re developing mobile games in both football and golf which will live under a new brand called Zynga Sports 365.

Starting with football, today we’re announcing two multi-year licensing partnerships, one with the National Football League and another with the NFL Players Incorporated. These licenses will enable us to bring real NFL teams and athletes including their names and likeness to our players creating an authentic football team manager experience that can be enjoyed anytime, anywhere.

Our new mobile football called NFL Showdown went live today in geo-lock and is currently available in select markets. NFL Showdown will be going live to players globally before the NFL Season begins.

In terms of our golf product, today I’m pleased to announce that we have signed an exclusive multi-year, multi-platform partnership with one of the world’s iconic athlete’s, Tiger Woods. This relationships will enable Zynga to create breakthrough mobile games that bring to life the world of Tiger Woods golf for consumers. While this mobile game is early in it's development we’re looking forward to bringing Tiger back to mobile for fans in 2015.

I’m particularly excited about the introduction of Zynga Sports 365 and our three mark key launch partners. At Zynga we have talented teams with deep expertise resulting in higher quality sports franchises for mainstream audiences. We look forward to sharing more details on these games as we approach each global launch. In addition to sports today we’re expanding our offerings in the runner category, and I’m pleased to share that we have entered into a multi-year agreement with Warner Brothers interactive entertainment to license the beloved Looney Tunes brand for mobile.

We expect to launch our Looney Tunes mobile game before the holiday season and look forward to sharing more details in the coming months when the game enters the geo-lock phase. Now I would like to turn it over to Clive Downie, Chief Operating Officer to share some details on our franchise progress and evolving content strategy.

Clive Downie

Thanks Don and hello everyone. First, I want to spend some time discussing our progress against our grow and sustain effort as well as our commitment to creating new hits then I will provide an update on our content strategy and go into further details on the new games we’re building.

Starting with our Farmville franchise we’re pleased with our teams continued commitment to delight consumers through our live web services of Farmville 1 and Farmville 2. On the mobile front in it's Farmville 2 Country Escape worldwide launch we have received meaningful feedback from our players which has allowed us to iterate and improve the game with a number of post launch features such as our summer event series. At the end of June our first event in the series received an incredible consumer response and as a result of the feature we saw a 75% increase in average daily bookings for the game.

Additionally last month the game achieved top U.S. chart additions including top 5 grossing on iPad and top 10 grossing on both iPhone and Google Play. Based on the results of summer event series our teams have operationalized their learning’s and developed a robust event schedule for Country Escape that we believe will add more value to consumers and grow the game overtime.

We’re also introducing new ways to connect consumers to our products. In July we launched Zynga’s first national television ad campaign with the goal of reaching new consumers. We’re pleased with the return on our investment for this TV campaign and we expect to engage in more targeted, highly strategic marketing initiatives including future TV campaigns for top priority products.

Turning to our other franchises as Don mentioned Q2 was a launch quarter for us and we expected some volatility as we prepared for the global launch of two franchise mobile products. New Zynga Poker and the new Words with Friends. Deliberately holding back these games was an important decision for us and not one that we took lightly. Moving these two releases to the back of the year is allowing us to further test these games and generate player feedback that will lead to a higher quality experience. In terms of our Words with Friends franchise, in March, we entered geo-lock in select markets and we have slowly ramped into more geographies to pursue deeper consumer insights which are positively influencing our game development process.

For example as a result of our testing we have found out players want to play more games simultaneously and at a quicker pace. So we have tuned up features to deliver that desired game play and improve the overall player experience. Looking at our Casino business in Q2 our team’s generated double digits bookings growth across the franchise with bookings up 13% sequentially. This past quarter we launched a number of new features in our poker and slot games as part of our effort to deliver consumers authentic casino experiences.

In late Q2, our poker product which just celebrated it's 7th birthday introduced a new web feature called Leagues. Leagues were one of the most requested features from our players adding a new social layer to the game where players are challenged to compete, improve and win. We value all our consumers and take introduction of new product and features very seriously and our poker fans in particular bearing in mind the age of products are one of our most cherished communities.

Therefore we have been slowly ramping the new Zynga Poker product in test markets while we iterate, integrate their feedback and refine the game prior to global introduction.

On slots, we continue to align with mainstream brands that resonate with our players such as Sharknado and Ted [ph] as well as our own IP like Farmville all of which recently launched an integrated slots games inside of our hit it rich product which now offers more than 36 themed slot experiences to consumers on a daily basis.

