Zynga (ZNGA) Mark Jonathan Pincus on Q4 2015 Results - Earnings Call Transcript

| About: Zynga (ZNGA)

Zynga, Inc. (NASDAQ:ZNGA)

Q4 2015 Earnings Call

February 10, 2016 5:00 pm ET

Executives

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Mark Jonathan Pincus - Founder, Chairman & Chief Executive Officer

Michelle Quejado - Interim Chief Financial Officer & Chief Accounting Officer

Analysts

Timothy L. O'Shea - Jefferies LLC

Michael Hickey - The Benchmark Co. LLC

Chris Merwin - Barclays Capital, Inc.

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

Douglas L. Creutz - Cowen and Company

Ryan Gee - Bank of America Merrill Lynch

Operator

Welcome to the Zynga Fourth Quarter 2015 Results Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded.

I would now like to hand the meeting over to Melissa Fisher, Vice President, Investor Relations. Please go ahead.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Thank you, and welcome to Zynga's fourth quarter earnings call.

As you have seen, we published our quarterly earnings letter on our investor website, so we can increase the time you have with Mark Pincus, our Chief Executive Officer and Chairman, and Michelle Quejado, our Interim Chief Financial Officer, to answer questions. Shortly we will open it up for live questions, interspersed as appropriate, with questions submitted to me in advance. We will answer as many questions as possible.

During the course of today's call, we will make forward-looking statements related to, among other things, our business plan, strategy and expectations for future performance, including our guidance for Q1, and expectations relating to our cost reduction plan, and our plans for our game slate and launches in 2016. Actual results may differ materially from the results predicted. Factors that could cause or contribute to such differences are detailed in our press release, quarterly earnings letter and under the caption, Risk Factors in our forms 10-Q and 10-K and elsewhere in our SEC filings. We will also discuss non-GAAP financial measures. Our press release and the investor presentation on our website, and when filed, our 10-K, include reconciliation of GAAP and non-GAAP financial measures. 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.

Karen, we're ready for our first live question.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Brian Pitz from Jefferies.

Timothy L. O'Shea - Jefferies LLC

Yes. Hi. Tim O'Shea here. Thank you for taking my question. So, my questions, and I had a couple of them just around advertising which continues to look like an area of strength. So just hoping for a bit of background of what's driving the strength, what's driving that growth maybe what gain, what audience and maybe if you could help us by quantifying the impact from that SponsoredPLAY ad unit. And then couple of weeks ago at CES, you announced a SponsoredPLAY ad unit designed for political campaigns. And I'm just curious if you've seen what type of adoption you've seen during January, February on that. And then just finally, over time I was just curious how you're thinking about the advertising business at a very high level and maybe where it can go from here. Thank you.

Mark Jonathan Pincus - Founder, Chairman & Chief Executive Officer

Sure. Thanks, Tim. So, for our ad business, we announced we had a record quarter for advertising in Q4. The biggest drivers behind that were the strength of Words With Friends engagement and on the value of that audience which is predominantly North American and middle aged and female, which on mobile is proving to be highly valuable. We continue to see tailwinds on the CPMs and interest in ads. Our team is innovating. We did announce through our Studio E new kinds of innovative engagement ad units which are more in sync for our players and for new kinds of advertisers. We don't have any more specifics to share about the actual adoption of new kinds of ads units like you mentioned.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Great. Karen, next question.

Operator

Thank you. And our next question comes from the line of Mike Hickey from The Benchmark Company.

Michael Hickey - The Benchmark Co. LLC

Hey, Mark. Michelle, Melissa. Thanks for taking my questions. I'm just curious, your slate looks impressive here for 2016. I'm just wondering if you sort of look over this slate, where do you see the greatest promise or a breakout here or maybe your top three performers? And then the quick follow-up, curious on the sort of continued delay of CSR2 and Dawn of Titans. I know you've been beta testing those games. I think initially the monetization was pretty good of Dawn of Titans, so curious why those games have fallen in the second half of the year? Thank you.

Mark Jonathan Pincus - Founder, Chairman & Chief Executive Officer

Sure. So, we are excited about our forward slate, as we said we expect to launch at least 10 games; six of those are in soft launch with a seventh very close to begin the soft launch. In terms of what do we expect to be the top contributors, I would just group the slots games together where those – the slots team continues to execute well. They launched two games in Q4 that both are doing well and are good contributors. They're coming out with four more games this year that are based on proven engines. In some of the cases, more of our proven license IP like Willy Wonka.

In addition to that, we said that we'll have a couple of match – free games (06:16) especially driven by our slots team who are interested in expanding the products for the same audience footprint. And we see a really good overlap and potential for cross-promotion. And then in the second half of the year, you'll see the NaturalMotion games come out, and we do see Dawn of Titans as the highest beta opportunity for the year. And that's why we have chosen to delay it and invest more. As we said they continue to show very high monetization rates. They're in 14 geos right now in soft launch. They continue to get good quality ratings. The team is executing. They're very focused on additional releases that will deliver more social features and we believe increased long term retention which is key to moving the LTV and the ability to take that game to a bigger scale. CSR2 also will launch second half of the year and we see that they're offering a big opportunity for organic installs given the 130 million installs that CSR1 got and the level of anticipation and high ratings for the game.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Karen Next question.

