Zynga (ZNGA) Q4 2016 Results - Earnings Call Transcript

Zynga, Inc. (ZNGA) Q4 2016 Earnings Call February 9, 2017 5:00 PM ET

Executives

Rebecca Lau - Zynga, Inc.
Frank D. Gibeau - Zynga, Inc.
Gerard Griffin - Zynga, Inc.

Analysts

Timothy O'Shea - Jefferies LLC

Operator

Good day, ladies and gentlemen, and welcome to the Zynga Fourth Quarter and Full Year 2016 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. As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Rebecca Lau, Manager of Investor Relations and Corporate Finance. Please go ahead.

Rebecca Lau - Zynga, Inc.

Thank you, and welcome to Zynga's fourth quarter earnings call. As you've seen, we published our press release, earnings letter and earnings slides on our Investor Relations website. On the call with me today are Frank Gibeau, our Chief Executive Officer; and Ger Griffin, our Chief Financial Officer. Shortly, we will open up the call for live questions.

During the course of today's call, we will make forward-looking statements related to our business plan and strategy, as well as expectations for our future performance. Actual results may differ materially from those results predicted. Factors that could cause or contribute to such differences are detailed in our earnings materials and under the caption, Risk Factors in our Form 10-Q and 10-K, as well as elsewhere in our SEC filings.

In addition, we will also discuss non-GAAP financial measures. Our press release, earnings letter, earnings slides and, when filed, our 10-K, will include reconciliations of our GAAP and non-GAAP financial measures. Please 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 webcasted and will be available for audio replay on our Investor Relations website in a few hours.

Now, I'll turn the call over to Frank for his opening remarks.

Frank D. Gibeau - Zynga, Inc.

Thank you, Rebecca. Good afternoon, and thank you for joining us for Zynga's Q4 earnings call. Earlier today, we released our quarterly earnings letter, which details our progress and performance over the last quarter. We had a good Q4 and made significant progress this year in our turnaround. We are encouraged by the fundamentals of our business as we head into 2017.

We are pleased with the performance of our live services and the quality of our new releases, as we improved probability and continue to sharpen our operating model. Our financial performance was strong. Year-over-year, we grew total bookings by 8% in 2016, our strongest bookings increase since 2011. Our top line growth was driven by our mobile bookings, which were up 27% versus 2015 and represented 80% of our total bookings for the year. We generated $60 million in operating cash flow, a $104.5 million increase compared to 2015 and our best performance in the last four years. We ended the quarter with $852 million in cash on our balance sheet.

There were three key drivers to our performance in 2016. First, we have sharpened our operating model and improved the underlying profitability of the business. Over the last few quarters, we have streamlined the organization, introduced stronger financial discipline and exited a number of projects that did not align with our strategy.

These combined efforts contributed to improved profitability this year, with non-GAAP operating expenses at 66% of bookings as compared to 72% in 2015, a 6 percentage point improvement year-over-year. Going into 2017, our teams will continue to focus on unlocking more value through better execution. While there's more work to be done, we remain committed to delivering long-term operating margins, in line with our peers.

Second, we shifted the focus of the company to grow our existing live services as a top priority. We believe the value of our live services is one of Zynga's best kept secrets. This effort is a core pillar of our turnaround strategy and has become a key growth driver for us.

Our approach is to create forever franchises, games that stand the test of time and have the potential to entertain players for years. There is no better example of this than Zynga Poker. In early 2016, we invested in new features and events that hit their stride in the second half of the year. In particular, Poker showed momentum with Q4 mobile bookings up 44% year-over-year. As a result, annual mobile bookings were up 20% for the year, the best performance in franchise history. A great achievement, as the game celebrates its 10th anniversary this year.

Third, we improved the effectiveness of our development process and launched all the titles in our 2016 slate. We had an aggressive release calendar for the year, and those games are now contributing to our live services portfolio. In particular, it was a big year for NaturalMotion with the launch of the CSR2 and Dawn of Titans.

This past summer, we successfully launched CSR2. We had a great holiday season delivering new bold beats, including that Bugatti Chiron launch as part of the Games for (RED) campaign. And this past quarter, we announced a long-term partnership with Porsche that has planned new events and is designed to increase engagement. CSR2 is currently the top grossing racing game in 37 countries in the App Store and is set for a strong 2017.

In Q4, we released Dawn of Titans worldwide to critical acclaim. The game has been recognized by players for its stunning visuals and innovative game play. While Dawn of Titans delivered on quality, it was slower out of the gate in terms of chart position. We expect to grow the game as a live service over time as we improve engagement and the elder game experience through new features and events. We are committed to Dawn of Titans but it remains just one of many contributing titles to our live services portfolio. Both CSR2 and Dawn of Titans are shaping up to be long-term franchises for us.

In 2017, we will continue to sharpen our operating model, grow our live services, and deliver innovation and quality across our existing and new games. In 2017, our product growth strategy will be built on three key pillars: first, we will continue to invest in our existing live services such as Zynga Poker, Words With Friends and Social Slot; second, we will pick up full year contributions from our 2016 releases such as CSR2, Dawn of Titans, Wizard of Oz: Magic Match, Willy Wonka and the Chocolate Factory Slots, FarmVille: Tropic Escape and a few others. These additions will further diversify and grow our live services portfolio; and third, we will also deliver a handful of targeted new releases to expand our genre leadership in key categories.