As Don mentioned we’re encouraged by the live services from NaturalMotion and are seeing positive signs around integration of Zynga’s live operations expertise into their product line up. In racing we continue to make our products available to more consumers worldwide bringing CSR Classic to Google Play in Q2. Since it's April launch on Google Play, the game has amassed 4.5 million downloads as of June 30th. Moving to our people category, Clumsy Ninja also expanded in new platforms in Q2 with it's launch on Google Play which to-date have achieved 4.4 million downloads as of June 30.

Looking at our future product pipeline we’re making significant investments in new game development and giving our teams the runway they need to build higher quality products. Our teams are aligning against that product principles that Don described which are to create the most appealing content, to drive the most connected experience and to develop the most personalized game play.

This is requiring more timing investment in 2014 in order to deliver an exciting, unique and distinct slate in the back half of this year and into 2016.

Now I would like to go deeper on how our content strategy is evolving reflecting the most diverse game portfolio in Zynga’s history and allowing us to span more demographics, player types and entertainment affinity. Today we announced our expansion into two additional content category, sports and runner. Starting with sports, we believe it's one of the most evergreen and global consumer categories. The sheer scale of American football is astounding with over 112 million watching the Super Bowl and over 30 million playing Fantasy Football each year.

Our new mobile football game NFL Showdown will lend Zynga’s expertise in free to play social games to deliver consumers a new year round way to engage with their favorite NFL teams and player. NFL Showdown is a manager style mobile first simulation game that offers sports enthusiast a unique social experience that delivers authenticity, accessibility and competition.

The game puts fans in the thick of the action letting them engage with their favorite teams and players 365 days a year taking on the role of coach, general manager and owner as they manage their team to victory. We believe that by partnering with the NFL and NFL Players Incorporated we can deliver consumers an authentic football management game and we look forward to getting player feedback during our NFL Showdown geo-lock which went live today.

With regards to golf, we’re incredibly excited to be partnering with golf icon Tiger Woods. Tiger is one of the most recognized and accomplished athletes in the world and is influenced the sport of golf since he joined the PGA in 1996. He is the first golfer in history to hold all four professional major championships at the same time including four master tournament. Golf’s massive global appeal and innate social nature lends itself well to mobile games and fosters the on the go competition we know our players want. By combining Tiger Woods’ unparalleled golf insight with our ability to create meaningful connections between consumers, we can develop a truly unique experience that brings authenticity and accessibility to sports enthusiasts.

And we’re looking forward to making this game available globally in 2015 and giving our players and Tiger’s fans new way to interact with their favorite golfer.

Our push into the sports category and the development of NFL Showdown and our Tiger Woods golf game is being led by our Zynga Orlando studio. The team includes several gaming industry veterans with the rich pedigree in mainstream sports and entertainment franchises. The team understands the art of developing sports games and high fidelity details consumers.

From gameplay simulation, character design and animation, the team has a history of delivering sports fans transformative, authentic entertainment experiences that feel as real as their favorite pastime. There is an enduring connection between consumers and sports franchises, events and personalities yet today only 4% of mobile game revenue is derived from sports focused games.

For the last year roughly 12% of all console video games sold in the U.S. were sports related. So sports is clearly under indexed on mobile and we believe that the long term potential for this category is incredibly promising and look forward to delivering a new franchise the Zynga Sports 365 to fans around the world starting today with the geo-lock of NFL Showdown.

In regards to the runner category we’re extremely proud to be partnering with Warner Brothers Interactive Entertainment to bring the iconic Looney Tunes brand to mobile. Looney Tunes is one of the world’s most recognized brands with high charged characters that have engaged consumers for decades and are perfect fit for the fast paced nature of runner games. We’re working closely with Warner Brothers Interactive Entertainment to bring exciting new features to this main stay category in mobile game and we look forward to sharing more details in the coming months about team’s approach geo-lock.

With that I will turn it over to our Chief Financial Officer, David Lee to go deeper on the financial details.

David Lee

Thank you Clive. Good afternoon everyone. Looking at the company’s pipeline I’m confident about Zynga’s future potential. We’re optimizing our games for long term success that means holding games until they are upto the quality standards we believe are necessary to develop lasting relationships with our players. As you’ve seen from today’s revised outlook this may impact our financial results in the short term but we believe this puts us in a position to deliver stronger products to consumers. I would like to now take you through the details of the quarter but before I begin please note that many of the financial measures here in are expressed on a non-GAAP basis.