Operator

Thank you. Our next question comes from the line of Chris Merwin from Barclays.

Chris Merwin - Barclays Capital, Inc.

Great. Thank you. I just had a couple of questions. I guess for Dawn of Titans just a follow-up. I know you're working on strengthening engagement for that game, but at the same time, you said it's generating the highest ever ABPU for a Zynga game which would suggest very strong engagement. So just curious what the disconnect is there and maybe an update on when you think you'll get the social features rolled out?

And then a second question, in the 1Q, I think you talked about investing more behind user acquisitions for both Friends and slots. And I'm just curious if those investments are onetime in nature or if that's something that we should expect throughout the year, given the 10 games that you have in the pipeline for 2016? Thanks.

Mark Jonathan Pincus - Founder, Chairman & Chief Executive Officer

Sure. On Dawn of Titans there is on one level how much engagement we're driving, and we're seeing – a good measure of that is sessions per day, which we've seen go up. And then there is also the level of long-term retention of the average player and the average payer in the game. And so while the two can be correlated, they're not exactly the same. And so for instance, the more – we saw in Empires & Allies, the more players have joined alliances, the more we move long-term retention for those players for lots and lots of reasons. So, we're working on that.

In terms of your second question, on our investment in UA, the way we look at it, we're bottom line-oriented, and we are looking at making these UA investments when it can be clearly accretive. And we've for the first time seen Words With Friends get to such a high level of engagement, such a high level of ad revenue per user that the LTV is high enough that we can make an accretive, a very accretive ad buys. We've begun that in Q4 and continued that. And similarly with slots, we've seen our games perform well – continue to perform well and deliver LTVs that let us continue to invest in UA. And what I'd say looking forward is, we'll continue to make the UA investments when we see the payback there and we won't when we don't – that's kind of a bottom line philosophy.

Having said that, and we do have this slate of new games coming out, and assuming that they all deliver high enough LTVs, we anticipate spending on UA on those as well. I will say that over time, we are working towards our marketing spend, coming back down as a percentage of our margin and bookings.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Great. Thanks, Mark. I'm going to read a question submitted by an investor now, and this is for Michelle. Were there any game closures in the quarter?

Michelle Quejado - Interim Chief Financial Officer & Chief Accounting Officer

No, game shutdowns in the fourth quarter.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

And then a quick follow-up, what was the purchase price for Zindagi?

Michelle Quejado - Interim Chief Financial Officer & Chief Accounting Officer

Zindagi was a $15 million upfront purchase price plus an earn-out provision.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Great, Karen. Next question from – are we – dial in (11:29).

Operator

Certainly our next question comes from the line of Dean Prissman from Morgan Stanley.

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

Hi. This is Jon Lanterman on for Dean. Thanks for taking my question. Just a quick question on advertising revenues. Again did pretty well in the quarter, bookings, which I believe this is the first time you guys have broken that out grew nicely year-over-year. Can you just give us a quick rundown of which games monetized through advertisements and then kind of the puts and takes of having a game that monetizes both through advertising revenues and micro transactions. Are you guys capturing the 98% of users that don't pay or what's the effects on retention? Any color would be helpful? Thanks.

Michelle Quejado - Interim Chief Financial Officer & Chief Accounting Officer

This is Michelle. So we did see a great quarter on ads, and primarily ads impacts our Words With Friends business that's primary (12:16). We do see it on some of our Ville games and our other Words With Friends games. And the effect on retention on ads is it's growing nicely. We see a great – we do see some seasonality bringing that number back down into Q1 but overall ads is a great business for us. And we've seen a lot of momentum and we expect and hope to see how that continues into 2016.

Jonathan P. Lanterman - Morgan Stanley & Co. LLC

Thanks.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Thanks. Karen, next question.

Operator

Thank you. Our next question comes from the line of Doug Creutz from Cowen and Company.

Douglas L. Creutz - Cowen and Company

Yeah, thanks. I was wondering if you could just kind of talk about what your major categories of advertisers are and if you can size them to whatever extent you can do that and in particular, I'd just be interested in knowing what percentage of your advertising is coming from non-gaming companies? Thanks.

Mark Jonathan Pincus - Founder, Chairman & Chief Executive Officer

Sure, Doug. This is Mark. We don't currently break out where our major advertisers are coming from but I think it's safe to assume that it looks like a lot of other companies given that the majority of our advertisers coming through other ad networks. And you can also see that we have Studio E that is a direct approach and they've made some announcements around different advertisers that they brought into the mix.