These live services, and new efforts combined, will more than offset continued pressure from our Web games and legacy mobile titles. Across both our live and new products, we are tuning to quality, long-term engagement, and games that drive our social vision forward.

With that, I would like to turn the call over to Ger so that he can further discuss Q4 and our Q1 guidance.

Gerard Griffin - Zynga, Inc.

Thanks, Frank. In Q4, we delivered another strong quarter with GAAP revenues of $190.5 million, above the high end of our guidance range, up 3% year-on-year and up 4% sequentially. Our GAAP net loss was $35.4 million, below our guidance range but an improvement of 31% year-on-year and 15% sequentially. We were below our guidance, primarily due to higher contingent consideration expense, offset partially by lower stock-based compensation expense.

Turning back to revenue performance, our over delivery was driven by better-than-expected bookings, offset by correspondingly higher deferred revenues. Our bookings were above the high end of our guidance range at $201.5 million, up 11% year-on-year and 2% sequentially. This represents the best quarterly bookings performance since Q1 2013, led by better-than-expected mobile bookings on Zynga Poker and CSR2.

Our stronger mobile bookings resulted in higher deferred revenue of $11 million, $6 million above our guidance. GAAP operating expenses were $162.4 million, down 8.5% year-on-year. Non-GAAP operating expenses were $126.3 million, down 3.1% year-on-year, in line with our expectations and resulting in higher operating leverage in the quarter. Our adjusted EBITDA, which includes the change in deferred revenue, was $10.6 million, $1.4 million below our guidance range. This experience (09:00) was due to the expense in the quarter of platform fees associated with higher mobile bookings which were deferred to future periods.

Overall, our strong performance delivered operating cash flows of $27.7 million, up $24.3 million year-on-year and $6.7 million sequentially. Finally, to-date we have spent $50 million buying back 18.5 million shares of our stock as part of our recently announced $200 million two-year buyback program. Based on current pricing, we would expect to complete the remainder of the program in the current fiscal year. We also continue to evaluate additional actions to enhance long-term shareholder value.

Turning to our guidance, our outlook for Q1 is as follows: GAAP revenue of $185 million, GAAP net loss of $16 million, net increase in deferred revenue of $5 million, bookings of $190 million and adjusted EBITDA, which includes the impact of deferred revenue, of $14 million. There is several key puts and takes you should think about when looking at Q1 guidance relative to Q4 performance. Our sequential decline in Q1 bookings will be driven by seasonal trends in advertising, continued declines in Web and older games, partially offset by a full quarter of Dawn of Titans and continued strength in our Poker franchise. We anticipate our gross margins in Q1 to be comparable to Q4, and we expect our total non-GAAP operating expenses to decline modestly on a sequential basis.

In summary, we are very proud of our progress as a team in 2016 and we're very excited at the potential ahead of us in 2017 as we continue to sharpen our operating model, enhance our live services and deliver innovation and growth across our existing and new games.

With that, we are happy to take your questions.

Question-and-Answer Session

Operator

And our first question comes from Tim O'Shea of Jefferies. Your line is now open.

Timothy O'Shea - Jefferies LLC

Yes. Hi. Thank you for taking my question. So just at a high level, can you help us think about maybe how many more games you might expect coming in 2017 and maybe the cadence of those launches throughout the year? In 2016, we had 10 mobile launches. Is it reasonable to assume that we should expect fewer in 2017? And then just any comments on the genres. Thanks.

Frank D. Gibeau - Zynga, Inc.

Thanks, Tim. This is Frank. I'd like you to think about 2017 really as a year of growth, driven by the live services of the forever franchises that we described earlier with Poker, Words With Friends, Social Slots, plus the 10 new titles being added to the portfolio. Those games getting full-year runs, that's going to drive a lot of the growth in our overall portfolio and how we think about our company. Bringing our live services excellence and really deploying that on the new releases, we think, is going to be a key driver for us.

In terms of the new releases, yes, we talked about a handful of targeted releases. They're going to be looking after the key genres that we're seeking to invest in – casual, invest express, action strategy, as well as social casino, the slots and poker businesses. We think that those are the areas where we'll continue to invest in. We'll have a handful of games there.

But if our Web – if our online businesses with regards to live services can continue to grow and begin to prosper like we think they can, it takes some of the pressure off relying on new shots on goal to grow the company. We think we can grow the company without a lot of new shots on goal. And in fact that would give us the flexibility to really spend the right time and effort in getting them in a position where the social vision is there, the long-term engagement is there, and that when they do release, we have very productive successful releases.

Timothy O'Shea - Jefferies LLC

Great. Thanks, Frank. Very helpful.

Operator

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Rebecca Lau for any further remarks.

Rebecca Lau - Zynga, Inc.

All right. Well, thank you, everyone, for joining today, and we really look forward to connecting with you folks over the coming months.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day, everyone.