Total bookings were a $175 million up 9% quarter-over-quarter driven by the launch of Farmville 2 Country Escape partially offset by declines in our web business. Bookings came in at the low end of our previously provided outlook primarily due to the delayed launches of new games and features as well as the continued decline of our web business.

Mobile bookings were up 76% year-over-year and 53% quarter-over-quarter to 88 million. Web bookings were down 37% year-over-year and 5% quarter-over-quarter at 86 million. All three of our core franchises casino, farm and words with friends grew booking sequentially in Q2 up 23% in total despite delays including the launch of the new Zynga Poker and Words with Friends games. The farm franchise was up 37% quarter-over-quarter driven by the successful launch of Farmville 2 Country Escape. Casino and words grew 13% and 4% sequentially.

In Q2, advertising bookings excluding licensing and developer payments grew 12% quarter-over-quarter, mobile now represents 76% of our advertising booking. We also grew ad bookings per DAU by 11% sequentially and 19% year-over-year. During the quarter we renewed and grew our partnerships with blue chip advertisers like NBC, Fox, Progressive, Clorox and others.

In terms of platform mix mobile bookings grew from 36% of total in Q1 due 50% in Q2 and for the first time represented the majority of Zynga’s bookings. Facebook related bookings were 45% off the total in Q2.

Turning to operating expenses, people related spend was down 10% quarter-over-quarter benefiting from a full quarter of the Q1 restructuring and as well we have lower head count which declined 35 people quarter-over-quarter due 1956 at the end of Q2. Technology spend declined 18% quarter-over-quarter in Q2 driven by the consolidation of our data center footprint.

These efficiencies were offset by a ramp in marketing expense pushing Zynga’s overall cash OpEx spend up 3% sequentially in Q2. As a result adjusted EBITDA was $14 million in Q2 or an 8% adjusted EBITDA to bookings margin for the quarter. Factoring in depreciation, amortization, interest, other income and tax results in a breakeven non-GAAP EPS.

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. During the quarter cash flow from operations was $80 million inclusive of restructuring and benefiting from the timing of some payments. Factoring in capital expenditures of $3 million and excess tax benefits from stock based rewards free cash flow was $40 million.

Now let’s turn to our outlook, I want to start by providing you with visibility to our plans going forward to help frame our financial guidance. By Q4, over half of our game related R&D expenditures will be spent on new and recently launched games, some of which will drive Zynga into new categories to reach more players. We remain enthusiastic about Zynga and NaturalMotion’s pipeline and are committed to their success. As such we’re providing our teams with the appropriate time and investment necessary to bring quality games to the market.

Ultimately our road map for achieving success and meeting our outlook depends on growing and sustaining our core franchises, launching new games on schedule and ensuring that the content we do launch resonates with consumers. With that in mind let’s move on to the outlook for Q3.

In Q3 we expect bookings to be between $165 million and $175 million and adjusted EBITDA to be between breakeven and $5 million. This sequential decline in bookings from Q2 is primarily due to the delayed launch of new games and features and the continued decline in our web business. We expect margins to compress in Q3 as R&D and marketing investments increase to support our future game launches. However we believe we’re making the right investment decisions to position the company for bookings growth in Q4 and into 2015.

We expect non-GAAP loss per share between $0.01 and breakeven based on share count of approximately 885 million. On a GAAP basis we expect revenue to be between $160 million and $170 million, net loss between $57 million and $52 million and GAAP loss per share of $0.06 using a share count of approximately 885 million shares.

On a full year basis we are lowering our outlook for bookings from $770 million to $810 million to $695 million to $725 million primarily to reflect the delayed launch of new games and features. We’re also lowering our previously announced adjusted EBITDA outlook range to $40 million to $60 million due to these factors.

We expect our non-GAAP EPS between the loss of $0.01 and breakeven based on the fully diluted share count of approximately 874 million shares if we report a non-GAAP loss or approximately 912 million shares if we report a non-GAAP profit. Stock based expense and capital expenditures of 2014 are expected to be approximately $130 million and $15 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 our management team has set a high bar for our quality and we’re holding the launch of new games to make sure they live up to the standard. Importantly the changes in our pipeline reflects additional time needed to optimize games for which we continue to have high expectations. We’re giving the products time to polish for quality, as well as add additional features for demand service and consumer research. In my first full quarter as CFO, I am disappointed to have to lower expectations for the year.