Douglas L. Creutz - Cowen and Company

Okay. Thank you.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Great. I'm going to read another question submitted by an investor at this time. As it appears that some of the competitors in the market are expected to continue to be far more dominant, successful in Zynga, will management give consideration to possible beneficial alliances, mergers or outright sale of the company in order to maximize shareholder return on investment?

Mark Jonathan Pincus - Founder, Chairman & Chief Executive Officer

So, as we think about the future, we're very focused on the path to create long-term value in the company. When I came back last spring, I said then and I repeated in the letter we published today that I wanted to return the company to a core focus around our vision for social gaming and excellence and running our live games. And I think in the past few quarters, our teams have executed well on our core live mobile franchises and that's been the biggest driver in our results. And we see that continuing into this quarter and this year.

Layering on top of that, we have supported a fairly large slate of on-launch new games and we think that as those turn into live operating games in the market, it's going to change the shape of our business and deliver better opportunities for bookings, growth and profitability. So as we think about the future, we think that we're going to deliver the best opportunity for shareholder value by continuing to deliver, execute on live and create new franchises.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Karen, next question?

Operator

Thank you. Our next question comes from the line of Justin Post from Bank of America.

Ryan Gee - Bank of America Merrill Lynch

Yes. Hi. This is Ryan Gee actually on for Justin. Thanks for taking my questions. The first one on mobile, obviously the business is progressing more towards mobile. Can you talk about what is the new level of marketing that's required here in this environment to remain competitive? Maybe thinking of it as a percentage of bookings. What's really adequate for Zynga, especially around new launches, either on existing IP like The Ville franchises or new titles such as Dawn of Titans?

And then follow-up just quickly on the PC side, it looks like DAUs on that business were stable quarter-over-quarter but ABPU was maybe down sequentially; it's hard to really know for sure. But any color on that business and whether that side of the Zynga has stabilized at all? Thanks.

Mark Jonathan Pincus - Founder, Chairman & Chief Executive Officer

Sure, Ryan, it's Mark. So, how do we think about marketing levels. I'd say that the number one operating objectives that we have internally for the company this year is to deliver on organic engagements and growth. And if you look at how we were able to turn around audience declines in last year in Words With Friends and restore that game to growth, it's a good example of I think the way that we can inflect our operating strategy across the rest of mobile. So with Words With Friends, the team executed well on features that drove higher engagement, higher turns played with the existing audience. That in turn was able to generate higher ad revenues per player, moved the LTV and bumped that game into a place where not only would it retain players better but we could afford to advertise effectively and grow the audience at scale. That's a strategy we've been pursuing effectively in slots. We just got there in Words With Friends. We have moved similarly on Poker from being in quarterly declines where the game declined, audience declined 10% in Q3, narrowed to 4% in Q4 and moving to actually an increase of 12%, made audience (18:28) from the beginning of Q1. So that's majority through moving on quality and features and organic.

I think as the mobile environment gets more competitive, the level of power you have in your brands and franchises and the quality of player, organic engagement you drive is going to be a bigger and bigger competitive factor in growing and maintaining games.

In terms of where that leads us as a percentage of overall bookings, we are very focused on that. We do think that there's percentages that you can sustain around the launch of games. And you want to see those come down over time as you maintain an audience over a longer and longer period of time. So level of new audience you're adding proportionally goes down and you see more organic coming in as well.

Michelle Quejado - Interim Chief Financial Officer & Chief Accounting Officer

All right. And I'll take the question on DAU. So overall as you mentioned, our DAU on our Web business had stayed fairly flat but our bookings are down quarter-over-quarter as we've seen – as we've talked to you. We've seen some declines in our Web business and we are working to kind of stabilize those but that's what's driving the ABPU number down for our Web businesses. It's really driven by the fact that our bookings are falling and our DAU is fairly stable.

Ryan Gee - Bank of America Merrill Lynch

Okay, great. And then one just quick reminder in the cost cutting plan. Can you just remind us how much of the savings are still to come for the remainder of 2016 that was announced last year?

Michelle Quejado - Interim Chief Financial Officer & Chief Accounting Officer

Sure. This is Michelle again. I can give you a status on where we stand on that. As we stated in the letter, we've completed our workforce reduction plan, and in addition, we exited our datacenters but if you remember back when we announced the plan we said that we would complete our cost savings measures in Q3 of 2016. I would say we're largely on – we are on track to complete that. We still have some work to do in some of our outside services areas that we are working through but we've committed to and completed a large portion of this and we are on track to complete those savings by the end of Q3.

Ryan Gee - Bank of America Merrill Lynch

Great. Thank you very much, guys.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Karen, next question.

Operator

I have no additional questions from the phone lines.

Melissa B. Fisher - Head of Corporate FP&A, Investor Relations and Treasury

Great. Well, thanks everyone for joining us today. We appreciate your interest in Zynga and we look forward to speaking with you again soon.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Everyone, have a good day.

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