But I believe a long term potential of Zynga remains bright and with that I would like to turn the call back over to the operator to open it up for questions. Sam?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Eric Sheridan of UBS. Your line is open.

Eric Sheridan - UBS

So on the pipeline guess maybe just a little more granularity on what you saw as the games moved from development to potentially going to market, they caused the push out and sort of a sub-question of that is if any games actually had outright cancelled as you saw the move to development and then on the licensing games I want to understand how long the agreements are for, whether they are exclusive and what the cost of those licensing agreements are. Thanks.

Don Mattrick

Let me speak to two questions, the first one on products what we learned. So when the products were going through the internal test into geo-lock team’s observed things that they could apply more time to polish and also came up with some new ideas based on observing consumers do with the products. When we netted that all out we thought we would end up in a better place by spending the extra time. You had a sub-question were any products cancelled? No. But there was no product cancellation as we were going through this, thus continuing to invest in things that we believe for the benefit of consumers and shareholders. In relation to our life agreements we don’t detail out specific terms but they are multi-year agreements, they are exclusive, a define set of rights and I’m really pleased that we were able to court and compete and land those partnerships because we’re seeing opportunities to create original products and to use some of our tact to create partnerships and having the NFL PA, Woods and Looney Tunes as partners in this exciting test and we think will be meaningful to consumers.

Operator

Our next question comes from Mike Olson of Piper Jaffray. Your line is open.

Mike Olson - Piper Jaffray

So kind of following on that Words with Friends and using a Poker likely to more broadly launch still in’14 or more like in’15? I guess maybe even beyond those, what’s assumed for those and NaturalMotion and other titles within the ’14 guidance?

David Lee

Let me take this question on guidance, as to your first question with regard to the two delays that we announced last quarter we said that on the course of the fiscal ’14 period we expect this to be in market. With regard to your broader question on NaturalMotion in guidance, what we can say is there are guidance reflects our best thinking on performance of both our existing businesses as well as our anticipated launches. That’s all we can disclose regard to NaturalMotion.

Operator

Our next question comes from James Cakmak of Telsey Advisory. Your line is open.

James Cakmak - Telsey Advisory

I just wanted to touch on the sports category, can you help us understand on the NFL partnership that you guys have, how exactly will you guys be geo-lock testing an NFL game, how does that work just given the U.S. kind of dominance of that sport and then just real quick, secondly, you guys have 1.1 billion in cash and I understand that at the same time want that flexibility for any opportunities that may arise but that is still a substantial sum. So being in kind of all-time lows here can you just help us understand the rationale for not instituting a buyback program?

Clive Downie

Let me take the first part of that question regarding how do we geo-lock test an NFL licensed product when the U.S. is the predominant region for that product. It's a great question and it's something that our teams have been creating a very robust plan around in the run-ups geo-lock. First of all there is two phases for geo-lock, actually the first phase is an infrastructure test where we actually test the backend infrastructure and the server architecture and we can do that in a market where we can identify pockets of consumers who do have interest in American Football because we have very robust targeting and there are American football fans around the world in other geos and we need a specific selection of those to test the infrastructure from a quantity basis and then phase two is actually around the tuning of the product and then what we will do is we will go to larger markets where there are larger pockets of consumer such as Canada where there is a large population of American football fan and that would satisfy our phase two need for tuning. So that’s how we’re approaching it.

David Lee

James with regard to your second question, it's a good question with 1.1 billion in cash and marketable securities, we will continuously evaluate the ways to produce superior shareholder returns inclusive of all levers.

Operator

Our next question comes from Doug Anmuth of JPMorgan. Your line is now open.

Andrew Conner - JPMorgan

This is Andrew Conner on for Doug, Don as we look at the financial model for your company it's really pretty simple, it's users multiplied by average spend and I guess there are some debate around Zynga’s strategy, is it to drive the user metric or is to drive the average spend per user? So I guess which metric is important to you from a 30,000 foot view and how would you encourage us to think about those two drivers particularly as you shift towards this sort of licensing approach to the portfolio? Thanks.

Don Mattrick

The first thing is we think about the question from a consumer perspective and I would have just slightly different view of it which isn't inclusive of monetary. It's about addressable audience and having the capabilities to create content both on the web and on mobile devices gives us a broader addressable market than what we had a year ago. It's getting people to participate with the products that we fill and we call those people players and we value the time that they spend in our experience. We know that players value quality, they value companies that over deliver value as measured by time, sophisticated game designs, social engagement personalization and the real opportunity we see is to take those people and turn them into fans. People who love our experiences, who advocate what we do and want to share it, and want to use it every single day on multiple devices over multiple years. So we see a great opportunity to go through that type of consumer journey, there is measures of percentage being absolute payment per user. They are important and generally they are moving in the right direction for us as a company but we’re really starting with over deliver value to consumers to strengthen our long term brand, strengthen our long term experiences and then the good financial numbers will fall out as a byproduct.

Operator

Our next question comes from Brian Pitz of Jefferies. Your line is now open.

Brian Pitz - Jefferies

Don, looking at the Zynga Sports 365 brand, it' sounds like you maybe looking into additional sports categories overtime. Can you just give us some insights or color in terms of the direction that you might be thinking and then regarding the Warner Brothers license, does this preclude you from entering other categories with the Looney Tunes IP or is it just for the runner category? Thanks.

Don Mattrick

So it's two questions, the first on sports, we’re really thinking about what a 21st century sports brand means on mobile devices on a smartphone, now a tablet what is the type of interface, what’s the right level of complexity, what are the right experiences and how do you build those time slices for people in the highest quality most connected, most personalized way. So we launched our brand today by sharing two products, I do anticipate that we will add to that in 2015 and beyond. We’re not disclosing what those things are today but think about it as again consumer centric recognizing that it's just different time usage, different engagement cycles and we now have these new devices that are with us everywhere we go and we know that consumers love experiences like the NFL and we think that they are underserved and think it's a great opportunity for us and that there is more sports, more activities that can fall into that brand and we intend to pursue it aggressively and invest and create new and you will hear more in the future.

Operator

Our next question comes from Chris Merwin of Barclays. Your line is now open.

Chris Merwin – Barclays

Can you please talk a bit about your marketing strategy for Farmville 2 in particular the TV campaign, did you just find that you’re getting some diminishing returns in traditional, online performance based channels or is it just a question of expanding your region and bigger picture do you think that TV is going to be a bigger part of the channel mix for all your future launches going forward. Thanks.

Clive Downie

So our live services require new consumers on a daily basis (indiscernible). We bring those new consumers in from a variety of sources. Actually the primary source is organic appeal of our franchises, they have very, very strong word of mouth and then we have our own cross promotional network and then we have paid acquisition. The paid acquisition strategy we have is targeting the highest return on investment for the consumers we bring in using that route. Of course it's an open market and we have to bid against others reach in-store. Our marketing cost is competitive with the market and we believe it's in the best interest for the long term growth. And on occasions what we’re looking to do now for products that have proliferated into a larger audience scale such as Farmville, we’re testing broader marketing techniques such as TV.

We see TV as having a rising tide benefit through the other forms of marketing and acquisition, because TV is brand activity really provides the ability to plant that emotion into consumers mind so that then later on they can think of an ad or they will speak to a friend about our product and so that’s what we see the role of TV is doing for our larger franchises and as we move forward as I talked about in the earnings call we will look to utilize it where appropriate for our major franchises.

Operator

Our next question comes from Justin Post of Merrill Lynch. Your line is now open.

Justin Post - Bank of America Merrill Lynch

I was wondering about the profitability of the new categories, some of the other categories aren’t proving to be too profitable at this point. What makes you excited about this category is the exclusivity of the license? Is it the customer appeal? Why do you think there can be more profitable in the new categories? Thanks.

Don Mattrick

It's all of the above when we enter into partnerships we’re paying attention to the economics. We understand what the range of opportunity is and we thoughtfully model out the value of having key partnerships, inclusive partnerships and categories that are underserved. So, obviously there is judgment and there is a different cost structure associated with license that (indiscernible).

As a company we have been blessed to have a collection of hit properties that have no licensing cost associated with it and we also see that there is some great partners, some great brands, we can get associated with and though what we perceive to be successful businesses in the future. So that’s a different cost structure and you get different advantages, having the NFL as an exclusive partner in the manager category, obviously there is some value to it and we believe that we can create a profitable business for ourselves and for the NFL and PA.

Operator

Our next question comes from James Lee of CLSA. Your line is now open.

James Lee - CLSA

Two questions here, Don, from a competitive point of view globally which category are you seeing competition the most and kind of over longer term how do you see positioning yourself your own company accordingly and which category do you see additional opportunity and which category do you see risk and my second question is regarding sporting games in general. How should we think about monetization versus your average games and what’s the user base which you think about when you’re looking at other mobile peers in general? Thanks.

Don Mattrick

If I’m communicating this let me just reiterate it again, we want to be an app scale leader. We see a huge market opportunity, we believe that we have got a great collection of people intellectual properties and capabilities. We have approximately 2000 people deployed on that opportunity, that’s more than the majority of our principle competitors and we know that we’re working through that awkward transition period, we’re not hitting our full potential but we believe when we do hit our potential we are going to have a pretty amazing business and we are going to be an app scale leader.

So that’s the big picture framing. There is excellent in competitors in different categories but again we’re doing a couple of things, we’re doubling down on our product quality, we’re paying attention to opportunities to connect the community and we’re building tech and automated data systems that will offer us personalization in a really meaningful way to consumers coupled with a mix of unique hits where we have complete ownership of that coupled with the technical excellence and creativity of NaturalMotion blended with the great live operations experience that a company like Zynga has.

We have got products to market that have been in market for more than five years. So we’re marrying all those ingredients and today we announced sports, we announced our partnership with Looney that gives us two new genres that we’re competing in and as I shared before we’re placing bets against the Top 20. You can imagine that we would love to be the leader in every important genre that we can execute on. And we’re doing the heavy lifting to get there and we have got more work to do but that’s our aspiration just to be an app scale leader in multiple categories with the mix of exclusively owned content or own ideas and key partners. So that move is what motivates us every day we get up to compete and execute and ultimately win against that vision.

Operator

Our next question comes from Richard Greenfield of BTIG. Your line is now open.

Richard Greenfield - BTIG

I’m sort of surprised that you shifted to a licensed IP model at least expanded into a licensed IP model, can you just talk I mean you kept headcount that are pretty high level of 2000 people which had been previously completely focused on original IP. I guess the question is as you shift more into licensing IP why not dramatically cut the number of people from 2000 down to 500 or 600? Do you really need 2000 people? And then the second question kind of related to that is when you look at the cost structure of the licensing agreements that you mentioned do you have guaranteed payments each year or is it simply tied to the release of the game meaning if your games for whatever reason that you launch don’t work with the NFL, Tiger Woods or Looney Tunes, do you’ve guaranteed commitments of cash that could eat in through the amounts of cash that I think lot of investors take comfort in on your balance sheet? Thanks.

Don Mattrick

Let me take them in two parts, so the first is, do we still believe in original content? Hell yes. We have got a lot of people focused on products. We have got titles like Farmville, we have got other things in development both in Zynga and NaturalMotion that are original, that have no licensing cost associated with that we’re really excited about. We’re being very purposeful about how we build those products. We’re lensing against it in the medium and long term and we recognize that we have got an opportunity to build new live services that can live for multiple years. Why not have smaller headcount? Well it's tied to our aspirations, we want to build a big, successful app scale company with multiple experiences able to service multiple network partners being able to be the best in class in multiple discipline.

So there is lot of and, and we’re not perfectly executing on each part of it but we have a vision, we have an appetite to compete and through persistence and through grit, through purposeful intent I believe we will get there.

You also asked a question about the economics and what I would say is kind of look at partnerships like the NFL and the NFL PA as waterfront property. There is a limited amount. It has value, it's a competitive resource and I can share with you that there were other companies who were interested in competing and potentially even paying more in the short term. In terms of particular details of the license and terms we don’t disclose that but obviously we believe that there is value in those partnerships otherwise we wouldn’t have signed it and we think it gives us a clear identity and a key content class to support the creation of a new sports brand. So if you believe in sports, if you’re personally interested in it, if you think there should be a creative interpretation living on smartphones and tablets I think the blending of Zynga Sports 365 with the NFL, with the NFL PA and with Woods is an awesome start for us to frame up our aspiration.

Operator

Our next question comes from Mike Hickey of Benchmark Company. Your line is now open.

Mike Hickey - Benchmark Company

I was curious if you could breakout your MAU and DAU data for mobile, please?

Don Mattrick

You’re asking for I believe our MAU and DAU data for mobile?

Mike Hickey - Benchmark Company

Yes.

Don Mattrick

We have historically not provided audience metrics for mobile versus web.

Mike Hickey - Benchmark Company

Okay you did in your last report, that’s fine. And the web piece, do you think there is long term value to this piece of your business and if so when do you think it's going to stabilize?

Don Mattrick

I will take that, yes, I think that we’re seeing that there is consumers who are engaging on Facebook on the web. We candidly have been focused on transitioning, growing our mobile capabilities. We have made great progress on that but that doesn’t mean that we should be jettisoning consumers who have devices, have experiences that they love inside of that. So, we’re choosing and finding the appropriate frame and I would love for us to make purposeful consumer centric choices but that doesn’t mean that our web business should go to zero and we will find ways to invest in that and grow that in smart ways, just the same ways as we have with iOS and Android.

Operator

Our next question comes from Edward Williams of BMO Capital Markets. Your line is now open.

Edward Williams - BMO Capital Markets

Just a couple quick questions, first of all looking into ’15 what sort of cadence do you think we can anticipate for a game like this?

Don Mattrick

We’re not giving our details of our release schedule obviously, what we have shared is there is significant investment occurring in ’14. We have moved some of the products from ’14 to late in ’14 to ’15. There have been moves not cancellations. So it's our hope, it's our aspiration that it will be more and it will lead growth inside of our business. Again giving 2015 guidance isn't what we’re doing today. But I encourage you to form your own opinions on things like the NFL, golf products, runner and other things that you know and I assume that some of the other new things come to market and we’re just going to execute as I’ve outlined with that focus on medium to long term and let the results take care of themselves.

Operator

Our next question comes from Ben Schachter of Macquarie. Your line is now open.

Ben Schachter - Macquarie Research

Couple of questions, first one, it seems like there are just a few mobile game companies that are getting these massive network efforts where they have multiple Top 10 or multiple Top 20 titles. So what is that those guys are doing so well and is it replicable and do you think it's more marketing related or game quality and just quickly to clarify the exclusive nature of the NFL license, is it correct to say that it's only exclusive to the managers gaming genre? Thanks.

Don Mattrick

Yes, look, how do people get a flywheel created? They do it by creating a content that gets to the top of the charts and they support it with marketing and is having a flywheel that drives cross promotion and valuable things? Absolutely. Zynga enjoyed that in the past and we aspire to get back to that in the future, that’s what we’re competing for. And we understand what we need to do to compete and drive against it. The NFL license is defined in the manager category, again I’m not going to get into the exact wording inside of it but think of it as being different than an action based game controlled through a controller with 17 buttons. There is a different iteration that’s appropriate for smartphone and a tablet and those are the rights we have acquired.

Operator

Our final question comes from Tony Wible of Janney Capital Markets. Your line is now open.

Tony Wible - Janney Capital Markets

I was hoping again on the NFL contract, can you guys give us at least a sense how much is fixed versus variable in that cost structure?

David Lee

Again we’re acknowledging that we have this exclusive multi-year relationship. We’re not detailing specific terms inside of it, what I will share is I would not have signed a deal on behalf of the company that I didn’t think was a mutual win for us and our partner. So we believe that there is a sustainable model and an opportunity to grow into a large market. We think it's an important asset to support the creation of a sports brand and we’re excited about it and our teams are off to a good start and we’re going to commit to growing this over multiple years. So no additional details on the licensing terms which candidly we just don’t do for contracts with key partners.

Operator

Thank you. And at this time I would like to turn the call back to Don Mattrick for closing comments.

Don Mattrick

I want to thank everyone for calling in and I also want to thank our staff for listening in on the call. I know that people are doing good work. I know that it's always challenging to be putting the effort in and to work through the process of transformation, executing in our own division and I can tell you personally I’m super excited about market opportunity, the caliber of people I get to work with and the aspirations that we have for growth and foreign investors, we appreciate your support and hope that you see the same opportunity as we see here at Zynga.

Operator

Thank you sir. 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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Source: Zynga's (ZNGA) CEO Don Mattrick on Q2 2014 Results - Earnings Call Transcript
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